FHA Loans

What is an FHA loan?

An FHA loan is a government-backed loan program with more lenient credit and down payment requirements and is intended to help homebuyers who may not qualify for conventional financing.

With less stringent underwriting guidelines, FHA loans are very popular among first-time buyers, and this loan program pairs well with JVM’s fast 14-day closing timeline.

What is FHA Mortgage Insurance?

As opposed to conventional loans, where mortgage insurance (MI) is added for loans with less than 20% down, FHA mortgage insurance is required for all FHA loans, regardless of the down payment. A down payment of less than 10% means that FHA mortgage insurance will remain for the life of the loan. You can remove the mortgage insurance by refinancing into a conforming loan once you reach at least 20% equity, by paying off the loan entirely, or, if you put more than 10% down, the mortgage insurance will cancel automatically after 11 years. . Typically, FHA buyers lower or remove their mortgage insurance by refinancing into a conventional loan within 5-10 years of their purchase date.

FHA mortgage insurance is composed of two parts: an Upfront Mortgage Insurance Premium (UFMIP) that is traditionally financed into the loan, and a monthly Mortgage Insurance Premium (MIP) paid each month.

• The Upfront Mortgage Insurance Premium is equal to 1.75% of the loan amount.
• The monthly Mortgage Insurance Premium varies from 0.15% per year to 0.75% per year, paid monthly, based on the loan term, loan size, and down payment.

One big advantage to FHA’s monthly Mortgage Insurance Premium is that they are NOT based on a borrowers credit score, unlike the mortgage insurance premiums on conventional loans. This one-size-fits-all approach can make FHA mortgage insurance significantly cheaper for buyers with less-than-perfect credit scores.

We often have buyers use FHA financing to get into their homes with the lowest down payment possible and refinance into a conventional loan once they build equity in the property. This will allow them to reduce their monthly payment significantly or to eliminate the mortgage insurance completely.

Nuances of FHA Loans

Condominiums

Condominiums must be approved ahead of time, which can make purchasing a condo with FHA financing tricky.

There are 2 distinct ways for condominiums to be approved for FHA Financing:

1. Either the condominium’s entire HOA can apply for approval through the Department of Housing and Urban Development (HUD), which is the government department that oversees FHA loans. Or,
2. The borrower can apply for HUD to approve just their one individual unit in the HOA, called a “Spot Approval”

The FHA Spot Approval process is much faster and easier to get approved. The reintroduction of this option has made obtaining FHA financing a viable option once again, as the traditional approval process was so cumbersome many HOAs simply chose to avoid applying for approval. This restricted options for buyers that may have had FHA financing as their only mortgage option.

Spousal Liabilities

Any spousal liabilities appearing on the credit report (think car loans, student loans, credit cards, etc.) must be incorporated into the qualification for non-borrowing spouses, even if they will not be on the loan. This rule applies for Community Property states, only!

This means that if you live in a Community Property state, we will need to pull a credit report from your spouse, always!

FHA County Loan Limits

FHA county loan limits can be lower than their conventional counterparts. This can limit your purchasing power when compared to a conventional loan.

Gift Funds

Gift funds must be documented with the most recent two months of bank statements from the gift donor to ensure that funds have been properly “seasoned.” Most other financing types will allow lenders to skip this documentation if the funds are wired directly to escrow, but FHA has stricter sourcing requirements for the gift donor’s ability to provide the funds.

Who are FHA loans best suited for?

If you have a less-than-perfect credit score, or a credit score too low for conventional loan approval.

620 is the minimum credit score required for conventional financing, but with multiple “risk factors” (high debt ratios, low down payment, etc.) you may not be able to receive approval for conventional financing with a score below 700. FHA financing will allow credit scores as low as 580, and is far more forgiving with multiple risk factors.

In addition, with the FHA’s one-size-fits all mortgage insurance premiums and lower rates than conventional loans, FHA loans may provide lower monthly payments even for clients that can qualify for conventional financing.

If you have a lower down payment.

FHA financing lets buyers put down as little as 3.5%, even for non-first time buyers and on loan amounts that exceed the low-balance loan amounts.. Conventional loans require a 5% down payment for non-first time homebuyers, or for loans that exceed the low-balance loan amount, unless the buyer can qualify for HomeReady or Home Possible financing.

