10 Must-Know Factors about FHA Loans

 

10 Must-Know Factors about FHA Loans

 By: Greg McKinney Mineola Texas

FHA loans are a great loan for first-time homebuyers and even those that already owned a home before. They don’t require perfect credit and have other forgiving qualifying requirements that make it an easier loan to obtain. 

If you’re thinking about buying a house and are considering FHA financing, here’s everything you must know. 

1.    You can have a credit score as low as 580 

FHA loans don’t require great credit. Unlike conventional loans which require a 660 or higher score, you can get approved with a credit score as low as 580.

 This falls under the ‘fair’ category in the credit tiers, which for most lenders would be a reason to decline your application, but FHA loans allow it. 

2.    You can get an FHA loan with a 500-credit score and a 10% down payment 

Here’s even better news. If you have a lower credit score but have a large down payment, you might get approved for FHA financing. 

The FHA allows lenders to approve borrowers with a 500 – 579 credit score IF they have 10% to put down on the home. This is good for borrowers who have been able to save but had a hiccup in their credit history and haven’t been able to improve their credit score yet. 

3.    You need only 3.5% down, but sometimes not even that much

 The FHA requires a 3.5% down payment from all borrowers. This means $3,500 for every $100,000 in sales price. But, if you have good credit (over 660), you might be able to use gift funds from family members for your down payment. 

You’ll still need 3.5% down, but the money may not have to come from just you. This varies by borrower and lender, though, so check with your lender first. 

4.    The home must be your primary residence 

The FHA loan program is only for borrowers buying a primary residence. In other words, you can’t use the financing to buy an investment home or vacation home. 

You must prove to the lender that you’ll use the property as your primary residence which means you’ll live in the property year-round and not rent it out or use it as a vacation home. 

5.    You’ll pay mortgage insurance upfront

 There is an upfront charge for mortgage insurance that the FHA charges all borrowers of 1.75% of the amount borrowed. The money goes directly to the FHA and is what helps them guarantee loans for lenders. 

It’s the FHA guarantee that allows lenders to have flexible guidelines, such as low credit scores and high debt-to-income ratios. If a borrower defaults, the FHA pays the lender back a portion of what they lost. 

The upfront mortgage insurance you pay goes into the FHA’s reserves to pay lenders back. 

6.    You’ll pay mortgage insurance for the life of the loan

 The FHA also charges mortgage insurance premiums annually, but you pay them monthly. All borrowers pay 0.85% of the outstanding mortgage balance each year, with the premiums broken down into 12 equal payments. 

The mortgage insurance lasts for the life of the loan, unlike conventional loan financing, though. This means you pay mortgage insurance even after you owe less than 80% of the home’s value unless you refinance the mortgage or sell the home. 

7.    Lenders can have their own FHA requirements

 The FHA requires lenders to follow their guidelines at a minimum. They also allow lenders to add to the requirements. For example, a lender must require at least a 580-credit score with a 3.5% down payment, but they can increase the credit score requirement to 620 or higher if they want. 

Always check with lenders to see what their FHA loan requirements are to ensure you meet them. 

8.    The FHA doesn’t fund or underwrite loans 

All FHA loans go through an FHA-approved lender. There are thousands of them across the United States. The FHA only sets the parameters and approves lenders to write and fund loans in their name – they don’t have anything to do with underwriting or funding the loan. 

The only time the FHA plays a role is if a borrower doesn’t make his/her payments. If the lender files a claim, then the FHA pays them back a portion of the funds they lost. 

9.    There are Minimum Property Requirements for FHA loans 

FHA loans have what they call Minimum Property Requirements that are a part of the appraisal. These are guidelines the home must meet in order for the FHA to insure the loan. 

Many sellers are wary of the guidelines and won’t accept FHA financing, but the requirements aren’t anything out of the ordinary and are typically things any buyer would want in a home. 

The point of the MPRs is to make sure the home is safe, stable, and sanitary, ready for buyers to live in it. 

10. The FHA has a home improvement loan too 

If you find a home that won’t pass an appraisal, the FHA offers the FHA 203K loan that provides funds to buy and fix up a home. 

You can borrow up to 115% of the home’s after-repaired value and use the funds left over after paying the purchase price to fix up the home. It’s like getting two loans in one and the 203K loan has one closing, one interest rate, and one payment. 

Final Thoughts 

FHA loans are a great alternative if you don’t qualify for conventional financing. With the low-down payment and credit score requirements, most people can qualify for FHA financing. 

If you’re buying a home to live in and have at least 3.5% to put down, you might consider this option for financing your home. FHA loans have competitive interest rates and great terms, making it an affordable way to buy or refinance your home.


  Greg McKinney Mineola Texas










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