FHA loans have been helping people become homeowners since 1934. Some benefits of FHA loans include:
FHA Loans
What Does FHA Offer?
Buying Your First Home? FHA loans might be just what you need. Your down payment can be as low as 3.5% of the purchase price, and most closing costs and fees can be included in the loan. This option is available for 1-4 unit properties.
Want a Fixer-Upper? FHA offers a loan that allows you to buy a home, fix it up, and include all the costs in one loan. If you already own a home and want to remodel or repair it, you can refinance what you owe and add the cost of repairs into one loan.
Financial Help for Seniors Are you 62 or older and living in your home? If you own it outright or have a low loan balance, the FHA Reverse Mortgage might be right for you. This allows you to convert a portion of your equity into cash.
Want to Make Your Home More Energy Efficient? With an FHA Energy-Efficient Mortgage, you can include the costs of energy improvements into the loan.
Manufactured Housing and Mobile Homes FHA provides financing for mobile homes and factory-built housing. There are two loan products: one for those who own the land that the home is on and another for mobile homes located in mobile home parks.
How FHA Loans Work
The Federal Housing Administration (FHA), which is part of HUD, insures the loan, enabling lenders to offer you a better deal. FHA allows buyers to purchase a home with as little as 3.5% down and is more lenient on credit, funds to close, and co-borrowers compared to conventional loans.
Credit and Underwriting
Most loans use credit scoring in the underwriting process. Low credit scores are often linked to higher mortgage delinquency rates, leading many lenders to set minimum credit scores. However, FHA does not have specific credit score requirements. While a high credit score can help get the mortgage approved, a low score does not automatically lead to denial. Borrowers with low scores can demonstrate their ability and willingness to repay the loan, explaining the circumstances of their credit difficulties during the underwriting process.
FHA underwriters review the credit and payment history of applicants, focusing on the most recent 12 to 24 months. A good payment record during this period can lead to approval, even if conventional financing has been denied. An experienced loan officer can help you present your case effectively and suggest ways to make your application more acceptable to FHA.
Down Payment and Closing Costs
In an FHA mortgage, you must put at least 3.5% of the sales price into the transaction, which can cover both the down payment and some closing costs. However, the total cost to close on an FHA loan often exceeds 3.5%, typically ranging from 6% to 8% of the sales price when including escrow for taxes and insurance, plus interest to complete the closing month.
Interest Rates and Points
The interest rate you select affects the total costs. A lower rate can reduce your payment but may require additional money towards "points." Conversely, a slightly higher payment could reduce closing costs.
Sources of Funds
FHA allows borrowers to source funds for closing from personal savings, gifts, grants, loans from retirement accounts, and seller contributions. This flexibility can make it easier to meet the financial requirements of purchasing a home.
Low FICO
To qualify for an FHA loan with a 3.5% down payment, for example, you'll need a minimum FICO credit score of 580. If your credit score is lower – between 500 and 579 – you may still be eligible for an FHA loan, but you'll need to make a higher down payment of 10%.
High DTI
If you have a high debt-to-income (DTI) ratio, FHA provides more flexibility and typically lets you go up to a 55% ratio (meaning your debts as a percentage of your income can be as much as 55%)
Zero Down
This program enables homebuyers to obtain 100% financing without having to make a down payment. This is achieved by combining a 1st and 2nd mortgage and is compatible with FHA loans. The 2nd mortgage can be up to 3.5%, based on the lesser of the sales price or appraised value, and has a 10-year term.