Introduction to FHA Home Loans
Why Do We Have the FHA Mortgage Program?
Established in 1934, FHA Home Loans have been helping people from many backgrounds and financial situations become homeowners! Because FHA (Federal Housing Administration) insures the mortgage, the lender is able to offer much better rates than conventional home loans. This is great for borrowers with lower down payments, higher DTI (debt to income), limited / fair / bad credit history, or other factors that a mortgage lender may consider "higher risk" and charge higher rates for a mortgage that is not insured by FHA.
There are many factors when evaluating if an FHA mortgage is the right solution for you. We will review the good and bad of FHA for different circumstances. We are glad to provide a free 30 minute review of your situation, see what you qualify for and tailor the best plan to purchase or refinance your home.
If you're unsure of some the things stated above, or would like to understand a little more about credit, credit scores and how to build credit to qualify for an FHA Home Loan, we suggest you review the linked articles as well, or first:
What is an FHA Mortgage?
FHA Mortgages are often associated with a "first time home buyer" program. While it is true that they are great for first time homebuyers, FHA Mortgages are not the only, or always the best option for first time home buyers. FHA Mortgages can also be used to purchase a home beyond your first home, as long as it's your primary residence, and it's been at least 3 years since you've owned any property.
As stated above, "FHA Backed Home Loans" are mortgages that are insured by FHA and HUD. In the event that the borrower defaulted on the loan, the lender would be reimbursed by the FHA Insurance Pool. Because of this, the lender is able to offer prime rates to a much wider range of homebuyers. This is great for the borrowers over the long term life of the loan.
Other great benefits of an FHA Loan are that they can close for borrowers with different financial situations, such as: low down payments, 100% gifted down payments, lower income, lower credit scores, past credit issues, high debts, high DTI (Debt to Income) and other situations. Often times lenders have lower "risk" fees associated with FHA backed mortgages, compared to similar fees for conventional mortgages, so this can also lower costs to close a loan for borrowers with limiting financial or credit factors.
While these benefits are great, they do come with associated costs. FHA Mortgages have two types of insurance associated with the loan. PMI (Primary Mortgage Insurance) which is due up front at closing, and MIP (Mortgage Insurance Premium) which is an annual / monthly premium for loans that have greater than 80% LTV (Loan to Value) at the time of closing. We will do a deeper dive into FHA Mortgage Insurance later, or click here to go there now.
While Borrowers with higher credit scores, or stronger financial pictures definitely qualify for FHA mortgages, they are not always in their best interest due to the insurance and other factors. Because of the less risk associated with a stronger financial health, lenders can offer comparable or better rates on a conventional mortgage, with less or no mortgage insurance expenses. This is an advantage associated with stronger credit scores and should not be overlooked, even if it is your first home purchase.
FHA LOAN LIMITS
2022 IS A BIG YEAR!
FHA Loan Limits
FHA mortgages have loan limits, which are based on the conforming loan limits set forth by Fannie Mae and Freddie Mac each year. For more information on these limits, click here.Just as with the conforming loans, there are limits for 1 unit (single family residences), 2 unit (duplex), 3 unit (triplex) and 4 unit (quadplex) properties.
There is a floor / ceiling limit set each year that no county can be less or greater than, based on median home price. These county limits will be equal to, or often times less than the conforming loan limit for that corresponding county.
The floor / ceiling are not limits to the value of the home, just the value of the loan. However, if purchasing a home that is greater than the FHA limit in your county, you will be required to have the difference either in reserves for down payment, or the buyer can get you qualified for a second mortgage to help offset some of the difference.
Current FHA mortgage limits for low and high cost areas:
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Area Type: | 1 Unit | 2 Units | 3 Units | 4 Units |
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Certain counties and metropolitan areas may have limits anywhere at or in between these limits and are determined annually by the previous years median home sale price from the prior calendar year. (2022 was decided in Nov 2021 by 2021 data of home sales in each US county)
For Detailed information of the FHA limits in your county, click here
QUALIFYING FOR
FHA HOME LOANS
IT'S NOT AS HARD AS YOU'D EXPECT!
Minimum Requirements to Qualify for FHA:
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Minimum Credit Score of 500, however, many lenders require scores of 580 - 620.
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Minimum 3.5% Down Payment. (If credit score is below 580, min DP is 10%)
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Down payment can be gifted by a family member.
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Mortgage Insurance is Required, and not able to be removed below 80% LTV.
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Debt to Income Ratio must be less than 43%.
