FHA loans are mortgages issued by the Federal Housing Administration. Designed for borrowers with low-to-moderate income, FHA loans have lower down payment requirements and accept lower credit scores than many conventional loans. Because of this, FHA loans can be an attractive option for many first-time home buyers.
Reasons to choose fha
- Generally lower down payment requirements that can accept gift funds
- Lower FICO score requirements than conventional financing
- Allows for higher debt-to-income ratios to qualify
- Increased allowance of seller concessions
- Mortgages are assumable and in a rising interest rate environment can position an advantage when selling
- 500-579 FICO score requirement with a 10% down payment.
- 580+ FICO score requirement for borrowers with at least a 3.5% down payment
- 43% maximum debt-to-income ratio (50% in some cases).
- An appraisal must be done by an FHA-approved appraiser
- 2 year waiting period after a bankruptcy (3 year waiting period for foreclosure)
- Mortgage insurance (MIP) is required
- Two years of employment history
- Non-occupying co-borrowers allowed
- Must occupy the home as a primary residence
Steady employment and be able to prove income with recent tax returns, W2’s, and paycheck stubs
FHA Loans Pros & Cons
Low Down Payment
Depending on your FICO score, you might only need a 3.5% down payment
Relaxed Credit Requirements
FHA loans are available for borrowers with credit scores as low as 500
Small Reserve Funds
You don’t need to have reserves when purchasing either a single family home or condominium. However, if you’re purchasing a duplex or multi-family home, three months will typically be required
Upfront Mortgage Insurance Premium
1.75 percent of the loan amount is paid when the borrower gets the loan. The premium can be rolled into the financed loan amount
Annual Mortgage Insurance Premium
This ranges between 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio (LTV). This amount is divided by 12 and paid monthly
FHA loans have a loan limit ceiling between $314,827 – $726,525, depending on area
Minimum Property Standards
Property must meet minimum standards to be eligible. A few of these standards include: home must be complete and “marketable”, must be free from hazards (lead-based paint, etc), and must be safe to access from public road.