FHA Loans
FHA stands for Federal Housing Administration. The FHA has some really great loans to offer for first-time homebuyers as well as for homebuyers who may have trouble qualifying for traditional home loans. For example, it is possible for people who have bankruptcies and foreclosures in their borrowing history to get an FHA loan.
The FHA is actually not the lender. They insure the loans that are issued by FHA-approved lenders. These loans don't require the typical 20 percent down payment. Many borrowers will only need a 3.5 percent down payment. There are actually cases in which buyers may be able, through working with both FHA and other assistance sources for homebuyers, to get their home with no down payment whatsoever.
The other big plus is that FHA loans carry lower annual percentage rates than mortgage loans that would be offered to subprime borrowers by traditional lenders.
These loans are for financing your primary residence. They are not available for financing second or vacation homes.
Qualifying for a FHA Loan – Rules for 2022
Credit Scores and Down Payment Percentages - Each year, the rules for qualifying for these loans changes. For 2022, applicants need a minimum credit score of 580 in order to get the low down payment, which is 3.5 percent. For those whose credit score is less than 580, they will have to come up with 10 percent for their down payment.
Other Factors Evaluated - The credit score is just one part of the story. The FHA will also evaluate the borrower’s bankruptcies, foreclosures, prior payment history on other debts. They will also want information on difficulties that kept the borrower from making payments on other debts in the past.
Negative strikes against qualifying for the loan include not having any credit history or a bankruptcy.
Someone with a bankruptcy will have to wait for two or more years after their bankruptcy before applying for an FHA-insured loan.
If you have late payments on debt obligations, it is best to wait until you have had a full year of on-time payments before you apply for a FHA-insured loan.
If you have had a foreclosure in the past, you may still be able to get a FHA-insured loan three years after your foreclosure. The lender will be looking at the circumstances behind the foreclosure.
If you have had any civil judgements against you for money owed, collections actions or unpaid/unresolved federal debt, the FHA-approved lender will be required by the FHA to establish that all of these outstanding issues are resolved or paid before you can go through closing.
As you can see, many types of borrowers who would not be eligible for a traditional mortgage, or who would face exorbitant interest rates, will be able to qualify for a FHA-insured loan at attractive interest rates.
Employment and Income
You must have an employment history that is steady or have two years of work with the same company. Your income has to be verifiable in some way, whether that be through pay stubs, your income tax returns or your bank statements.
Debt-to-Income Ratio Requirements
Debt-to-income ratio is the percentage of your income before taxes that you spend on monthly debt. Taking into account the proposed mortgage payment as well as the other debts, the FHA requires that these debts all total less than 43 percent of your pretax income in order to qualify for the loan. If your debt load is too high, you will struggle to pay all of your bills and mortgage expenses and care for yourself and your family.
Property Requirements
The property must also pass muster with the FHA. It must be the place where you intend to reside. You must move into the home within 60 days of closing the loan. The home cannot be an investment. There will be an inspection to ensure that the home is safe and habitable.
Down Payment Assistance Programs
One of the helpful programs that are popping up on the national, state and local levels are down payment assistance programs. These programs are not offered by the FHA, but they often supplement the FHA loan. Such programs help borrowers who qualify in every other way for a FHA-insured loan. These down payment assistance programs either provide the assistance as a grant that you never have to pay back, as a loan that may be forgiven under certain circumstances or as a low-interest loan. The FHA has some really strict rules about where your down payment money comes from, but these down payment assistance sources qualify under the rules because they are from either charitable organizations or from public entities who are providing home ownership help for families whose income is lower and also for first-time buyers of homes.
Maximum Loan Amounts
There are many areas of the country that have exorbitantly priced homes. For this reason, the FHA has maximum loan amounts that are chosen by the area. For example, if you are in a lower cost area, the 2022 FHA lending limit for a single-family home is $420,680. If you are in a higher cost area, this year's lending limit for the same type of home is $970,800.
One important consideration for the borrower who is considering purchasing a home in an area where housing prices are inflated is if it is a good idea to make payments on a house that may decrease substantially in value over time. This was the problem that many people encountered in the Great Recession of 2008. Many people had to walk away from homes where they had some small bit of equity earned because they were paying enormous mortgages on homes that were not in any way close to worth the amount of money they had paid for the home. A suggestion is to carefully evaluate areas where the home prices are more in line with the actual worth of the building and the land.
Watch Out for Lender Overlay!
As you can see, the FHA loan standards are designed to get many people into housing. The problem is that the FHA is not the lender, they only insure the loan. The FHA-approved lender may have more strict requirements for you to get your FHA loan through them. This may be a lower debt-to-income ratio or even a higher credit score. If you don't qualify due to lender overlay, you can apply to other FHA-approved lenders.
Closing Costs
In order to buy a home, many things need to occur before closing. For example, the home must be inspected. There must be a title search to ensure that the legal seller is the one sitting at the closing table. There are attorney's fees, lender origination fees, surveys of the property, fees for recording the title and property taxes. The FHA loan does not cover the costs of these fees. It is customarily required that the homebuyer pay these fees. Often, borrowers can work through their real estate agent to negotiate that the seller pay these fees. Other possibilities for getting others to cover the closing costs that are acceptable to the FHA include the builder or lender covering the closing costs. If the lender covers the closing costs, they will likely charge a bit more in interest over the life of the loan.
Current Interest Rates for FHA Loans
FHA loan interest rates will vary, based upon the lender. Lenders that are approved by the FHA include traditional national banks, local banks and credit unions. Currently, FHA loan rates are hovering around the low 3 percent range.
Pros of FHA Loans
New homebuyers and those who have lower credit scores or who have other blemishes on their credit history will often qualify for FHA-insured loans.
Even though these borrowers are considered “subprime” to a traditional lender, they will receive attractive interest rates through the FHA-insured mortgage programs.
The down payments required from borrowers are lower than those required by traditional mortgage lenders.
These loans can be combined with other forms of public assistance for lower income or new borrowers so that the borrower will not need to come up with a down payment of any kind.
Cons of FHA Loans
Since the FHA is not actually the lender, and you have to go through FHA-approved lenders, you may not qualify due to stricter standards that the lender has for the loan.
Because you are not paying 20 percent as a down payment, the FHA requires two mortgage insurance premiums to be paid. One is an upfront premium that is 1.75 percent of the loan amount. Lenders often will allow you to make that mortgage insurance premium a part of your loan. The second is an annual mortgage insurance premium that is .45 percent or 1.05 percent. This premium is paid monthly.
Overall, for first-time borrowers or borrowers with less than stellar credit, FHA loans are often a great way to buy one's home due to the relaxed qualifying standards, lower down payment requirements and good interest percentage rates.