FHA Loans: Popular With Certain Groups
FHA doesn’t actually lend people money, they only insure the loan with lenders against loss. FHA loans are given to consumers though FHA approved lenders who lend money to consumers that has FHA insurance for the loans. FHA loans are meant to help people who may have less-than-perfect credit, have lower down payments or have short-sold their home or been foreclosed on in the past.
Lenders are excited to loan money under FHA guidelines because FHA insures that if the loans default, then the lender gets repaid out of the FHA insurance fund. The FHA loan program was initially developed in the 1930s as a way to help the housing market get on it’s feet and since it’s launch it has helped millions of families get into a home that would have otherwise not qualified for traditional financing.
Advantages of FHA Loans
FHA loans have risen in popularity in recent years because lenders have increased requirements for other loans. When compared to other types of loans, FHA loans are generally easier to qualify for due to flexible guidelines and lower down payment requirements. FHA loans also have a lower credit score requirement than conventional loans. FHA loans can also be assumable, which means in the future it would be possible for someone to assume an FHA loan from the original borrower.
FHA Loans: How To Qualify For An FHA Loan
The first step to qualifying for an FHA loan is to work with a loan officer at an FHA approved lender. General guidelines that the loan officer will discuss with you for FHA loans include:
- Documenting an employment history over the last two years. FHA guidelines consider the last two years of employment and look at a steady pay history or employment with the same employer.
- Generally must have a valid social security number and be a resident of the US. There are exceptions for resident aliens, but these exceptions will vary by lender.
- FHA loans require a minimum down payment of 3.5% when buying a home – but the down payment may be a gift under certain conditions.
- The property will need to be inspected by an FHA appraiser and an FHA approved appraisal must be done.
- Although there is some flexibility, the total monthly mortgage payment generally should not exceed 30-32% of your gross monthly income.
- Your total debt should not be more than 43% of your gross monthly income. Again, there is some flexibility with this number, but this is a good guideline.
- Minimum credit scores now apply with FHA loans and can vary by lender. A credit score of 580 and above requires a 3.5% down payment and a credit score of 500-579 requires a 10% down payment. Credit score requirements will vary by lender.
- If you have had a bankruptcy that has been discharged, the waiting period is 2 years.
- If you have had a foreclosure, the waiting period is 3 years and you must have good credit.
Mortgage Insurance For FHA Loans: FHA UFMIP
All FHA loans are required to have mortgage insurance – both in up-front mortgage insurance (UFMIP) as well as monthly mortgage insurance.
Up-front mortgage insurance premium (UFMIP or MIP) is an insurance premium that is collected at time of closing and is paid directly to FHA. It is financed into the loan and is 1.00% of the loan amount, regardless of their credit score.
So as an example for a $300,000 loan you would pay 1.00% of the total loan amount or $3,000.
Annual MIP / Monthly MIP Monthly mortgage insurance premium is actually an annual premium but is collected monthly. This amount of insurance premium depends on the loan-to-value ratio and length of loan. It is possible to pay either .85% of the loan amount or .90%. If the loan to value ratio is less than or equal to 95 percent, a borrower will pay .85%. If the loan to value is more than 95 percent, then the annual MIP will be .90%.
As an example for a loan to value that is less than 95%, a $300,000 loan multiplied by .09 is $2,700 in annual premium that will be paid at the rate of $225 each month.
MIP and UFMIP can be difficult to understand and many times FHA will change the guidelines on what they require to be paid for both MIP and UFMIP so be sure to ask your loan officer about the UFMIP and MIP requirements on FHA loans.