January 28th, 2019 10:44 AM by Jackie A. Graves, President
An FHA loan is
a government-backed mortgage insured by the Federal Housing Administration, or
FHA. Popular with first-time homebuyers, FHA home loans require lower minimum
credit scores and down payments than many conventional loans.
You can qualify
for an FHA loan with a credit score as low as 500 with 10 percent down. To get
FHA’s maximum financing of 97.5 percent, you need a credit score of 580 or
higher and 3.5 percent down. FHA borrowers pay for mortgage insurance, which
protects the lender from a loss if the borrower defaults on the loan.
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
To be eligible
for an FHA loan, borrowers must meet the following lending guidelines:
FHA loans are
ideal for borrowers with little cash saved up for a down payment, and those who
have less-than-ideal credit and cannot qualify for a conventional loan. 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.
credit scores under 500 generally are ineligible for FHA loans. However, there
may be some wiggle room there. The FHA does make allowances, under certain
circumstances, for applicants with “nontraditional credit history or
insufficient credit” if other criteria are met. Ask your FHA lender or an FHA
loan specialist whether you qualify.
FHA requires a
down payment of at least 3.5 percent of the home’s purchase price, but you need
a credit score of at least 580 to be eligible. For example, if you bought a
$200,000 home, the minimum down payment would be $7,000.
can use their savings, a financial gift from a family member or a government
grant for down-payment assistance. States, cities,
counties, local housing authorities and nonprofits are all potential sources
for down-payment help. The National Council of
State Housing Agencies is a good resource for assistance programs.
HUD limits how
much FHA lenders can charge in closing costs to no more than 3 percent to 5
percent of the loan amount. The total for closing costs will vary based on
the state you live in, the size of your loan and whether you pay points to
lower the interest rate.
The FHA allows
home sellers, builders and lenders to pay some of the borrower’s closing costs,
such as for an appraisal, credit report or title expenses. For example, a
builder might offer to pay closing costs as an incentive for the borrower to
buy a new home.
typically charge more interest on the loan if they agree to pay closing costs.
Borrowers can compare loan estimates from competing lenders to decide which
option is best for them.
their home loans from FHA-approved
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.
insurance is generally required when borrowers put down less than 20 percent.
It insures the mortgage for the lender in case the borrower defaults. All FHA
loans require the borrower to pay two mortgage insurance premiums:
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.
The FHA 203(k) loan is a special
program that allows homebuyers who want to make major renovations to a home to
roll the cost of the repairs into their mortgage. The chief advantage of a
203(k) mortgage is that the loan amount is not based on the current appraised
value of the home, but on the projected value after the repairs are completed.
203(k) allows the borrower to finance up to $35,000 for nonstructural repairs,
such as painting and replacing cabinets or fixtures.
repairs an FHA 203(k) will cover:
One key benefit
of a 203(k) is that it allows you to buy a fixer-upper that you might not have
been able to afford otherwise. However, not all properties qualify and applying
for the loan can be more difficult because a detailed proposal of the work and
cost estimates are required.
For 2018, the
maximum loan limit for FHA loans in high-cost areas is $679,650 and the minimum
limit in low-cost areas is $294,515. These are referred to as “ceilings” and
“floors” that FHA will insure. FHA updates limit amounts each year in response
to changing home prices.
floor limits vary according to the cost of living in a certain area, and can
vary 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
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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