While the FHA loan program is a great low-risk financing option, many borrowers are unaware that there is more that one type of FHA loan. In fact, there are several different loans designed to help different types of borrowers.
Since interest rates and fees vary between loans, it is important that borrowers become familiar with the different types of FHA loans.
A LITTLE INFORMATION ABOUT FHA LOANS
The FHA loan was created back in 1934 by the Federal Housing Administration as a government-backed home ownership program. According to the U.S. Department of Housing and Urban Development in 2018, 80% of the FHA loans were made to first-time home buyers (The FHA defines a first-time home buyer as someone who has not purchased a home in the last three years).
FHA loans are always sourced through private lenders, instead of directly through the FHA. The federal government doesn’t provide any money to borrowers, but instead guarantees to pay a large part of the debt given to those private lenders.
This means, if a borrower stops making payments, or enters into bankruptcy or foreclosure, the government will repay the lender for their losses. In doing this, private lenders have a greater incentive to give loans to home buyers that may not otherwise qualify due to the higher down payment and higher credit score requirements of conventional loans.
While not to be used for investment properties, you may purchase a one-to-four-unit property with an FHA loan that can be rented out, as long as one of the units is used as your primary residence.
ADVANTAGES OF USING AN FHA LOAN
FHA loans come with plenty of advantages, especially for those who are having trouble qualifying for conventional loans. Many people have problems qualifying for conventional loans if they have a lack of credit, lack of down payment, previous foreclosures, bankruptcies or short sales.
Lower Credit Score Requirements
If you find yourself lacking good enough credit to qualify for other loans, then an FHA loan is a great option. FHA loans are far more flexible on credit score requirements. A reasonable credit score is usually still required, but you don’t need a great one. Some FHA loan programs are available to borrowers with credit scores as low as 500*, with 580 being acceptable. Most other loan programs require credit scores of at least 620-640.
(*Generally requires a 10% down payment for scores between 500-579.)
Credit scores for FHA loans can differ from lender to lender, so if you don’t qualify with one lender it wouldn’t hurt to try another.
Apply for an FHA loan today by completing the form on this page!
Lower Income Requirements
While borrowers are required to have sufficient income to qualify for an FHA loan, there are no minimum or maximum income requirements. Like with other loans, you will be required to provide proof of employment (pay stubs, etc..).
Lower Down Payments
One huge advantage of using an FHA loan, is that down payments can be as low as 3.5% of the home’s purchase price. While the down payment price can be more for borrowers with lower credit scores, it will usually be much less than you’d get with conventional loans.
In some cases, you can even apply for down payment assistance, but you may run into maximums when doing this. Your income must meet certain requirements to be eligible for down payment assistance. Give our friendly experts a call at 877-432-5626 to learn about the options available to you.
Help with Additional Fees
The FHA loan will usually help with additional fees that come with purchasing a home, including closing costs. FHA loans allow the seller to pay 6% of the sales price to additional fees. These additional fees could include origination fees and other closing costs.
This differs from conventional loans, in which sellers can usually cover no more than 3% toward closing costs if the buyer has a down payment less than 10%.
In some cases, the seller may not be willing to cover closing costs, especially in a hot housing market. Sellers are looking for a faster sale and, in a down market, paying closing costs may contribute to a faster sale.
Explore your home financing options with the help of FedHome Loan Centers.
Worried About Debt?
A debt-to-income ratio, or DTI, is something every lender is going to look at when considering a borrower. For most lenders, mortgage loans require a maximum DTI ratio of 41%, but FHA loans usually allow for higher DTIs.
Financing for Repeat Borrowers
One common misconception with FHA loans is that they can only be used for first-time buyers. This is not the case. As long as the loan is used to purchase a primary residence, repeat buyers can also qualify for an FHA loan.
Considerations When Using an FHA Loan
While FHA loans are usually great options for those with lower credit scores, there are some facts you’ll want to take into consideration.
You may find that your mortgage insurance premiums (MIPs) are higher each month than they would be with a conventional loan. Most borrowers find this a small price to pay for the FHA loan’s easier qualifications and lower down payment requirements.
Upfront and monthly mortgage insurance are usually required for FHA loans. This protects the lender against losses from defaults on home mortgages. FHA loans require you to have mortgage insurance for the duration of the loan. However, you can refinance your loan once you have 20% equity and eliminate your mortgage insurance payments.
With conventional loans, you can usually avoid mortgage insurance by making a larger down payment. The down payment would have to be around at least 20%.
You may also want to consider that the value of your home may go up in value over time. If you are using an FHA loan, the only way to get rid of higher mortgage insurance costs is to refinance with a conventional loan. In order to remove your mortgage insurance with a conventional loan, you just have to submit a written request to your lender. To do this, you would have to meet the requirements of the conventional loan lender.
Refinancing could mean an increase to your interest rates and more closing costs, plus plenty of paperwork. FHA loans have a loan limit in many areas, so you may find it difficult to receive one for a higher-priced home.