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Home must be the borrowers primary residence
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Borrower must have steady income and employment, with two year history.
There are many factors to evaluate if a borrower is on the edge of the above requirements. However, if everything is better than the above figures, the most important part is figuring out how much home value you qualify for. This is based upon three factors:
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Borrower's Income
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Borrower's qualifying expenses
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Your DTI, (expenses /divided by/ income)
This will determine the monthly budget your family has available for a mortgage payment, including all PITI (principal, interest, taxes and insurance). Based on the mortgage rate you're able to qualify for, this will determine the loan value you are qualified for so you can begin your home shopping with a pre approval in hand.
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What if We Are Qualifying Jointly for our FHA Home Loan?
Buying a home with multiple people happens every day. Yes, while most are going to be two spouses or domestic partners, it can also be any relationship from two siblings, parent / child, two friends, or anything in between. However, with an FHA home loan, the property must be both applicants primary residence, if applying jointly. (Different if one applicant is only a co-signer to help a less qualified primary applicant)
Note, when qualifying jointly, the lender will use the credit scores of the person with the lower scores only. However, both applicants income and expenses are used to determine DTI.
UNDERSTANDING
FHA MORTGAGE INSURANCE
Nothing You'll Ever Use... But it May Help You Save Thousands!
What is FHA Mortgage Insurance
There are two types of mortgage insurance when it comes to FHA Home Loans: 1: MIP (Annual Mortgage iInsurance Premium) and 2: UPMIP (Up Front Mortgage Insurance Premium). Let's take a look at both:
1: MIP - Mortgage Insurance Premium
Mortgage Insurance Premium is more similar to conventional mortgage PMI (Primary Mortgage Insurance). The amount of premium will be a percentage of the loan balance, due every month with your mortgage payments. The percentage of premium paid is determined by the original LTV (Loan to Value) of the Loan when the home was purchased and mortgage was closed. MIP Is not a requirement on all homes if original LTV is below 78%.
2 UPMIP - Up Front Mortgage Insurance Premium:
UPMIP is different and in addition to MIP. As stated above, not all FHA Home loans require MIP, however, any and all FHA Mortgages issued in 2022 have 1.75% of the loan amount due up front at the time of closing. This can either be added to "cash to close" by the borrower, or added to the loan amount and paid by the lender. This is the portion that covers the lender in the event of default by the borrower on FHA loans.
While it can look like an expensive up front cost, if you have less than perfect credit, or you're building your career and income, this premium will save you thousands, compared with higher interest rates from a conventional loan.
If you have good credit and a stronger financial profile, you may qualify for better rates and a net monthly cash flow / equity position by avoiding the UPMIP by choosing a conventional mortgage for your family's new home purchase or mortgage refinance.
This is an introductory overview to FHA Mortgage Insurance. Click here for a deep dive into understanding MIP and UPMIP.
IS AN FHA MORTGAGE
RIGHT FOR MY FAMILY?
It All Comes Down To The Numbers. We Will Help You Navigate The Best Path
BENEFITS OF FHA HOME LOANS
There are two types of mortgage insurance when it comes to FHA Home Loans: 1: MIP (Annual Mortgage iInsurance Premium) and 2: UPMIP (Up Front Mortgage Insurance Premium). Let's take a look at both:
1: MIP - Mortgage Insurance Premium
Mortgage Insurance Premium is more similar to conventional mortgage PMI (Primary Mortgage Insurance). The amount of premium will be a percentage of the loan balance, due every month with your mortgage payments. The percentage of premium paid is determined by the original LTV (Loan to Value) of the Loan when the home was purchased and mortgage was closed. MIP Is not a requirement on all homes if original LTV is below 78%.
2 UPMIP - Up Front Mortgage Insurance Premium:
UPMIP is different and in addition to MIP. As stated above, not all FHA Home loans require MIP, however, any and all FHA Mortgages issued in 2022 have 1.75% of the loan amount due up front at the time of closing. This can either be added to "cash to close" by the borrower, or added to the loan amount and paid by the lender. This is the portion that covers the lender in the event of default by the borrower on FHA loans.
While it can look like an expensive up front cost, if you have less than perfect credit, or you're building your career and income, this premium will save you thousands, compared with higher interest rates from a conventional loan.
If you have good credit and a stronger financial profile, you may qualify for better rates and a net monthly cash flow / equity position by avoiding the UPMIP by choosing a conventional mortgage for your family's new home purchase or mortgage refinance.