FHA Mortgage Loans

FHA BASIC GUIDELINES

The FHA loan is the most popular government-backed home loan in the country. These low-down payment loans are made by qualified lenders and guaranteed by the Federal Housing Administration (FHA).

FHA loans require just a 3.5% down payment for borrowers with a 580-credit score or higher. For homebuyers with less-than-perfect credit, FHA loans offer additional significant benefits. The government backing means average FHA interest rates are typically lower than average rates for conventional mortgages.

Borrowers with credit scores as low as 500 can qualify for an FHA loan with a 10% down payment. Guidelines and policies will vary by lender.

This historic home loan program continues to open the door to homeownership for millions of Americans who might struggle to secure conventional financing.

FHA loan limits

No matter which type of FHA loan you’re seeking, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits in 2022 range from $420,860 to $970,800.

The upper limit for FHA loans on single-family homes in low-cost counties is $420,860. An example is Lucas County, Ohio, where Toledo is located. The upper limit for FHA loans in the highest-cost counties is $970,800 — San Francisco County, California, for example.

Some counties have housing prices that fall somewhere in between, so the FHA loan limits are in the middle, too. An example is Denver County, Colorado, where the 2022 FHA loan limit is $684,250. A more detailed explanation can be provided by your loan officer.

Debt-to-income ratio

The FHA requires a DTI Ratio of 46.9 percent or lower for your Monthly Mortgage Payment, otherwise known as your front-end debt to income ratio. Your back-end debt to income ratio which includes your mortgage PITI, can’t be more than 56.9% of your pretax income. This may include debts that you aren’t actively paying, like student loans that are deferred.

For student loans in deferment, your FHA loan underwriter will include 1% of the loan’s total as the monthly payment amount. For other types of loans that you aren’t currently repaying, underwriters will use 5% of the loan’s total to calculate your DTI.

Property Appraisal

The property you’re trying to buy with an FHA loan, whether it’s a house, a condo, a manufactured home, or a multifamily home, must meet FHA minimum property requirements.

The FHA requires an appraisal that’s separate (and different from) a home inspection. They want to be sure the home is a good investment  in other words, worth what you’re paying for it — and ensure that it meets basic safety and livability standards.

For an FHA 203(k) renovation loan, the property may undergo two separate appraisals: An “as is” appraisal that assesses its current state, and an “after improved” appraisal estimating the value once the work is completed.

FHA property requirements

In addition to borrower qualifications, the property must meet certain requirements before you can qualify for an FHA mortgage.

• The loan must be for a principal residence, and at least one borrower must occupy the property within 60 days of closing.
• The property can be a single-family home (either detached or part of a development like a condo or townhouse), a multifamily home with up to four units (so long as you occupy one) or a manufactured home that’s on a permanent foundation.
• It can’t be an investment property, except for a multi-unit dwelling where you live in one of the units.
• Unless you are using a 203K loan for renovation, it must pass an FHA Appraisal, which ensures the home meets the FHA’s minimum property standards.
• The property can’t be a house flip, meaning you can’t buy a home within 90 days of a prior sale.
• You must take title to the property in your own name or in the name of a living trust at settlement.

Mortgage insurance

FHA mortgage insurance is built into every loan. When you get an FHA mortgage, you’ll make an upfront mortgage insurance payment (which can be rolled into the total amount of the loan) and make monthly payments thereafter. Your MIP upfront payment will be equal to 1.75% of the total value of your loan. For example, if you borrow $150,000 for your mortgage, you’ll pay $3,500 for your upfront payment. Your upfront MIP is due at closing. It is usually added onto the balance of the loan. If you start with a down payment of less than 10%, you’ll continue to pay mortgage insurance for the life of the loan. Those with 10% down payments will pay monthly FHA mortgage insurance for 11 years.

FHA MONTHLY MORTGAGE INSURANCE CALCULATIONS

Terms Less Than or Equal To 15 Years

Here’s what you can expect to pay for your annual MIP if your loan term is less than or equal to 15 years. Let’s say you:

• Borrow less than or equal to $625,500, with a down payment of at least 10%. You’ll pay 0.45% annually. On a $150,000 home loan, that’s $675 every year, or $56.25 each month.

• Borrow less than or equal to $625,500, with a down payment of less than 10%. You’ll pay 0.70% annually. On a $150,000 home loan, that’s $1,050 every year, or $87.50 each month.

• Borrow more than $625,500, with a down payment greater than or equal to 22%. You’ll pay 0.45% annually. On a $700,000 home loan, that’s $3,150 every year, or $262.50 per month.

• Borrow more than $625,500, with a down payment greater than 10% but less than 22%. You’ll pay 0.70% annually. On a $700,000 home loan, that’s $4,900 a year, or about $408.33 per month.

• Borrow more than $625,500, with a down payment less than 10%. You’ll pay 0.95% annually. On a $700,000 home loan, that’s $6,650 a year, or about $554.17 per month.

Terms Greater Than 15 Years

Here’s what you can expect to pay if you have a loan term for longer than 15 years. The most common example of this type of loan is a 30-year fixed rate. Let’s say you:

• Borrow less than or equal to $625,500 for your home purchase and you have a down payment of 5% or more. You’ll pay 0.80% each year. On a $150,000 home loan, that’s $1,200 per year or $100 per month.

• Borrow less than or equal to $625,500 for your home purchase and you have a down payment of less than 5%. You’ll pay 0.85% each year. On a $150,000 home loan, that’s $1,275 per year or $106.25 per month.

• Borrow more than $625,500 for your home purchase and you have a down payment of 5% or more. You’ll pay 1% each year. On a $700,000 home loan, that’s $7,000 per year, or about $583.33 per month.

• Borrow more than $625,500 for your home purchase and you have a down payment of less than 5%. You’ll pay 1.05% each year. On a $700,000 home loan, that’s $7,350 per year, or about $612.50 per month.

FHA documentation requirements

Here is some of the documentation you will need when applying for an FHA home loan:

• Valid government-issued ID, like a driver’s license or passport.
• Copy of Social Security card.
• Up to two years’ worth of original pay stubs, W-2 forms, or valid tax returns.
• Signed and dated letters that detail the source and amount of any gift funds and explicitly state that you don’t need to pay back the money.
• 2 months of bank statements all pages.
• More documentation may apply based on your specific circumstances

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 Reverse Mortgage

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 foreclosure waiting period

If you have previously lost a home to foreclosure, you’ll have to wait three years before applying for an FHA loan. There are some exceptions, however, for circumstances like a serious illness which can be documented.

Those who have experienced bankruptcy can also qualify for an FHA loan, though you’ll have to demonstrate that you’re now on better financial footing. Some allowances may be made on an individual basis, but in general, you’ll need to wait two years after a Chapter 7 bankruptcy and at least a year after a Chapter 13 bankruptcy to apply for an FHA mortgage.