Are you looking to buy a home or refinance?
If so, Federal Housing Administration (FHA) loans are an increasingly popular option for many borrowers. FHA loans provide several advantages over traditional mortgages and can make the process of buying a home easier than ever before! With low down payments, flexible credit requirements, and competitive interest rates, it’s no wonder why more people are turning to FHA loans as their preferred financing solution.
In this article, we will discuss the key features of these types of loan packages that make them such an attractive choice when purchasing or refinancing your current mortgage. Read on to learn more about how FHA Loans could be just what you need!
What Is An FHA Loan?
The Federal Housing Administration (FHA) was created in the 1930s and has since been a great resource for those looking to buy or refinance their home.
FHA loans are designed to help make homeownership more accessible by offering government-backed loan options with lower credit requirements than traditional loans. This makes it easier for people who might not otherwise qualify for a conventional mortgage, such as first-time buyers, to get into a home of their own.
With an FHA loan, you can also enjoy flexible terms that allow you to pay off your loan faster if desired – making them an attractive option compared to other types of mortgages available today.
How Does an FHA Loan Work?
FHA loans are government-insured mortgages that offer several advantages over traditional mortgages.
They are designed to help borrowers purchase or refinance their homes with more flexible credit requirements than traditional loans. This means it’s easier to qualify than other types of mortgages, and you might even be able to get approved with less-than-perfect credit.
With an FHA loan, the down payment is smaller – making it a great option for first-time buyers who aren’t able to afford a large down payment.
Benefits of an FHA Loan
Some of the main benefits of an FHA loan are:
- Low credit score requirements – You can qualify with credit scores as low as 580, and you can easily raise your credit score by making on-time monthly payments. Conventional loans typically require a minimum score of 640.
- Low down payment requirement – Just 3.5% down is required for many FHA loans, making home ownership easier for more people than ever before. Conventional loans typically require a minimum down payment of 5% or more.
- Lower interest rates – With lower down payment requirements and more flexible credit requirements, the interest rate on a mortgage with an FHA loan is generally lower than rates for comparable conventional loans because of the MIP. The rate you can get with an FHA loan is set by the lender, so you might be able to get a lower interest rate than you would with other types of loans.
- Less stress – When you’re purchasing a home, there can often be a lot of stress involved. With an FHA loan, you have less to worry about than other types of mortgages since the government insures the loan if the borrower defaults on the loan.
FHA Loan Requirements
Before you apply for an FHA loan, there are a few requirements you will need to meet.
Are you looking to buy a home or refinance with an FHA loan? Good news! FHA loans can be a great way to make homeownership more accessible and affordable. Before you apply, there are a few requirements you should be aware of.
Here’s a quick list of what you’ll need:
- A valid social security number
- Proof of U.S. citizenship or legal residence
- Verifiable employment history
- A minimum credit score of 580 (maybe down to 500)
- A 3.5% down payment
- A debt-to-income ratio of no more than 43%
- An appraised value from an FHA-approved appraiser
Keep in mind that these are just the basic requirements for an FHA loan. There may be some additional requirements based on your specific situation, so make sure you check with us before submitting your loan application.
FHA Loans And Credit Score
When it comes to getting an FHA loan, your credit score can one of the most important factors in determining whether or not you’ll be approved. While many factors go into your credit score, there are some key things to keep in mind to help you understand and manage it.
- Payment history is one of the biggest factors in your credit score. Always make sure you pay your bills on time and in full. Late payments or missed payments can have a big impact on your score.
- Credit utilization is also important. This is the ratio of how much credit you’re using compared to how much credit you have available. The lower you can keep your credit utilization ratio, the better it will be for your credit score.
- Account diversity is also a factor. Having more than one type of credit account (such as a credit card and a loan) and having a longer credit history can help your score.
- Hard inquiries can also affect your score. A hard inquiry is any time you apply for new credit or a loan and will show up on your credit report within a few months of the inquiry taking place. These inquiries typically don’t affect your credit score right away, but they can have an effect on your score over time as creditors may decide not to lend to you based on your credit report showing too many hard inquiries.
Understanding and managing your credit score is key when it comes to getting an FHA loan. Keep these factors in mind and make sure you understand the importance of managing your credit to improve your chances of getting approved.
FHA Loan Limits
FHA loan limits vary from state to state.
