Are you in the market for a new home and looking for financing options? If so, you may have heard about FHA loans. FHA loans are a popular choice for many homebuyers, particularly first-time buyers, due to their low down payment requirements and relaxed credit score standards. In this article, we’ll explore everything you need to know about FHA loans, including their benefits, eligibility requirements, and how to apply.
What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This type of loan is designed to make homeownership more accessible to individuals with lower credit scores and limited funds for a down payment. FHA loans offer lower down payment requirements than conventional loans, making them a popular option for first-time homebuyers.
Benefits of FHA Loans
FHA loans offer several benefits over conventional loans, including:
Lower Down Payment Requirements
FHA loans require a down payment of as little as 3.5% of the purchase price, compared to conventional loans that typically require at least 5%. This lower down payment requirement can make it easier for first-time homebuyers to qualify for a mortgage.
Relaxed Credit Score Requirements
FHA loans have more lenient credit score requirements than conventional loans. While conventional loans typically require a credit score of at least 620, FHA loans may be available to borrowers with credit scores as low as 500. However, borrowers with lower credit scores will likely need to make a larger down payment.
More Flexible Debt-to-Income Ratios
FHA loans also offer more flexibility when it comes to debt-to-income (DTI) ratios. DTI is a measure of your monthly debt payments compared to your monthly income. FHA loans allow for a DTI ratio of up to 43%, while conventional loans typically require a DTI ratio of 36% or lower.
FHA loans also offer a streamlined refinancing option, known as the FHA Streamline Refinance. This option allows homeowners with an existing FHA loan to refinance without having to go through a credit check or provide income documentation.
Eligibility Requirements for FHA Loans
To be eligible for an FHA loan, you must meet the following requirements:
While FHA loans have more lenient credit score requirements than conventional loans, you will still need a minimum credit score of 500 to qualify for an FHA loan. However, borrowers with a credit score between 500 and 579 will need to make a down payment of at least 10%.
To qualify for an FHA loan, you will need to have a stable employment history and a verifiable source of income. Your debt-to-income ratio must also be within the allowable limits.
The property you are purchasing must meet certain requirements to be eligible for an FHA loan. The property must be your primary residence, and it must meet certain safety, soundness, and security standards.
How to Apply for an FHA Loan
To apply for an FHA loan, you will need to follow these steps:
Step 1: Find an FHA-approved Lender
You will need to find an FHA-approved lender to apply for an FHA loan. Not all lenders offer FHA loans, so you will need to do some research to find a lender that does.
Step 2: Complete an Application
Once you have found a lender, you will need to complete an application for an FHA loan. You will need to provide information about your income.
Types Of FHA Home Loans
There are several different types of FHA loans. The type of FHA loan you choose limits the type of home you can buy and how you can spend the money you receive. This makes it especially important to be sure that you’re getting the right type of loan. If none of the following loan types match your goals, you might want to consider another type of government loan.
Let’s look at a few different FHA loan classifications.
When it comes to purchasing a home, you can get in with a little as 3.5% down if you have a median FICO® Score of 580. It’s worth noting that if you have a score that low, you’ll need to keep an equally low DTI. Jet Direct Mortgage requires a ratio of no more than 38% before your mortgage payment is included, and no more than 45% after the inclusion of your payment.
If your median FICO® is 620 or higher, you may be able to qualify with a higher DTI. In no event will your DTI be able to rise above 57%.
At Jet Direct Mortgage, you can purchase up to a two-unit property with an FHA loan.
FHA Rate/Term Refinances
If you find yourself in a situation where you’re in some other type of mortgage and you want to take advantage of lower rates, but your credit has taken a hit, you may want to look into an FHA rate/term refinance.
This could be a good option because of its less stringent credit requirements. You can use this to lower your rate or change your term with a FICO® Score median as low as 580, assuming you have a low DTI. You may be able to carry more debt into the transaction if your median FICO® is 620 or higher.
It’s worth noting that depending on the amount of equity you carry into the rate/term refinance, you could end up paying mortgage insurance premiums for the life of the loan (or at least 11 years with 10% equity or more) in addition to an upfront premium. If you’re already in an FHA loan, you can save some money on your rate/term transaction. Let’s get into that next!
An FHA Streamline allows homeowners with FHA loans to do a rate/term refinance with a few special benefits. To begin with, you may be able to refinance into a lower rate even if you owe more on your home than it’s worth.
The logic here is that if you have a more affordable payment, you’re more likely to be able to stay in your home and pay it off, which is good for the FHA. You’ll also usually be able to get a lower mortgage insurance rate as the MIP for FHA Streamlines is 0.55% of your overall loan amount annually. Additionally, the upfront MIP is only 0.01%.