Speak with the experts at FedHome Loan Centers for information on your home financing options.
The Different Types of FHA Loans
While most types of FHA loans have a lot in common, it is important to know the different types.
Fixed Rate Mortgages
Fixed-rate mortgages allow borrowers to choose a loan term between 10 and 30 years. The benefit of these mortgages is that the interest rates and monthly payments won’t change over time. These are the most common type of FHA loan.
Adjustable Rate Mortgages
Also known as ARMs*, adjustable rate mortgages are appealing to some because they can offer lower interest rates and monthly payments. These payments can increase or decrease over time, though. Terms for ARMs are between 10 and 30 years.
Unlike fixed-rate mortgages, ARMs only have a fixed interest rate for an initial period, then it is subject to change. In some cases, these interest rates and monthly payment fluctuations can happen as often as one-to-two times per year.
If interest rates are low, you could potentially purchase a more expensive home with an ARM. Thanks to its initial fixed rate period, an ARM may be a good option if you are only looking to own the home for a few years.
In a five-year FHA ARM loan, you can refinance up to 97.75% of your primary home’s value and the home can be purchased with a down payment as low as 3.5%.
(*Although ARM loans are an option, they are generally not recommended for home buyers intending to reside in their home long term.)
Reach out to one of our Loan Specialists today for more information at 877-432-5626.
FHA 203(k) Rehabilitation Loan
The FHA 203(k) Rehab Loan is perfect for those looking for a home that needs some work. With the FHA 203(k) loan, homeowners and home buyers can finance up to $35,000 of their mortgage for repairs and renovations to a residence.
Using this loan, you can find a home that costs less as long as you’re willing to put in the work.
In most cases, this loan will provide funds to purchase the property and enough to make necessary improvements and repairs. Sometimes, the loan will even provide enough to cover the borrower’s existing mortgage or rent for up to six months.
FEMA FHA Disaster Relief Loan
It was announced by the U.S. Housing and Urban Development that federal assistance will be provided to those who lost homes located in a FEMA disaster area. If your home was lost or badly damaged by one of the recent hurricanes or other natural disasters, then you may qualify for a $0 down FHA Disaster Relief Loan.
Current states with FEMA designated disaster areas are: AK, AL, AR, AZ, CA, CO, CT, FL, GA, GU, HI, IA, ID, KS, KY, LA, MD, MI, MN, MO, MP, MS, MT, NC, ND, NE, NM, NV, NY, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV, WY.
You may qualify for this FHA loan to purchase a home even if you were a renter and did not own a home during a disaster.
If you’re home has been affected by a natural disaster, FedHome Loan Centers is here to help.
Buying a Short Sale or Foreclosure with an FHA Loan
Short sales are something that affect Americans on a large scale. They became the preferred way of disposing of bad assets when they surpassed bank foreclosure sales. In fact, many lenders prefer short sales to foreclosures.
A short sale is a transaction that involves selling a home for less than the balance owed on its mortgage. If you are looking for a bargain, then a short sale may be the way to go. Buying a short sale home using an FHA loan has the potential to save you additional money up-front on the down payment.
FHA Short Sale Purchase Requirements:
• The property must be identified as one-to-four units. Nothing over four-units, such as a five-unit apartment, will qualify.
• The home must not have been used as a rental for more than 18 months. (A variance must be obtained if the home was used as a rental for more than 18 months.)
• The home must not have been purchased as a rental or other type of investment.
• The seller is facing some sort of hardship.
FHA short sales usually take around four-to-six months. See if you qualify to purchase a short sale home with FedHome Loan Centers.
1.5% Down Payment Assistance
A new assistance program is available for those having trouble coming up with the funds for a down payment. Known as the DPA Advantage Program, it allows first-time home buyers to receive a 1.5% grant of the home’s purchase price.
The grant is also available to any borrower on the loan application who is a current, retired, volunteer or non-paid:
• First-responders (police officer, firefighter, public safety officer, paramedic, emergency medical technician (EMT), including volunteers or similar);
• Medical personnel (nurse, doctor, phlebotomists, health ambassador, or hospital, American Red Cross worker, or similar);
• Civil servants in a federal, state or local municipality; or
• Military personnel
The grant has a minimum qualifying credit score of 580. This program can be used in conjunction with the FHA 203(b) and 203(k) programs. The grant cannot be used with the FHA 203(h) program.
For more information on this or any other loan programs contact our Loan Specialists at Loan Specialists at 877-432-5626.
CHOOSE THE RIGHT FHA LOAN FOR YOU
There are many FHA loans to choose from, so picking the right one can seem like a daunting task. One of the best ways to be sure you pick the right loan is to work with a trusted lender, sharing your wants and needs so that they can find the best loan for you.
Reach out to FedHome Loan Centers today to speak with one of our Loan Specialists and find the perfect loan for your situation!