- Posted by: steve
- Category: fha, mortgage news
A mortgage insured by the Federal Housing Administration (FHA) is one of the most popular types of loans among those buying a home for the first time.
It’s an enticing type of borrowing thanks to its low down payment thresholds. These often make it possible for buyers to purchase their first property when the option may have previously looked impossible.
Before you apply for a FHA loan, be sure to consider everything involved in it, from the smaller down payments to the mortgage insurance premiums that are enforced to protect the lenders.
If you’re wondering if an FHA loan is right for you, read on to learn more.
What is an FHA Loan?
Down payments can be as low as 3.5% for an FHA loan. Credit scores usually considered are those in excess of 580.
If you supply an upfront down payment of at least 10% but have a lower credit score closer to 500, you may still qualify.
If you do have a credit score on the lower end of the scale, before you apply for a FHA loan it’s crucial to consider that your interest rates will be higher.
As you apply for a FHA loan, it’s crucial to understand that those borrowing the money will need to take on payments that insure lenders, which will protect them if you default on your repayments.
These loans also offer lower closing costs than standard mortgages as well, making them even more attractive.
Why Were FHA Loans Created?
In the 1930s, a sudden wave of defaults and foreclosures took place, leaving mortgage lenders unprotected and facing a loss on their lending.
It became clear that an insurance policy was required to protect lenders from such eventualities and to ultimately ensure that the housing market didn’t implode.
This policy was also devised so that those with lower incomes wanting to get on the property ladder could do so.
While these loans meant the less wealthy could own their own homes, it also put lenders’ minds at rest with the knowledge that, should the crashes of the 1930s repeat themselves, they were safer this time.
Should You Apply for a FHA Loan?
There are two major factors to consider when deciding whether it’s the right fit for you to apply for a FHA loan.
If you have little saved in the bank, the idea of owning a home can seem like a pipe dream.
This is where the FHA can work in your favor.
The idea of paying a lower down payment makes it much less daunting to get onto that initial rung of the property ladder.
Finding that initial 3.5% is easier than coming up with the heftier down payments asked of other homeowners, which will often be in excess of 20% in comparison.
If even this seems unattainable, local programs that assist in finding a low down payment are out there too.
These differ from state to state, and are generally referred to as down payment assistance programs or local home buying programs.
If you have a low credit score, a mortgage via the FHA can give you the opportunity that conventional mortgage lenders don’t.
If you need to check your credit score, there are way to do this now that neither cost you anything or end up affecting your rating.
Are You Looking to be More Energy Efficient?
If you’re simply looking at ways to make your home more eco-friendly, this is another reason to apply for a FHA loan.
The FHA’s Energy Efficient Mortgage program (EEM) is a tailor-made mortgage that insures lenders looking to be more economical when it comes to utility bills.
A home that is more energy efficient can help homeowners cut costs on energy and utility bills.
These lower household costs leaves more room for higher mortgage repayments.
The EEM program recognizes this and the FHA will therefore insure a borrower’s mortgage so that the cost of energy efficient tweaks can be made to the residence.
If you want to apply for a FHA loan on these grounds, you will only need to be approved for the loan amount used to purchase or refinance a home rather than the total loan figure.
The borrower then decides which package of improvements to sign up for on their home (after the property is assessed by a surveyor).
Are You Eligible to Apply?
There are more requirements to consider than just the down payment you can afford and your credit rating when you decide to apply for a FHA loan.
Here are some factors to consider before going forward with your application.
Your employment history should be steady, and it’s typically preferred that you have worked for the same employer for the past two years.
Applicants will be checked in terms of their lawful residency status in the U.S. and whether they have a valid Social Security number.
You must also meet the age requirement in your state for signing a mortgage.
The FHA now states that only primary residence occupants can apply for a FHA loan.
In addition, you are required to be appraised by a property evaluator signed off by the FHA.
Front and Back-End Ratios
A front-end ratio is calculated as a mortgage payment plus HOA fees. It also includes property taxes, mortgage insurance, and homeowners insurance.
If you apply for a FHA loan, the front-end ratio requirement is less than 31% your gross income, although there is a leniency here that allows some to be approved with a percentage up to 40%.
A back-end ratio is calculated as a mortgage plus the rest of your monthly debts. These might include credit card repayments, car financing debts, and more.
These must add up to less than 43% of an applicant’s gross income but there’s leeway here too.
If your percentage is as high as 50% you may still be eligible.
Bankruptcy and Foreclosure
Those looking to borrow are required to be two years out of bankruptcy and have re-established a decent level of credit.
If the circumstances are considered extenuating then exceptions can be made as long as you are out of bankruptcy for more than one year.
