What is an FHA Loan or FHA Mortgage?
FHA loans are federally assisted mortgages that are insured by the FHA (Federal Housing Administration). FHA loans allow borrowers who have low down payment needs to qualify for a mortgage and purchase a home. We can help you to qualify for an FHA loan even if you have low credit scores.
FHA loans are issued by federally qualified and approved FHA approved who will underwrite the mortgages in a way to make sure that borrowers can find the loan they need while still having the ability to repay the loan. These lenders are protected from foreclosure by a mortgage insurance premium (MIP) that is paid by the borrowers ( but financed on top of the mortgage applied for) and is explained below.
FHA Mortgage Benefits – Why are FHA loans better?
- FHA mortgages allow for low credit scores.
- They are more forgiving on the income and asset requirements.
- Debt to income rations of up to 56.9%
- FHA mortgages require very low down payments.
- FHA mortgages never have pre-payment penalties
- FHA rates are good despite the low down payment and sometimes low credit scores but the lower your credit score the higher the rate. This is called risk based pricing.
- You would be eligible for an FHA streamline refinance one day.
FHA Loan Requirements
- FHA mortgage loans require both taxes and insurance to be escrowed.
- They require you to have a mortgage insurance premium (MIP)
- You must have a sustained history of employment (typically at least two years)
- The home must be your primary residence.
- You must occupy the home within 60 days of closing and live in the home for the first 12 months.
If your down payment is less than 20% of the purchase (or 20% of the value on a refinance), you will be required to have MIP (Mortgage Insurance Premium) which is a percentage of the loan and also can be financed (rolled into the loan) so that you do not have to pay out of pocket.
What is the FHA Mortgage Down Payment Requirement ?
The minimum down payment requirement for an FHA mortgage in 2021 is 3.5%. For this, you must have a minimum of a 580 credit score. See below for options available when your credit score is below 580. This program is available for primary residences that are 1-4 units.
What is the FHA Credit Score Requirement?
Borrowers who are interested in an FHA mortgage can qualify for a mortgage with a credit score as low as 530. However, any borrower with a credit score that is less than 580 will need to put at least 10% down on their purchase or have 10 percent equity in a refinance and the rate will be higher. So, there is a benefit to doing whatever you can to improve your credit score. We can help you in this area as well.
What is FHA Mortgage Insurance (MIP)?
The FHA mortgage insurance premiums (MIP) provide lenders with protection against any future losses in the event that a borrower defaults on the loan. The lenders are protected because the FHA will cover the FHA lenders’ losses in the event of a homeowner’s default. Loans must meet the requirements referenced above (established by the FHA) to qualify for insurance.
How Much Will FHA Mortgage Insurance Cost?
LTV Greater than 90% – Mortgage Insurance Premiums (MIP) must be paid until the end of the loan term, or 30 years, whichever occurs first.
LTV less than or equal to 90% – Mortgage Insurance Premiums (MIP) must be paid for 11 years or the end of the loan term, whichever comes first.
Mortgage Insurance Premium (MIP) Base Rate Calculation
Loans less than or equal to $625,500
- <= 95% LTV 80 basis points
- > 95% LTV 85 basis points
Loans greater than $625,500
- <= 95% LTV 100 basis points
- > 95% LTV 105 basis points
Mortgage Insurance (MIP) Calculation Example:
- Purchase Price = $315,000
- Loan Amount = $300,000
- Loan to Value Ratio = 95.23%
- Result of example above = 85 basis points or .0085
- Mortgage Insurance Premium = ($300,000 X .0085) = $2,550 annual or $212.50 per month
FHA Streamline Refinance
This is a great program that is only available if your currently have an existing FHA loan. Here are the benefits:
- FHA Streamline Rates are the same as the purchase FHA home loans.
- A Streamline FHA Refinance is fast and easy because there is less documentation required.
- FHA mortgages (even the Streamline Refinance) never have pre-payment penalties.
- No verification of employment or income is required.
- No appraisal is required. The FHA will simply use your original purchase price as the value.
- No pre-payment penalty. This means you can refinance out of this program or sell your home without any concern about a penalty.
- No official credit score requirement by the FHA. However, some lenders may impose their own credit score minimums.
FHA Mortgage Loan Programs for Seniors
If you are a homeowner age 62 or older and have a significant amount of equity in your home, you may qualify for the FHA Home Equity Conversion Mortgage Program (HECM). This is basically the FHA’s version of a reverse mortgage program.
