FHA loans have flexible qualification requirements and low down payment options, making them a great option for first-time homebuyers.
Benefits of FHA Loans
- Low interest rates
- Down payment options as little as 3.5%
- Fast close – 14 to 21 days from contract to keys
- Can use gift funds for down payment & closing costs
- Minimum credit score of 580
- Minimum down payment of 3.5%
- Up to 56% debt-to-income ratios
- Primary residences only
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 – or by paying off the loan entirely. Typically FHA buyers lower or remove their mortgage insurance by refinancing 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 is based on an annual rate of 0.45% to 1.05%, depending on the loan amount and down payment.
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 reach 10-20% equity in the property. This will allow them to reduce their monthly payment significantly, or eliminate the mortgage insurance completely.
View mortgage rates for March 28, 2023
Nuances of FHA Loans
Condominiums must be approved ahead of time, which can make purchasing a condo with FHA financing tricky.
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.
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 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 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.
If you have a lower down payment.
FHA financing lets buyers put down as little as 3.5%. To help cover the additional costs of obtaining your loan, you can opt for a higher rate and take a large lender credit to help offset closing costs, instead of paying for these out of pocket.
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 far lower than the 15% down needed for conventional duplexes. For 3-4 unit properties, the 3.5% minimum down payment also applies, but these properties are required to meet a “cash flow” requirement, which can be hard to satisfy in today’s market.
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 stricter requirements 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. Additionally, these lenient guidelines allow JVM Lending to close FHA loans in as fast as 14 days!
Pros & Cons of FHA Loans
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.
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.
Low Down Payment
Utilizing FHA financing can help you get into your home with the lowest amount down, but can also allow you to keep more cash in your pocket to help with moving expenses, repairs, or renovations.
The upfront mortgage insurance premium is often financed into the loan amount, which increases the monthly payment, along with the monthly mortgage insurance costs.
Lower Loan Limits
In some counties, the FHA loan limit goes as low as $420,680, while the minimum conventional loan limit is $647,200. 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. 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.
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