So What Is an FHA Loan?
FHA stands for Federal Housing Administration. In simple terms, this is a loan program that’s popular with first-time homebuyers that is backed and insured by the federal government. Now it’s important to know that this isn’t who will make you the loan, your lender will do that, but this is an entity that oversees and helps folks get into new homes. Also worth noting – not all lenders are FHA qualified and not all FHA qualified lenders are the same when it comes to interest rate, fees, etc. Like anything else, always shop around to get the best deal.
What Are the Advantages of FHA Loans?
When it comes to an FHA loan- What’s in it for me? A much lower down payment! I don’t know about you but growing up I always thought before buying a home I would need a whole boatload of cash. With an FHA loan, the down payment requirement is 3.5%. This is incredible because your down payment can come from a variety of sources including your own savings, monetary gifts from family members or in the form of down payment assistance programs if you qualify.
If you missed my previous post on local down payment assistance programs check out the article, Idaho first time home buyer programs. FHA loans are also good for single family residences but also potential income properties that you plan on living in including duplexes, triplexes and fourplexes. Talk about getting some help paying your mortgage payment!
It’s also worth noting that as an FHA buyer, in some cases your closing costs can be included in your loan amount which means that’s even less cash you have to bring at closing. Even the seller of the home you want to buy can choose to help contribute to your cause. That’s something you will have to negotiate in your contract before buying your home. What Are the Disadvantages of an FHA Mortgage?
What Are the Disadvantages of an FHA Mortgage?
So all these great things about this loan program- what’s the catch? Really, there are only two major drawbacks with this type of loan. The first one is the property you are looking to buy has to be in pretty good shape before the FHA will extend out a loan. So no leaking roofs, no severely trashed carpets, no peeling paint- the home has to be considered habitable. Most likely, if you plan on picking a complete fixer for your first place, you may have to reconsider the property or think about a 203k loan which we will cover in another article.
The last major drawback is the amount of mortgage insurance you will have to pay. Since the government is backing the loan- they want to be sure they’re covered in the event you default on the loan and they have to take back the home.
The insurance essentially comes in two parts- for the first part, you pay a premium at close which will be approximately 1.75% of the loan amount and can be bundled into the loan itself. The second part is for continued coverage, or annual premium, you are required to pay monthly and this amount is included in your monthly mortgage payment. The amount depends on the length of the loan and the loan to value ratio or “LTV”.
For a Loan term longer than 15 Years and Loan amounts less than $625,000:
- LTV less than or equal to 95 percent, annual premiums are .80%
- LTV above 95 percent, annual premiums are .85%.
For Loans terms shorter than 15 Years and Loan amounts less than $625,000:
- LTV less than or equal to 90 percent, annual premiums are .45%
- LTV above 90 percent, annual premiums are .70%
For those who plan on living in their home for an extended period of time will usually refinance in the future once there’s enough equity and depending on the type of loan you get then- this can remove the insurance requirement, so you are not stuck paying it for life.
FHA Loan Limits
FHA loan limits vary by county. Currently in Ada and surrounding Idaho counties:
- Single-family $271,050
- Duplex $347,000
- Triplex $419,425
- Fourplex $521,250
FHA Loan Requirements
Minimum credit scores for FHA loans depend on the type of loan the borrower needs. To get a mortgage with a down payment as low as 3.5 percent, the borrower needs a credit score of at least 580.
Those with credit scores between 500 and 579 must make down payments of 10% or more. Other Requirements:
- Must have a steady employment history, usually in the same line of work, or worked for the same employer for the past two years.
- Must make a minimum down payment of 3.5 percent. The money can be gifted by a family member.
- New FHA loans are only available for the occupancy of a primary residence.
- Your “front-end ratio” (mortgage payment plus HOA fees, property taxes, mortgage insurance, home insurance) needs to be less than 31 percent of your gross income. It’s difficult but possible to get approved with as high a percentage as 46.99 percent. Each lender will have their own requirements, higher credit scores, larger savings, etc.
- Your “back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of your gross income. You may be able to get approved with as high a percentage as 56.99 percent. Again, each lender will have their own requirements.
- Typically you must be two years out of bankruptcy and have re-established good credit.
- Typically you must be three years out of foreclosure and have re-established good credit.
When it comes to buying your home – there are many choices out there when it comes to loans. The only way to know which one is for you is to seek out the advice of a reputable lender. We can help walk you through the loan process. For more home buyer resources including current mortgage rates visit our homebuyers resource page.