October 15th, 2019 10:07 AM by Jackie A. Graves, President
If you have too much debt to qualify for a conventional
mortgage, low credit scores, or little money saved for a down payment,
consider buying a home with an FHA loan.
The Federal Housing Administration, a division of the Department
of Housing and Urban Development, was created 80 years ago to help low and
moderate income families borrow the money they need to buy a home. The FHA
doesn’t actually make home loans. It guarantees that lenders will be repaid if
you default on the loan.
That guarantee allows banks and mortgage companies to work with
borrowers who might not be able to qualify for conventional home loans and at
surprisingly competitive interest rates.
The majority of lenders make these mortgages, and about 1 in 6
new home loans is backed by the FHA, according to Ellie Mae, a California-based
mortgage technology firm.
There are limits on how much you can borrow with an FHA loan for
a single-family home. The FHA raised limits for 2019 up to $314,827 for
single-family homes in most parts of the country or as much as $726,525 in
high-cost cities such as New York and San Francisco.
(Here’s where to find the FHA loan limits in your area.)
If the amount you need falls within the guidelines above, here
are the advantages to getting an FHA loan.
Most FHA mortgages require a 3.5% down payment — that’s $3,500
for every $100,000 you borrow — and the average down payment on an FHA home
loan is about 5%, according to Ellie Mae.
That’s far less than the 19% average for conventional home
Your down payment can be a gift from a relative, a friend or an
organization that provides financial assistance.
mortgages require the down payment to come from a borrower’s
savings or other assets, such as proceeds from the sale of another home.
The average FICO score for buyers who finance FHA loans is 674,
according to Ellie Mae.
That’s considerably lower than the average score of 754 for
conventional, non-FHA financing. So what’s the secret to qualifying if you have
a credit score in the low 700s or high 600s?
Successful applicants usually have a two-year history of steady
employment and paying their bills on time.
You can get an FHA loan if you’re self-employed. Just be ready
to document your income with tax returns and financial statements from your
The same big financial problems that derailed FHA applications
in the past continue to do so. If you:
According to Ellie Mae, the average borrower with a new FHA loan
spends 29% of their gross, pretax income on housing costs — everything from
mortgage payments and taxes to insurance and homeowner association fees.
That homeowner also spends 44% of their income on all debt
payments, which would be their housing costs plus car loans, student loans and
credit card bills.
The average buyer who finances with a conventional loan only
spends 24% of their income on housing costs and 36% of their income on all
recurring debt payments.
With the government standing behind your debt, lenders charge a
much lower interest rate than your credit scores and debt might warrant.
Ellie Mae says the average cost of a 30-year fixed-rate FHA
loan, including both purchase and refinancing, is around 4.63%. That’s just
slightly higher than the average cost of a conventional loan, which is around
All borrowers, regardless of loan term or down payment, must pay
the 1.75% up-front mortgage insurance premium at closing.
That means you pay a $1,750 insurance premium on every $100,000
While that sum can be added to your loan amount so you don’t
have to bring more cash to the table, it’s still an extra charge. And if you
finance it, you’ll pay interest on it, too.
Most borrowers will also have to pay monthly insurance premiums,
which were actually reduced in January 2015 for 30-year fixed-rate mortgages.
For a 30-year loan with a down payment of less than 5%, your
premiums will be 0.85% (down from 1.35%) of the outstanding balance each year.
That cost is typically divided into 12 monthly payments and
added to your mortgage payment. That’s $850 per year, or about $70 per month,
per $100,000 of loan balance.
If you put more than 5% down on a 30-year loan, your annual
premiums will be 0.80% (down from 1.30%).
It used to be that you only had to carry this insurance for at
least five years on all loans longer than 15 years, or until the balance on
your mortgage was down to 78% of the original purchase price, whichever took
Since mid-2013, new FHA borrowers who put down less than 10%
have been required to pay these premiums for the life of the loan. This rule
If you keep your FHA financing for 30 years, you’ll pay
significantly more in mortgage insurance premiums than you would with a
conventional loan and private
That’s because on non-FHA loans, borrowers can usually drop
private mortgage insurance once the loan balance is down to 80% of the purchase
price and after as little as one year.
Conventional loans also allow you to count home price
appreciation toward obtaining the needed equity. FHA mortgages do not.
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