An FHA mortgage is insured by the Federal Housing Administration (FHA) and is a popular option with first-time homebuyers. It was specifically designed to help potential homebuyers get into a home with less stress by providing lower down payment options and flexible underwriting guidelines.
FHA clients can get financing with a loan-to-value (LTV) ratio of up to 96.5%. This means you’d have the ability to get a new home with as little as 3.5% down which can be paid with 100% gift funds. Sellers may give up to 6% of the purchase price for closing costs and pre-paid costs.
For 2018, the maximum loan limit for FHA loans in high-cost areas is $679,650 and the minimum limit in low-cost areas is $294,515. These are referred to as “ceilings” and “floors” that FHA will insure. FHA updates limit amounts each year in response to changing home prices.
Because an FHA loan is government-insured, it has less stringent qualifications and credit requirements compared to Conventional financing. The minimum credit score depends on a variety of factors, so be sure to check with your Mortgage Loan Officer about your specific situation.
Another appealing feature of FHA loans is that their mortgage rates and terms are competitive with Conventional mortgages. Interest rates on FHA loans generally fall within .125% lower of rates on conventional loans.
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FHA loans are ideal for borrowers with little cash saved up for a down payment, those who have less-than-ideal credit and cannot qualify for a conventional loan. FHA loans tend to be popular with first-time homebuyers, as well as those with low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as they use it to buy a primary residence.Get Started Now
Borrowers who are interested in an FHA Purchase Loan must be able to make a down-payment of at least 3.5% (which can be a gift), must live in the property they are purchasing and have a debt-to-income ratio no higher than 50-55% (depending on their credit history).
FHA borrowers can use their savings, a financial gift from a family member or a government grant for down-payment assistance. States, cities, counties, local housing authorities and nonprofits are all potential sources for down-payment help. In our local area of Delaware County, there are a handful of DAPs (Down Payment Assistance) programs that are available. The National Council of State Housing Agencies is a good resource for assistance programs too.
HUD limits how much FHA lenders can charge in closing costs to no more than 3 percent to 5 percent of the loan amount. The total for closing costs will vary based on the state you live in, the size of your loan and whether you pay points to lower the interest rate.
The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as for an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home. The great thing about an FHA loan, is that the seller/builder/lender can offer up to 6% in credits to offset closing costs and prepaids; Conventional financing is limited to 3%.
FHA borrowers generally need to have good credit, although borrowers who have blemishes earlier in their credit history may also be eligible if they have demonstrated financial responsibility in recent years even with scores “as low as 500” with 10 percent down.
To get FHA’s maximum financing of 97.5%, you need a credit score of 580 or higher.
Mortgage insurance is generally required when borrowers put down less than 20 percent. It insures the mortgage for the lender in case the borrower defaults. All FHA loans require the borrower to pay two mortgage insurance premiums:
Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be incorporated into the loan amount. Also, if a borrower chooses not to have the higher loan amount, the premium can be paid at closing where a seller credit can be applied against the full amount.
Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or Loan-to-Value. This premium amount is divided by 12 and paid monthly.
FHA Streamline Refinance: The FHA Streamline Refinance is a special mortgage product reserved for borrowers with existing FHA loans.*The program allows homeowners to bypass many of the traditional underwriting requirements. This means that there is far less required documentation and you don’t have to go through the process of another appraisal.
FHA Cash-Out Refinance: The FHA’s Cash-Out Refinance Loan is for homeowners who want to take cash out of their home equity to pay off debt, fund school tuition, making home improvements or any other purpose.
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