FHA home loans are mortgages that are insured against default by the Federal Housing Administration (FHA)
What is the FHA?
The Federal Housing Administration, or FHA for short, is a federal agency of the United States Government established in 1934 to stabilize the U.S. mortgage market, improve housing conditions and standards, and provide an adequate home financing system.
It accomplishes this by providing mortgage insurance on loans made through its approved lenders and setting standards for underwriting and construction.
How do FHA loans work?
The FHA provides mortgage insurance to their approved lenders so that if a borrower defaults on their loan, the lender is reimbursed. The FHA does not directly offer loans.
Borrowers will have to pay a one-time upfront mortgage insurance premium (MIP) that is rolled into the loan and an annual MIP that is divided by twelve and included in their monthly payments.
The premiums go into a fund that repays lenders if borrowers default. Mortgage insurance is required for the full length of FHA loans.
Who are FHA loans for?
FHA loans are best for borrowers who are looking for a minimal down payment and who may have trouble getting approved elsewhere. Further, it will be important that the house they want to buy falls within the mortgage limits.
What are the qualifications for an FHA loan?
Basic qualification requirements for an FHA loan
Have a social security number (SSN)
Be of the minimum age to enter into a mortgage
Meet income requirements
Show two years of work history and income that will continue for the first three years of the mortgage
Have qualifying debt-to-income and mortgage payment-to-income ratios (varies based on credit score and compensating factors)
Hold a minimum credit score of 500 for the 10% down payment and 580 for 3.5% down payment (although many lenders require at least a 620)
Must be creditworthy (i.e., no recent bankruptcies, liens, unresolved delinquencies or collection accounts, recent foreclosures, etc.)
Have mortgage insurance
Take the title in their own name or in the name of a living trust
Live in the property as their primary residence within two months and for one year (exceptions do exist)
Have no delinquent tax or non-tax federal debt
Additionally, the home must meet the “Property Acceptability Criteria,” and the loan must be under the FHA maximum limit for their area
How long does it take to close an FHA loan?
Many factors can influence the closing time of a loan. However, according to Ellie Mae, FHA loan closing times average around 50 days.
What kind of mortgage insurance is required for an FHA loan?
All FHA loans require borrowers to pay an upfront and annual mortgage insurance premium regardless of the amount of their down payment. The annual premium continues for the entire length of the loan.
Upfront mortgage insurance premium (UFMIP)
The UFMIP is paid at the time that the loan closes and is equal to 1.75% of the base loan amount. Note that it must be entirely financed into the loan or entirely paid in cash. The proceeds are placed into an escrow account set up by the U.S. Treasury Department to protect the government if the borrowers end up defaulting on their loans.
Annual mortgage insurance premium (MIP)
MIP is due annually but can be paid monthly. Proceeds go to the FHA to cover the loss for the lender if the client defaults.
Why is mortgage insurance required on an FHA loan?
Mortgage insurance is required on an FHA loan to protect the government and the lender against losses. FHA loans enable higher accessibility to home ownership by lowering credit and financial requirements. As a result, lenders face a higher risk. Mortgage insurance helps to mitigate that risk.
Can I get help in paying my down payment on an FHA loan?
Yes. HUD and the FHA allow borrowers to use gifts and assistance programs to get the funds needed for their down payment. However, the gift must be from an eligible person who does not have a financial interest in the transaction (i.e., family, a friend, employer, etc.). The seller, builder, or real estate agent would not be an eligible gift giver. Further, the gift must be given without any expectation of repayment.
Can FHA loans be refinanced?
Yes, just like any mortgage, an FHA loan can be refinanced. Further, the FHA offers a streamlined program that makes refinancing quite simple.
What are the interest rates on FHA loans and how are they determined?
Both fixed and adjustable interest rates are available on FHA loans. The average rates in the market will depend on current economic activity, and the rate offered will further depend on the borrower’s credit and financial profile.
Lenders will evaluate the level of risk borrowers present and will offer the best rates to those presenting the least amount of risk (i.e., high income, good credit, cash reserves, etc.).