FHA Energy Efficient Mortgages
Yes, there is a way to use your loan to help fund energy efficiency improvements in your home. In 2011, the Federal Housing Administration came out with the FHA Power Saver Grant. They will pay for up to 1% of the closing costs or loan origination fee if the borrowers spend at least $3,500 on energy efficient improvements in the home.
Want to learn more? Let one of our FHA Lenders walk you through the details of the program and provide an FHA rate quote.
FHA Loans for Manufactured Housing and Mobile Homes
The FHA now can finance your mobile home and factory built manufactured home. There are mortgage products for people who own mobile homes that will be located in a mobile home park and a mortgage product for people who also own the land that their mobile home is on. Want to learn more? Talk to one of our qualified FHA lenders to discuss your personal scenario and to get an FHA lender consultation.
FHA 203k Rehab Loan
The FHA has come out with a great program called the 203K which enables buyers to purchase a home AND borrow the funds needed to rehab the home. This program allows you to avoid costly short term construction loans that exist outside of the FHA 203k rehab mortgage loan program. This is a single, long term loan (either fixed or adjustable) that will cover the cost to purchase the loan as well as the rehabilitation costs.
FHA Loan Frequently Asked Questions – FHA FAQ
How does an FHA loan work? Borrowers apply for a loan with FHA approved lenders. The FHA insures the loans as long as their guidelines are met. The added protection provided to the lenders by the FHA allows them to relax the requirements and make FHA loans attractive to potential home buyers.
Can FHA loans be used to buy investment or rental properties? No, FHA loans are for primary residences only but can be up to 4 units.
How long do you have to live in a house with an FHA loan? The requirement is that you occupy the residence a minimum of 60 days after closing and you must live in the home for a minimum of 12 months afterwards.
Are FHA loans for first time home buyers only? No, they are available to anyone who can meet the requirements.
What is an FHA 203b loan? It is a fixed rate loan that first time home buyers typically apply for.
What documentation do I need to provide for an FHA loan? You will need the standard documentation (pay stubs, tax returns, verification of employment, bank statements and verification of other significant assets, deed or contract of sale). There will also be additional FHA forms that will need to be completed by the lender on your behalf that you will need to sign.
Can you refinance with an FHA loan or even get an FHA Cash Out Refinance loan? Yes you can email us for more info at firstname.lastname@example.org
What is the FHA down payment requirement? You will need to put down 3.5% for an FHA loan. However, if your credit score is below 580 then a down payment of 10% will be needed.
Do FHA loans require mortgage insurance? Yes, if you are putting down less than 20%, you will need to pay monthly MI (Mortgage Insurance). This provides added protection for the lender in the event of a foreclosure.
Can veterans apply for an FHA loan? Veterans can apply for an FHA loan but they will need to submit a DD form 212 with your application. We believe the best program for veterans is the VA loan.
What are the FHA mortgage loan fees? We recommend that you contact us to outline all of the fees that may pertain to you. Each scenario will vary and can result in costs that are slightly different. The costs are government regulated and the lenders are required to provide you with a good faith estimate.
What is the FHA Loan limit in my area? We recommend that you discuss this with one of our lenders. They can discuss the loan limits with you as well as determine whether you qualify.
Can I get an FHA loan with bad credit? The good news is there are FHA loans available for individuals who have bad credit. The interest rate may be slightly higher and you may need to put down more, but this can absolutely be done.
Can I purchase a car before applying for an FHA loan? It is not recommended to make any major purchases before applying for any loan. You do not want that car payment as part of the qualification calculation.
Are FHA loans better than conventional loans? If you are putting less than 20% down then yes an FHA loan is better than a conventional loan. The rate will be better and your total payment will likely be less. You will also have access to the FHA streamline refinance program in the future where no appraisal will be required.
Can I get an FHA loan after a bankruptcy? Yes but you will need to wait two years after your bankruptcy.
Can I get an FHA loan after a foreclosure? Just like the bankruptcy you can but not until two years after.
Should I get an FHA loan if I am putting at least 20% down? You may want to consider some other loan if your down payment is 20% or more. FHA loans require you to monthly mortgage insurance regardless as to what your down payment amount is. The mortgage insurance adds costs to your payment. It is for this reason that it may not make sense for you to go with an FHA loan with a larger down payment.