FHA loans are important options for many borrowers. We often receive questions on these loans, so we’d like to share some of the top questions to help you stay fully informed on your borrowing options.
FHA FAQ Part 1: Frequently Ask Questions on FHA Loans
Q: What is the FHA?
A: The Federal Housing Administration. This is a branch of the United States Department of Housing and Urban Development, and its primary responsibility is providing mortgage insurance on approved loans, as well as creating mortgage standards for construction and underwriting. The FHA was first created in 1934 as part of FDR’s New Deal, and is seen as one of the major contributors to the increase in homeownership since the Great Depression.
Q: What is the Advantage of an FHA Loan?
A: There are many advantages that come from using an FHA loan. Most of all, they have lower down-payment requirements than many other loan options. If you meet the requirements, you can secure a home with only 3.5% down on the loan. Other products may require at least 10% or even 20% to issue a loan, so FHA loans often allow borrowers to enter homeownership when they otherwise would not be able.
Another advantage of an FHA loan is that you can get a loan even if you have a credit score as low as 500. At this score, you will have a higher requirement for a down payment (more on down payments below) but it does open new options if your score is low.
Q: Are FHA Loans Issued by the FHA?
A: No. FHA loans are administered and issued by individual lenders who are approved to offer these loans. The money you receive does not come from the FHA, but actually comes from the lender or bank. Instead of offering loans, the FHA insures the loans that meet their requirements. By having insurance, the financial risk is taken off the lender, which allows them to write more loans. By providing insurance, the FHA makes more loans available to a greater number of potential homebuyers, which, in theory, should stimulate the market. According to HUD.gov, the FHA is the top mortgage insurer in the nation.
Q: What are the Down-Payment Requirements?
A: The total down payment you need for an FHA loan will largely depend on your credit score. If you have a credit score of 580 or higher, you will be able to qualify for the loan with only a 3.5% down payment. You can always pay more, but 3.5% is the minimum you will be required to pay for an FHA loan. For perspective, at 3.5% you would pay $3,500 for every $100,000 in purchase price.
If your score is between 579 and 500, you can still qualify for an FHA loan, but you will need to bring a down payment of at least 10%. This means for every $100,000 in purchase price, you will need to bring $10,000 in a down payment.
Q: If I am Not a First-Time Buyer, Can I Still Use FHA Loans?
A: Yes. While many homeowners with an FHA loan are first-time buyers, this is not a requirement for these loans. As long as you meet the other criteria required by the FHA, you will be able to use these loan options. This loan option is popular among first time buyers because of the lower down-payment requirements, but it’s still available for borrowers at other phases of homeownership.
Q: What Type of Mortgage Insurance Will I Pay with FHA Loans?
A: FHA loans have many advantages, but one of the downsides is that borrowers will usually need to pay two forms of mortgage insurance. First, there is an upfront mortgage insurance premium that is usually equal to 1.75% of the loan amount. If your loan amount is $200,000, this means your insurance premium could be around $3,500. In some cases, you may be able to roll this upfront cost into your mortgage, helping you save on upfront costs. There will also be an annual mortgage premium that is paid monthly, and this premium is usually between 0.45% and 1.05%.
Q: When Will FHA Mortgage Insurance Disappear?
A: This will also depend on the specifics of your loan, but it’s possible that you will be paying mortgage insurance for the duration of your loan. Most homebuyers who use an FHA loan will have to pay insurance the entire time, or at least for 30 years if their loan is somehow extended. However, this is the policy for borrowers who put down 10% or less on the mortgage. If you put down more that 10% on the FHA loan, you may be able to cancel insurance once you reach a certain level of equity.
Q: What is the Credit Requirement for an FHA Loan?
A: A minimum of 500. There are actually two tiers of credit requirements. First of all, you will have to have a score of at least 500 to qualify at all for an FHA loan. If your credit score is below 500, it’s likely that you will not be able to qualify for a loan. Between 500 and 579, you will be required to bring a down payment of at least 10%, but if your score is 580 or higher, you can secure the loan with as little as 3.5% down.
Q: What is the Allowable Debt-to-Income Ratio for an FHA Loan?
A: Although there are some exceptions, you will need to have a debt-to-income ratio of 43% or less. Debt-to-income ratio, or “DTI” is one of the essential factors that lenders consider when issuing a loan. It is a way of measuring your income compared to your total monthly payments, and it’s considered a reliable factor for measuring lending risk.
Stay tuned for FHA FAQ Part 2!
Providing the Information You Need on Your Next Loan
Don’t see your question in our FHA FAQ? Feel free to contact use for more information on FHA loans.
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