They are based on the median home price in each state. These limits are updated each year by the Department of Housing and Urban Development (HUD) to reflect current home values.
There are limits to how much you can borrow with an FHA loan.
You can check out our FHA mortgage limits page to look up the loan limits.
Down Payment Gifts
Down payment gifts for FHA loans are allowed and treated similarly to other mortgage loan types.
The donor of the gift funds must be an acceptable source, such as a family member or employer, and they must provide a letter stating that no repayment is expected. Documentation from the donor may also be required in order to verify their ability to give such a generous gift.
Types Of FHA Home Loans
Home Equity Conversion Mortgage (HECM)
A HECM is FHA’s reverse mortgage program that helps older homeowners with low or fixed incomes convert their home equity into tax-free cash without having to sell their homes.
Some of the benefits include:
- Access to tax-free cash: A HECM allows you to access a portion of your home’s equity without having to pay taxes on the proceeds.
- No monthly mortgage payments required: If you have sufficient available funds, there are no monthly mortgage payments required with this type of loan as long as the homeowner lives in their primary residence and meets other requirements outlined by HUD (U.S. Department of Housing and Urban Development).
- Flexible repayment options: You can choose from several different repayment options including lump sum payments or regular monthly installments for a set number of years or throughout your lifetime.
FHA 203(k) Improvement Loan
An FHA 203(k) loan is designed to help you repair, improve or even buy and renovate a home with a single loan that’s insured by the Federal Housing Administration. This type of loan allows borrowers to borrow up to $35,000 ($50,000 in some instances) for home improvements without having to pay mortgage insurance although a down payment of at least three percent is required in most cases.
The interest rate on this type of financing is the rate on the underlying mortgage, but it will vary depending on the type, amount and term of the loan.
FHA Energy Efficient Mortgage
The FHA Energy Efficient Mortgage (EEM) is a great option for those looking to buy or refinance their home. This loan program allows you to finance the cost of energy-efficient improvements into your mortgage so that you can make upgrades without having to pay out of pocket.
For example, you could use an EEM loan to add insulation and new windows, upgrade your HVAC system, or install solar panels – all while taking advantage of lower interest rates than what’s typically available with other financing options.
With this type of loan, there are no additional costs associated with the purchase and installation process; it’s one simple payment!
Section 245(a) Loan
FHA 245(a) loans are graduated-payment mortgages (GPMs). They are designed for borrowers who expect an increase in income over time.
This is great if the borrower is making a permanent increase in income through promotions or receiving a pension or retirement account that will begin paying income shortly. A borrower who expects an increase in income can refinance their existing mortgage, consolidate debt or make other large purchases using this mortgage program.
FHA Streamline Refinance
With this program, borrowers can get a streamlined refinancing process that eliminates costly paperwork and appraisal fees that are usually required when applying for other types of loans. Plus, there’s no credit score requirement so even those with lower scores may still qualify! The best part? You can close on your new loan in as little as 30 days—allowing you to start the savings sooner than ever before!
FHA Cash-Out Refinance
Depending on where you live, you may be able to use this type of loan to refinance and get cash back from your mortgage.
Not all states do these, so it’s a good idea to check with us to make sure you’re in a state that does.
You can use the cash back to remodel your home, pay off high-interest debt or other expenses that currently have a monthly payment.
FHA Loan FAQs
Is it hard to get an FHA loan?
Not at all. You may even qualify for an FHA loan even if you don’t have the best credit or not a ton saved up for a down payment.
How long does it take for an FHA loan to close?
Usually 30 days. This also depends on the lender – some are faster than others.
What is the downside of an FHA loan?
This depends on what’s important to you.
If it’s lower interest rates and monthly payments, then FHA loans are typically a good option.
If not paying MIP is important to you, then FHA is not your play.
Get in touch with us and we can talk it through.
What is the biggest advantage of an FHA loan?
This can also be seen as subjective, depending on what’s most important to you.
We can say that the majority of people love the low down payment option and the rates, as that opens the door to homes they wouldn’t have thought were a possibility in the past.
Is it harder to get approved for FHA or conventional?
Unless you have a bullet credit score and are putting 20% down, FHA loans are easier.
Wrapping It Up
If you’re considering buying a home and are looking for a low down payment option, an FHA loan may be the perfect fit. Check your eligibility now or give us a call to chat about your FHA loan options!
Local FHA Resources