The FHA’s lower interest rates also makes it easier for lenders to offer lender credits that reduce a buyer’s closing costs while still offering an aggressive rate and payment.

If you are considering buying a multi-family residence.

FHA loans are also useful if you are targeting 2-unit properties, as the 3.5% minimum down payment is lower than the 5% – 15% down needed for duplexes with conventional financing.

For 3-4 unit properties, the 3.5% minimum down payment also applies, compared to the 5% – 20% down payment required by conventional financing., But, the FHA requires that these properties meet a “cash flow” requirement, which can be hard to satisfy in more competitive and higher priced markets.

If you have an appraisal shortfall.

FHA financing offers a strong alternative for buyers who encounter an appraisal shortfall and wish to restructure their loan. Going from a higher down payment requirement with conventional financing to a 3.5% down payment can free up funds to cover an appraisal shortfall.

Debunking the Stigma of FHA Loans

Some real estate agents can have a false impression that FHA financing is a “lesser” quality financing option than conventional financing. Although FHA financing does have some slightly higher standards for appraisals and additional protections in place for borrowers, by no means is it an inferior financing option.

The more lenient requirements associated with FHA financing are meant to encourage first-time homeownership. It also means that the more lenient underwriting guidelines are easier for buyers to satisfy, increasing the likelihood of loan approval. Finally, our team of FHA experts here at , JVM Lending close FHA loans  as fast as 14 days!

Pros & Cons of FHA Loans

Pros

Lenient Credit Guidelines

FHA financing is a great choice if you have less-than-perfect credit, with a minimum credit score requirement of just 580. You can also qualify with a recent credit event such as a bankruptcy, foreclosure, or short sale. Finally, medical collection accounts are not counted against you, which can save debt ratios.

Lower Interest Rates

Interest rates for FHA loans tend to be lower than rates for conventional loans, especially if your credit score is on the lower side. This can help keep your monthly payment low, even with monthly mortgage insurance payments.

And, with mortgage insurance premiums that are not credit-score dependent, total monthly mortgage payments may be lower by pursuing FHA financing.

Low Down Payment

Utilizing FHA financing can help you get into your home with the lowest amount down.  This can allow you to keep more cash in your pocket to help with moving expenses, repairs, or renovations.

Streamlined Refinances

The FHA offers streamlined refinances, which allow for people with FHA mortgages to quickly and easily refinance into a new FHA mortgage with a lower rate and payment.

These refinances do not require appraisals, full credit reports, nor income documentation, which make them extremely easy to qualify for.

There are also strict requirements for the lender to prove that the refinance has a “benefit to the borrower”, which helps protect the consumers from predatory lending practices

Cons

Mortgage Insurance

The FHA requires two mortgage insurance premiums on all loans, regardless of down payment amount. The 1.75% upfront mortgage insurance premium is often financed into the loan amount, which increases the monthly payment. The monthly mortgage insurance premiums also increase costs overall.

By comparison, conventional loans only require mortgage insurance if the down payment is less than 20%. And, if mortgage insurance is required on a conventional loan, the borrower may choose either an up front mortgage insurance premium or a monthly mortgage premium.

Despite these two FHA mortgage insurance types, we still recommend that borrowers compare what payments look like between both programs to ensure they are selecting the most affordable option for them.

Lower Loan Limits

In some counties, the FHA loan limit goes as low as $498,257, while the minimum conventional loan limit is $766,550. This can significantly reduce your purchasing power and may make finding a home tricky with continuing appreciation.

Primary Residences Only

FHA loans can only be used to purchase a primary residence. This means you will need to meet Conventional financing guidelines regarding credit score, down payment, and debt ratios if you are hoping to purchase a second home or investment property.

Down Payment Options for FHA Loans

Down payment can be as low as 3.5%, and all of this can come in the form of gift funds from family or close family friends. Gift funds must be well-documented with the most recent two months of bank statements from the gift donor.

FHA financing also works with many down payment assistance and grant programs, which can help you come up with even less cash out-of-pocket.

Is an FHA loan right for you?

There is no one-size-fits-all for mortgage financing. The best way to determine whether an FHA loan makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.