Another benefit of FHA Streamlines is reduced documentation. Every situation is different, but because you already have an existing FHA loan, you may qualify for less documentation in each of the following areas:
- Reduced appraisal requirements
- Limited employment verification
- Less documentation for income and assets
There are some other things to keep in mind. If you don’t have an existing mortgage with Jet Direct Mortgage, we require a 640 median FICO® Score. If your loan is with us, the required median FICO® is 580. Additionally, timing is important. You have to have made at least six payments on your current loan before you can do a streamline. Also, at least 210 days have to pass between the first payment you make on your current loan and the first payment on the new streamline.
Finally, you have to be current on your loan. For the purposes of an FHA Streamline, that means having no 30-day late payments in the last 6 months and only one payment that’s 30 days late in the last year.
If you’re looking to get a cash-out refinance, you can do so with an FHA loan. Jet Direct Mortgage requires a minimum median credit score of 620 for an FHA cash-out refinance. The FHA does require that if you convert your property value into cash, you leave at least 15% equity in your home.
If you’re doing a cash-out refinance, full documentation is required. This includes income and asset sharing as well as employment verification.
FHA 203(k) Loan
While Jet Direct Mortgage does not offer this particular loan, an FHA 203(k) loan allows you to buy a home and make renovations on a single loan. While it’s possible to only make renovations with a 203(k) loan, this usually isn’t your most affordable choice. The minimum FHA 203(k) loan balance is $5,000 – you cannot borrow less than this. Any home repairs or improvements you make must conclude within 6 months to stay within your loan terms.
Some eligible projects you can complete with a 203(k) loan include:
- Replacing old or dangerous flooring
- Making improvements to the home’s “modernization.” This can include adding systems like central air or an automatic garage door opener
- Adding or replacing roofing, sections of gutters or plumbing
- Making accessibility improvements for disabled people who live in the home
- Making structural repairs and changes to the home’s foundation
- There are two different types of 203(k) loans: Standard loans and Limited loans. Limited loans require less paperwork for approval, while Standard loans give you more freedom to repair your property.
As a home buyer, you want to ensure that you have access to the best financing options available. One popular choice is an FHA loan, which is a government-backed mortgage that offers many benefits. In this guide, we will explore FHA loan requirements and provide you with all the information you need to make an informed decision.
What is an FHA Loan?
An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). This means that if a borrower defaults on their loan, the FHA will pay the lender for the losses incurred. This insurance allows lenders to offer FHA loans with more lenient requirements, making it easier for borrowers to qualify for a mortgage.
FHA Loan Requirements
One of the most significant advantages of an FHA loan is that it allows borrowers with lower credit scores to qualify for a mortgage. However, there is still a minimum credit score requirement of 500. Borrowers with a credit score between 500 and 579 must make a down payment of at least 10% of the home’s purchase price. Those with a credit score of 580 or higher can qualify for a loan with a down payment of just 3.5%.
Another critical factor in qualifying for an FHA loan is your debt-to-income ratio (DTI). This is the percentage of your monthly income that goes towards paying off debt. The maximum DTI for an FHA loan is 43%, although lenders may have stricter requirements.
FHA Loan Income Verification
To qualify for an FHA loan, you must have a reliable source of income. Lenders will verify your employment and income through pay stubs, W-2s, and tax returns. Self-employed borrowers will need to provide additional documentation, such as profit and loss statements and business tax returns.
FHA Loan Property Requirements
FHA loans are designed for owner-occupied properties, so you must intend to live in the home you purchase. Additionally, the property must meet certain requirements, such as being in good condition and meeting minimum safety standards.
Mortgage Insurance Premiums
FHA loans require mortgage insurance premiums (MIPs) to protect the lender in case of default. Borrowers must pay an upfront premium of 1.75% of the loan amount at closing, as well as an annual premium that varies based on the loan amount, term, and LTV ratio.
Benefits of an FHA Loan
Lower Down Payment
One of the most significant benefits of an FHA loan is the lower down payment requirement. With just a 3.5% down payment, FHA loans are a great option for first-time homebuyers who may not have significant savings for a down payment.
More Lenient Credit Requirements
FHA loans are more forgiving of credit issues than conventional mortgages, making them an excellent choice for borrowers with lower credit scores or a history of bankruptcy or foreclosure.
Flexible Qualifying Guidelines
In addition to credit scores and DTI ratios, FHA loans have more flexible qualifying guidelines, allowing borrowers with lower incomes or higher debt levels to qualify for a mortgage.
An FHA loan can be an excellent choice for home buyers who may not qualify for a conventional mortgage. By meeting the FHA loan requirements, borrowers can access more lenient qualifying guidelines, lower down payment requirements, and more flexible credit requirements. If you’re in the market for a new home, consider an FHA loan as a financing option.