Assessors will still look at your spending since this time and decipher whether or not it has been responsible.
If you apply for a FHA loan, you should also be three years out of foreclosure.
The same rule applies here. They’ll look to see that your credit is ideally rebuilt to a good level, but extenuating circumstances are taken into consideration.
The home you are purchasing must meet the standards laid out by the FHA assessors considering your application.
If you are buying from a seller, it’s possible that he or she may adhere to any recommended improvements, subsequently meeting the requirements.
If they don’t, you’ll be liable to pay for the required repairs at closing.
This means the deal will be held in escrow until the repairs are complete.
Can You Apply for a Loan on More Than One Property?
In most cases, the FHA loan program is for single families, restricting FHA mortgages to only one.
HUD 4155.1 Chapter Four Section B, states: “At least one borrower must occupy the property and sign the security instrument and the mortgage note in order for the property to be considered owner-occupied.”
It also details that:
“FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower’s principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.”
There are exceptions, however.
You are entitled to apply for a FHA loan on top of an existing one where a larger home is justified. For example, this might occur when a family grows or other such circumstances.
Similarly, if you are relocated for work, but wish to keep your property already under an approved FHA loan, you may be eligible to take on a second mortgage via the same methods.
Property owners vacating a jointly-owned primary residence could also be eligible.
If you are “non-occupying co-borrowers” on a FHA mortgage that already exists, you may also be eligible to apply for a FHA loan.
In this instance, the new home must be that borrower’s primary residence.
There are different rules for different circumstances when it comes to multiple FHA mortgages and the rules are therefore not set in stone.
Discussing your case with an expert is required if this is the path you are looking to take.
Which Type of FHA Loan is Right for you?
Fixed Rate and Adjustable Rate Loans
Typically, fixed rate is what those with little or low income will be going for. This often applies to young couples, recent college graduates or those in higher education, for example.
If your income falls under the low-to-moderate bracket, then an adjustable rate mortgage may be a better fit.
Often this applies to families that have, until recently, rented their homes and are trying to take that leap onto the property ladder.
This type of loan is aimed at homeowners over the age of 62.
The reverse mortgage method of lending lets the borrower transfer equity in the home into a line of credit or income.
Secure Refinance Loans
If interest rates increase, your adjustable rate loan can be affected and can impact your financial situation.
The FHA secure refinancing system takes this into consideration and is a way of protecting you should the threat of loan foreclosure suddenly loom its head.
There are specific loans that take into account if you are specifically purchasing a property in a complex of condos.
Growing Equity and Graduated Payment Loans
If you have a low or limited income but believe that your financial situation will improve in the near future, a growing equity mortgage is an excellent option to look into.
Here, repayments begin modestly, but as your circumstances change, you will pay back larger amounts as time goes on.
Similarly, if you are on a low-to-moderate income, but this is set to increase significantly over the next five to 10 years, the graduated payment mortgage is an ideal method of FHA borrowing.
FHA Jumbo Loans
Also known as a “non-conforming loan,” jumbo mortgages exceed the county limit for mortgage loans in a particular zip code.
Although you may want to apply for a FHA loan under the jumbo system, there are factors to consider before doing so, including the fact that there are no cash-back procedures in place and you cannot apply for down payment assistance.
These are loans that help service members, veterans, and eligible surviving spouses get their foot on the property ladder.
Other buying factors may come into play with VA loans. For example, a home may be required for adaptation when you return from your service.
The U.S. Department of Veteran Affairs guarantees a portion of the loan, enabling the lender to agree to terms that are more beneficial to you.
In applying for a VA mortgage, factors such as length of service or service commitment, duty status and character of service may come into consideration.
There are various sub-categories of VA loans to consider when you apply for a FHA loan of this type.
There are purchase loans and cash-out refinance programs for those in active service. A valid Certificate of Eligibility is required.
Interest rate reduction refinance loans are granted if you already have an existing VA guaranteed loan on the property in question. The new loan will typically help in lowering the interest and the payment installments on the other VA loan.
If you wish to apply for a FHA loan on the Native American direct program, you can be assessed to buy, build, re-finance or improve on Native American trust lands.
This requires the involvement of your tribal organization and, again, requires an approved Certificate of Eligibility.
Veterans with total and permanent disabilities that are a result of or related to your military service may apply for an adapted housing grant.
New Florida Mortgage
If you think you’d like to apply for a FHA loan, experts at New Florida Mortgage are on hand to help.
The first step would be to check out today’s rates by heading to our quote generator.
We’re here to help you through every step of applying for your FHA mortgage and getting you that step closer to being a homeowner.
Contact us today to get started!