An FHA loan is a federal government initiative aimed at helping families access low-interest funding for a home purchase. The Federal Housing Authority (FHA), an agency under the Department of Housing and Urban Development, administers these loans.
FHA loans are insured by the federal government and are a more affordable and risk-free mortgage option for a first-time homebuyer. In addition, the requirements for accessing FHA loans are less stringent than those of regular mortgages.
FHA Loans Requirements
To access and benefit from the FHA loans, there are eligibility requirements that an applicant must meet. In addition, only lenders who have received authorization from the FHA can dispense FHA loans. Below are the requirements for accessing FHA loans.
1. Mortgage Insurance Premium (MIP)
In a conventional housing loan, borrowers who cannot meet 20% of the purchase price can still qualify for mortgages. How? By paying for private mortgage insurance (PMI).
The PMI premiums are known as Mortgage Insurance Premium (MIP). This provision serves the dual purpose of making the loans more accessible and mitigating lenders’ risk.
However, since the FHA loan allows borrowers to pay as low as a 3.5% down payment, the FHA has made PMIs and the attendant MIPs mandatory. Every FHA loanee must have PMIs and pay MIPs regardless of their down-payment.
For FHA loan applicants who make down payments less than 10%, their monthly MIPs will continue as long as the loan is active. However, loanees who make down payments higher than 10% will only pay the monthly MIPs for eleven months.
For FHA loans, applicants must pay an upfront premium of 1.75% of the loan amount. In addition, loanees must pay annual premiums in the range of 0.45% to 1.05% of the average outstanding balance for the year in question.
2. Debt-to-Income Ratio
Your debt to income ratio (DTI) is the portion of one’s income that is required to pay off debts. This income portion is expressed in percentages.
While lenders generally provide loans to applicants with DTIs less than 43%, stricter lenders work with a 36% DTI ceiling.
FHA applicants must have DTIs less than 43% to be eligible for the federal housing loan.
3. Primary Residency
The FHA requires the home to be the loanee’s place of primary residence. For a home to be tagged as a primary residence, the owner must spend a larger period of the year living in the house.
The FHA also requires the loanee to move into the home within sixty days of closing on their home.
This requirement bars an FHA loan applicant from paying for a rental home, a vacation home, or a secondary residence.
In addition, your property of choice must meet HUD and FHA guidelines. Also, make sure to get an appraisal from an FHA-approved appraiser.
4. Steady Income and Proof of Employment
To qualify for the FHA housing loan, applicants must typically tender proof of two-year work history and proof of steady income, except in special cases.
For example, an FHA loan applicant who resigned from employment to set up a business in the same field will not require proof of work.
Also, a full-time student, a stay-at-home parent, military personnel on active duty, or an individual with a limiting medical condition are exempted from meeting this requirement.
If there are any gaps in employment for more than a month, applicants must also submit a letter of explanation. The FHA does not require the employment to be in the same field or employer.
The applicant can verify proof of steady income through pay stubs and tax returns.
The FHA lender will also examine your fee payment history to determine your trustworthiness.
5. Credit Score
The FHA sets a minimum credit score as an eligibility requirement for the housing loan. In addition, applicants must have a FICO score of at least 500.
6. Age, Social Security, and Residency
Only applicants above the age of eighteen can qualify for the FHA loan. Applicants must also be permanent residents of the United States and possess a Social Security Number.
FHA Loans Limits
The FHA loans come with base and ceiling limits subject to yearly updates. The minimum and maximum loan amounts obtainable are base and ceiling limits, respectively.
These limits depend on the type of home the applicant intends to finance. The 2022 FHA base limits for the different kinds of homes are listed as follows:
- Single-family home – $420,680
- Duplex – $538,650
- Triplex – $651,050
- Fourplex – $809,150
For ceiling limits, the FHA sets the following amounts;
- Single family home – $970,800
- Duplex – $1,243,050
- Triplex – $1,502,475
- Fourplex – $1,867,275
How to Apply for an FHA Loan
To apply for an FHA home loan, you must have first identified an FHA-approved lender and chosen home. As earlier stated, ensure that the cost of your home meets FHA guidelines. Ensure that you get your home appraised.
Finding a lender is easy because most banks, mortgage brokers, online lenders, and credit unions provide FHA loans.
Note that lenders can set personalized terms and rates outside of FHA regulations. Therefore, you can do yourself a favor by comparing rates and terms until you find the ones you prefer.
» Next, you should tender a loan application to your lender through their designated channels. For example, your lender may receive your application online, by phone, or by email.
Your application will require some information. This information is listed below:
- Full name
- Social Security Number
- State-approved Identity card or driver’s license
- Income information
- The address of the property
- The cost of the property
- The down payment amount
- Employment history
Also, prepare any documents that will back up any claims or information you have tendered. These documents include;
- Tax returns for the last two years
- Financial statements
- Recent pay stubs
- Proof of other income (e.g, disability income and social security income)
- Bank statements for the last sixty days
- Names and contact information of employers for the previous two years
- W2s from the last two years
- Profit and loss statements (for self-employed applicants)
Summary of Application Steps
- Choose a home
- Get your home appraised
- Choose a lender
- Submit your application
- Submit supporting documents
FHA Down Payment
If you intend to finance a home through the FHA, your loan will require a down payment. Applicants with a FICO score from 500 to 579 must make a down payment of at least 10%.
Applicants with a FICO score equal to or greater than 580 can make down payments as low as 3.5%.
