January 26th, 2020 11:22 AM by Jackie A. Graves
If you are in the process of buying your first home or you’ve
been thinking about it, you may have heard of FHA loans. If not, you certainly
will as soon as you start working with a lender. FHA loans are among the most
popular types of mortgage loans, especially with first-time buyers. So what
makes them so ideal, and should you consider one for your home purchase? We’ve
got all the important details.
An FHA loan is a type of mortgage loan that is guaranteed by the
government—specifically by the Federal Housing Administration (FHA). “Since the
FHA insures these loans, that means if borrowers default on the loan, the
government will pay the lender for any losses,” said Money
Under 30. “The FHA does not itself lend money; it merely guarantees
the lender will not face losses.”
The popularity of FHA loans among first-time buyers can be
tracked to two main factors: low credit score requirements and low down
payments requirements. We’ll get into more details below.
The FHA loan was designed for first-time buyers with lower and
moderate incomes, and is predominantly used by those who are making their first
purchase. “According to an analysis conducted earlier this year, FHA discovered
that 82% of its purchase loans went to first-time buyers,” said FHA Handbook.
But, the loan is available to any borrower who meets the FHA’s
criteria. “Even people who have owned homes in the past can use FHA loans to
buy another property, as long as the house being purchased is their primary
You can qualify for an FHA loan with a credit score as low as
500. That’s far below the minimum 620 score lenders are typically looking for
on conventional loans. FHA loans also require as little as 3.5% down—among the
lowest down payment requirement in the industry. That combination makes FHA
loans one of the easiest loans for buyers to qualify for.
Keep in mind that the 3.5% down is generally reserved for credit
scores of 580 or better; to purchase a home with a 500 score using an FHA loan,
you’ll need 10% down.
FHA loans also allow some flexibility related to the source of
down payment funds and closing costs. Down payment funds can come from a gift
or a grant, while, “FHA loans allow sellers to pay up to 6 percent of the loan
amount to cover buyers' closing costs,” Tim Pascarella, assistant vice
president with Ross Mortgage Corporation in Royal Oak, Michigan, told HSH.
“In conventional loans, sellers can only pay up to 3 percent.”
You’ll need to factor a little more money into your closing
costs and your monthly payment with an FHA loan. “Borrowers will also need to
pay FHA mortgage insurance—similar to private mortgage insurance (PMI) that
lenders require on traditional mortgages when borrowers put less than 20
percent down,” said Money Under 30. “FHA
mortgage insurance is paid in two ways—upfront as a part of your closing costs,
and then as part of your monthly payment. The upfront cost is 1.75 percent of
your total loan amount, and the monthly cost varies based on the amount of your
down payment, the length of your loan, and the initial loan-to-value ratio. It
could be as low as .45 percent or as much as .85 percent of the loan amount.”
On a $300,000 loan, the upfront mortgage insurance premium would
be just upwards of $5,200 and the premium would be around $112 to $260 per
month, depending on the specific loan term. There are also limits to how
much house you can buy with an FHA loan, which vary by state and also by
county. You can check limits in your area here.
In addition to credit, down payment, and maximum loan amount
requirements, borrowers—and the home they wish to purchase—must meet other
• The borrower must be a legal resident of the United States,
must live in the country, and must be able to show two years of steady,
verifiable employment history.
• The property must be the borrower’s primary residence—"no vacation
cabins or rentals,” said The
Mortgage Reports. “However, you can buy a multi-unit property, like
a duplex, as long as you live in one of the units.”
• The property must be appraised by an FHA-approved property appraiser.
• “Your front-end debt ratio (monthly mortgage payments) should not exceed 31
percent of your gross monthly income,” said Bankrate.
“Lenders may allow a ratio up to 40 percent in some cases. Your back-end debt
ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent
of your gross monthly income. Lenders may allow a ratio up to 50 percent in
Source: To view the original article