August 11th, 2019 8:25 AM by Jackie A. Graves, President
An FHA loan
is a government-backed mortgage insured by the Federal Housing Administration,
or FHA for short. Popular with first-time homebuyers, FHA home loans require
lower minimum credit scores and down payments than many conventional loans.
Although the government insures the loans, they are offered by FHA-approved
come in fixed-rate terms of 15 and 30 years.
FHA loans work
flexible underwriting standards allow borrowers who may not have pristine
credit or high incomes and cash savings the opportunity to become homeowners.
But there’s a catch: borrowers must pay FHA mortgage insurance. This coverage protects
the lender from a loss if you default on the loan.
insurance is required on most loans when borrowers put down less than 20
percent. All FHA loans require the borrower to pay two mortgage insurance
Upfront mortgage insurance premium: 1.75
percent of the loan amount, paid when the borrower gets the loan. The
premium can be rolled into the financed loan amount.
Annual mortgage insurance premium: 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, or LTV. This
premium amount is divided by 12 and paid monthly.
So, if you
borrow $150,000, your upfront mortgage insurance premium would be $2,625 and
your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25
per month), depending on the term.
insurance premiums cannot be canceled in most instances. The only way to get
rid of the premiums is to refinance into a non-FHA loan or to sell your home.
FHA loans tend to be popular with first-time homebuyers, as well as those with
low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as
they use it to buy a primary residence.
are limited to charging no more than 3 percent to 5 percent of the loan amount
in closing costs.
The FHA allows home sellers, builders and lenders to pay up to 6 percent of the
borrower’s closing costs, such as fees for an appraisal, credit report or title
to qualify for an FHA loan
eligible for an FHA loan, borrowers must meet the following lending guidelines:
FICO score of 500 to 579 with 10 percent
down or a FICO score of 580 or higher with 3.5 percent down.
Verifiable employment history for the
last two years.
Income is verifiable through pay stubs,
federal tax returns and bank statements.
Loan is used for a primary residence.
Property is appraised by an FHA-approved
appraiser and meets HUD property guidelines.
Your front-end debt ratio (monthly
mortgage payments) should not exceed 31 percent of your gross monthly
income. 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 some cases.
If you experienced a bankruptcy, you
must wait 12 months to two years to apply, and three years for a
foreclosure. Lenders may make exceptions on waiting periods for borrowers
with extenuating circumstances.
vs. conventional loans
loans, conventional loans are not insured by the government. Qualifying for a
conventional mortgage requires a higher credit score, solid income and a down
payment of at least 3 percent for certain loan programs. Here’s a side-by-side
comparison of the two types of loans.
loans vs. conventional mortgages
3% to 20%
for credit scores of 580+; 10% for credit scores of 500-579
15, 20, 30 years
or 30 years
0.5% to 1% of the loan amount per year
premium: 1.75% of the loan amount; annual premium: 0.45% to 1.05%
rate, fixed rate
of FHA loans
to its popular FHA loan, the FHA also insures other loan programs offered by
private lenders. Here’s a look at each of them.
FHA 203(k) loans —
These FHA loans help homebuyers purchase a home — and renovate it — all with a
single mortgage. Homeowners can also use the program to refinance their
existing mortgage and add the cost of remodeling projects into the new loan.
FHA 203(k) loans come in two types:
203(k) has an easier application process, and the repairs
or improvements must total $35,000 or less.
203(k) requires additional paperwork and applies to
improvements costing more than $5,000, but the total value of the property
must still fall within the FHA mortgage limit for the area.
Conversion Mortgage, or HECM — A HECM is the most popular type
of reverse mortgage and is also insured by the FHA. A HECM allows older
homeowners (aged 62 and up) with significant equity or those who own their
homes outright to withdraw a portion of their home’s equity. The amount that
will be available for withdrawal varies by borrower and depends on the age of
the youngest borrower or eligible non-borrowing spouse, current interest rates
and the lesser of the home’s appraised value or the HECM FHA mortgage limit or
Efficient Mortgage (EEM) program — Energy efficient mortgages
backed by the FHA allow homebuyers to purchase homes that are already energy
efficient, such as EnergyStar-certified buildings. Or they
can be used to buy and remodel older homes with energy-efficient, or “green,”
updates and roll the costs of the upgrades into the loan without a larger down
FHA Section 245(a) loan — Also
known as the Graduated Payment Mortgage, this program is geared at borrowers
whose incomes will increase over time. You start out with smaller monthly
payments that gradually go up. Five specific plans are available: three plans
that allow five years of increasing payments at 2.5 percent, 5 percent and 7.5
percent annually. Two other plans set payment increases over 10 years at 2
percent and 3 percent annually.
to find FHA lenders
their home loans from FHA-approved lenders rather than the
FHA, which only insures the loans. FHA-approved lenders can have different
rates and costs, even for the same loan.
FHA loans are
available through many sources — from the biggest banks and credit unions to
community banks and independent mortgage lenders. Costs, services and
underwriting standards vary among lenders or mortgage brokers, so it’s
important to shop around.
about how to find the best FHA
loan limits for 2019
For 2019, the
floor limit for FHA loans in most of the country is $314,827, up from $294,515
in 2018. For high-cost areas, the ceiling is $726,525, up from $679,650 a year
ago. These limits are referred to as “ceilings” and “floors” that FHA will
insure. FHA updates limit amounts each year in response to changing home
required by law to adjust its amounts based on the loan limits set by the
Federal Housing Finance Agency, or FHFA, for conventional mortgages guaranteed
or owned by Fannie Mae and Freddie Mac. Ceiling and floor limits vary according
to the cost of living in a certain area, and can be different from one county
to the next. Areas with a higher cost of living will have higher limits, and
vice versa. Special exceptions are made for housing in Alaska, Hawaii, Guam and
the Virgin Islands, where home construction is more expensive.
servicers can offer some flexibility on FHA loan requirements to those who have
suffered a serious financial hardship or are struggling to make their payments.
might be in the form of a temporary period of forbearance,
a loan modification that would lower the interest rate, extend the payback period,
or defer part of the loan balance at no interest.
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