Pros and Cons of an FHA loan
Pros
- Maintenance of housing standards
Owning a home through an FHA loan means that a home buyer can only buy houses that meet the best property standards. All homes eligible for an FHA loan go through a compulsory inspection.
Although this provision may limit a buyer’s choices and probably make it difficult to seek some financial help with the renovation, there is still something to smile home about.
- Excellent interest rate
FHA loans come packed with mouthwatering interest rates that are nowhere as distressing as interest rates elsewhere. This is good news for buyers with poor credit scores and seeking to save much on interest payments.
- Easier qualification
An FHA loan is easier to get compared to other conventional loan choices, especially for people with low credit scores. In addition, since the government insures the loan, FHA-backed lending institutions are more eager to dish out loans because they know they will get their money back.
- Lower down payments
With an FHA loan, a buyer pays a smaller down payment for a home. Compared to conventional lenders, who may require between 10 to 20 percent down payment, an FHA-loan borrower can pay as low as 3.5%. More interestingly, the buyer can also borrow to cover the down payment.
Cons
- Limited financing and fewer loan choices
An FHA loan may restrict a borrower from borrowing as much money as a conventional lender would offer. There is a cap to what a borrower can borrow, and there are limited loan options if you seek an adjustable-rate or interest-only mortgage.
- More mortgage insurance premium
The FHA requires a borrower to pay a down payment below 20% to pay Private Mortgage Insurance.
The payment is an upfront payment of 1.5 percent, in addition to a monthly insurance premium that amounts to 0.5 percent of the loan amount. This may mean more expensive insurance payments than a conventional mortgage will require.
- Limited home choices
There are limited FHA-approved homes available. A buyer may have a particular kind of house in mind to purchase, but such a house may not fall under the FHA’s approved places.
FAQs About FHA Loans
What is the FHA minimum credit score?
The minimum credit score for FHA loans is 580. However, people with credit scores between 500 and 580 can still qualify, but there’s a catch. A 580 credit score requires a 3.5% down payment of the property’s value.
But for any credit score that falls below 580, a 10% down payment is required.
What is the maximum FHA loan amount?
Currently, the FHA maximum loan amount is $970,800 for a single-family home, $1,243,050 for a duplex, $1,502,475 for a tri-plex and $1,867,275 for a four-plex. This, however, applies to high-cost areas in the US.
In low-cost regions in America, the maximum FHA loan amount for a single-unit property is $420,680. The maximum amounts for 2-,3-, and 4- units properties are $538,650, $651,050, and $809,150 respectively.
Is buying a multifamily home with an FHA loan possible?
Yes. You can take out an FHA loan to buy a multifamily home. Potential borrowers can purchase homes with four living units under FHA rules. All the requirements set by FHA to qualify for the loan must be met.
Can I use the FHA loan for a second home?
No. FHA loans are designed primarily for financing a principal residence. FHA will not insure more than one property as a primary residence for any borrower unless:
- The borrower is required to relocate (for employment reasons) to a farther location
- The family size of the borrower increases
- The borrower initially lived in a co-owned FHA-insured property.
Do credit unions offer FHA loans?
Yes. Credit unions, as well as other financial institutions approved by FHA, can give out FHA-insured loans. As a result, credit union FHA loans offer some of the most competitive FHA loan rates.
In addition, since credit unions are nonprofit organizations, they may be able to pass on their tax savings to their members at cheaper interest rates, making them one of the most affordable options for FHA loans.
Can you buy land with an FHA loan?
Yes. You can use a single FHA loan to purchase a plot of land, build a house up until it’s completed, and finance a permanent mortgage on the completed property.
The best part is that you can accomplish it without having an excellent credit score or a large down payment.
Is FHA just for low-income borrowers?
No. FHA home loans have no minimum or maximum income limitations. The rules do not state that you have to earn a low income to qualify for the FHA loan.
All that is required is that you can cover all your outstanding debts and still be able to take on new debt (the mortgage).
Can I qualify for FHA loans with student loan debt?
Yes. Your student loan debt influences your debt-to-income ratio, which ultimately determines the kind of property you can get. And as long as you can take remit the mortgage payments and keep paying your student debt and any other debt you have on the side (if any), you may qualify for an FHA loan.
Can I qualify for an FHA loan if I have a bankruptcy?
Yes. You can still qualify for an FHA loan after filing for bankruptcy, but not straight away. For example, you can apply for an FHA loan if you have made at least 12 on-time payments in the 12 months following a chapter 13 bankruptcy.
The waiting period for a chapter 7 bankruptcy is two years after discharge, and you must meet every FHA requirement.
Can I qualify for an FHA loan with a high DTI?
The typical FHA criteria allow for a DTI of 43%. However, compensating factors allow for substantially greater ratios of up to 56.9%. The DTI varies with credit scores.
People with higher credit scores may qualify for an FHA loan with a high DTI within the FHA-approved range. People with cash reserves or residual incomes may also be eligible for FHA loans with high DTI.
How long do FHA loans take to close?
FHA loans typically take around 47 days to close. FHA refinances faster, with an average closing time of 32 days. FHA loans are usually completed in a period similar to traditional loans but may require more time at specific points.
Conclusion
FHA loans are generally housing loans for low-income households. However, anyone can apply irrespective of economic class.
While FHA loans have their cons, they are a safe strategy for first-time homeowners. FHA loans have low risks and are easy to obtain. Ensure that you meet the requirements, and you could be the newest homeowner in town.