What is an FHA Loan?
In 1934 Congress authorized the creation of the Federal Housing Administration. Back then, the economy was still struggling from the throes of the Great Depression and banks stopped lending money, that is if they had any money in the first place. The housing industry was dead in its tracks and new home construction was almost non-existent as more than two million construction workers had lost their jobs. To further suppress the housing industry, banks stopped making new home loans and for those few banks that did issue home loans the terms were so out of reach that only the wealthy could qualify. At that time down payment requirements for homes could be as high as 50% of the sales price. Today, the minimum down payment for an FHA loan is just 3.5% of the sales price and since being established has insured nearly 50 million loans.
What is the Loan Guarantee?
This type of loan can really be thought of as an insurance policy rather than a loan program. An FHA loan is one of the three “government-backed” mortgages. A government-backed mortgage means the lender is compensated for part or all of the loss when the home owner goes into default with their mortgage. This compensation is financed with two separate insurance policies, an upfront mortgage insurance policy that is rolled into the loan amount and an annual policy that is paid in monthly installments. The upfront premium is 1.75% of the loan amount and the annual premium for most FHA loans is 0.85% of the outstanding loan balance and paid back in monthly installments for the life of the loan.
What are the Down Payment and Closing Cost Requirements?
FHA loans do require a down payment and the minimum down payment is 3.5% of the sales price. The FHA loan is widely popular with first time buyers due to the low down payment requirement. VA loans are of course an option but only for those who are eligible for the program and the USDA program limits the amount of household income borrowers can have as well as requiring the property be located in a preapproved, rural area.
Down payments can come from the borrower’s own funds as well as in the form of a financial gift from a qualified donor. Eligible donors include the borrower’s family including parents, siblings, grandparents, aunts, uncles, a close friend or partner, a charitable organization, non-profit or government agency designed to assist first time buyers purchase and finance a home.
Standard closing costs are required with an FHA loan. These costs include those from the lender as well as non-lender entities. Typical lender fees might include a loan processing fee, origination fee or underwriting fee for example. Non-lender fees can include charges for title insurance, settlement charges and attorney fees. Your loan officer will provide you with a list of fees you might expect to see at your closing. These fees are all one-time charges. In addition to these one-time charges, there are other costs that will occur again, sometimes referred to as “recurring” closing costs.
Such costs include paying for an insurance policy and setting up escrow or impound accounts. Escrow and impound accounts are savings accounts used to pay annual or semi-annual property taxes and to renew the homeowner’s insurance policy each year.
What Type of Credit Do I Need?
FHA loans do require a minimum credit score. With 3.5% down the minimum qualifying score is 580 and with 10% down the minimum score is 500. When lenders request credit and credit scores, the request is made to three credit bureaus, Experian, TransUnion and Equifax. These scores range from 300 to 850. While these three bureaus all use the same algorithm when calculating scores, their scores are typically similar but rarely exactly the same. This is due to the variances and locations of businesses and merchants who report payment patterns of their customers. Of the three reported scores, the lender will ignore the highest and lowest score and use the middle one.
For borrowers with a limited credit history, “alternative” credit may be an option. Alternative credit verifies payment histories with local utilities, mobile phone bills and other monthly obligations that would not appear on a credit report. The most important alternative credit requirement will be rent history showing that the renter has paid their rent over the past year on time with no lates. A signed document from landlord will provide evidence there were no rent payments made more than 30 days past the due date.
FHA loans are also more forgiving as it relates to credit and overall qualifying compared to other low and no-down payment mortgages.
What Type of Loans are Available through the FHA Loan Program
FHA loans come in both fixed and adjustable rate terms. Fixed rate terms range from 10 to 30 years in five year increments. Available terms are 10, 15, 20, 25 and 30 years. FHA loans can also be offered in adjustable rate terms, most often as a hybrid mortgage. A hybrid is an adjustable rate mortgage, or ARM, that is fixed for an initial period before turning into a mortgage that can adjust annually. The benefit of a hybrid is the lower start rate compared to a standard fixed rate loan.
FHA loans can only be used to finance a primary residence and cannot be used to finance a rental or investment property.
How Can I Refinance My Existing FHA Loan?
FHA loans can also be used when refinancing an existing mortgage. When refinancing an existing FHA loan, the documentation and credit requirements are reduced significantly. When first qualifying for an FHA loan to buy a home, lenders review credit, income, assets and employment before issuing an approval. Yet when replacing an existing FHA loan with a new one, much less documentation is required.
As long as the new rate is lower than the existing one or the borrowers are replacing an adjustable rate or hybrid mortgage with the stability of a fixed rate loan, the existing FHA mortgage qualifies for the “streamline” status. A streamline refinance does not require employment history, income, or assets. To be eligible for the streamline refinance there must be NO late payments made on an existing FHA loan more than 30 days past the due date in the last 12 months.
How to Apply for an FHA Loan
Applying for an FHA loan can be done in one of our offices, over the phone or you can apply online at our website. Applying online means doing so at your convenience without having to adhere to a set of business hours or make an appointment. If you apply online, it only takes a few minutes and once completed, hit “submit” and the application goes directly to our secure server.