FHA LOAN GUIDE
FHA (Federal Housing Administration) loans are home loans backed by the federal government. They are great options for first time home buyers who don’t qualify for conventional loans because they lack the required credit scores or the funds necessary to make a 20% down payment on a new house. You may be surprised to learn that you can qualify for an FHA loan if you have a credit score of 500.
2019 FHA Loan Requirements
3.5% minimum down payment with a credit score of 580 or higher
10% minimum down payment with a credit score between 500 and 579
2 year work history with same employer
Verifiable income through tax returns, bank statements, pay stubs
Debt ratio without mortgage payment no higher than 31% (40% in certain cases) of gross monthly income
Debt ratio with mortgage no higher than 43% (50% in certain cases) of gross monthly income
Must be purchasing property as primary residence
No bankruptcy in the last 2 years
No foreclosure in the last 3 years
Applicants with bankruptcy or foreclosure histories must have re-established positive credit
How much money do I need for a down payment?
If your FICO score is 580 or better you will need 3.5% of the purchase price as a down payment. A 3.5% down payment on a home purchased for $250,000 is $8,750. Consumers with a credit score ranging from 500 to 579 a 10% down payment may be required. The down payment for the house purchased for $250,000 in this case is $25,000.
FHA allows buyers to use savings, gifts from family members, and grants as sources for their down payments. You can find down payment assistance from a variety of entities including states, counties, cities, local housing authorities, and not for profit groups. A good resource for finding assistance is The National Council of State Housing Agencies.
Can I get an FHA loan with bad credit?
The FHA usually requires a credit score threshold of 500 to qualify for a loan. It does make some exceptions however. Under certain circumstances applicants who have nontraditional credit histories or don’t have sufficient credit history are approved if they meet other criteria. You need to contact a lender or loan specialist to discuss your specific situation.
What are closing costs, and how much will I have to pay?
Closing costs include items like title fees, the appraisal, and your credit report. The cost varies depending on where you live, the size of the loan, and whether you are paying points to lower your interest rate. HUD will not allow lenders to charge more than 3% to 5% of the loan amount for closing costs.
It is permissible for lenders, sellers, and builders to pay all or a portion of the closing costs. Sellers and builders sometimes offer this as an incentive to entice buyers. Lenders offering to pay a portion of closing costs normally increase the interest rate to offset it.
What is MIP, and will I have to pay it?
A Mortgage insurance Premium is normally required for borrowers who put down less than 20%. This insurance is protection for the lender in the event you default on your loan. You will be responsible for two mortgage insurance premiums when you take out an FHA loan.
An upfront premium is paid at the time you get the loan. It is 1.75% of the loan amount. This premium can be rolled into the loan.
An annual premium is paid monthly. The rate varies from .45% to 1.05% depending on the terms of the loan, the amount of the loan, and the loan to value ratio.
If you borrow $200,000 your upfront premium is $3,500. Your annual premium will be anywhere from $900 a year ($75 a month) to $2100 a year ($175 a month).
Can I get an FHA loan to buy a house and renovate it?
Yes. You can apply for an FHA 203(k) loan that allows you to purchase a home and roll the money necessary to renovate it into your mortgage. Lenders will base the loan amount on the projected value of the home once renovations are completed rather than on the current appraised value.
This loan allows for a maximum of $35,000 in non-structural repairs like painting and replacing fixtures. Items a 203(k) loan will cover include:
Heating and air conditioning systems
Kitchen and bathroom remodels
Patios and decks
You should be aware that not all properties qualify for these loans. Getting your loan approved may take longer because you will have to submit a detailed proposal that describes the scope of the work with cost estimates included. On the plus side, obtaining a 203(k) loan may make it possible to purchase a house you couldn’t afford otherwise.
Is there a limit to the amount of money I can borrow from the FHA?
Yes. In 2019 the FHA increased the limit it will fund for a home purchase from $294,515 to $314,827 for most of the country. In areas where the cost of living is highest the FHA increased the limit from $679,650 to $726,525. These numbers change annually depending on fluctuations in the real estate market.
The limits vary according to the cost of living. One county can be different from the one right next to it. Exceptions are made for Hawaii, Alaska, the Virgin Islands, and Guam because the cost of building is higher than in other areas of the country.
What happens if I suffer a financial hardship?
The FHA is aware that borrowers can suffer hardships that are beyond their control. To that end, it allows lenders the leeway to offer some flexibility. This can take the form of forbearance which is a temporary period of loan modification. Lenders may temporarily lower interest rates, extend payback periods, or defer a portion of the loan balance at zero interest.
How do I find a lender that makes FHA loans?
The FHA insures the loans made by FHA approved lenders. It does not make FHA loans. Different lenders may offer different terms and charge different fees for the same loans. Underwriting standards, services, and costs may vary.
You would be wise to shop around. You can choose from major banks and credit unions to community banks and mortgage lenders to get the loan that best fits your needs and pocketbook. A good place to start looking for a lender is HUD’s website.
The good news is you don’t have to wait years until you have perfect credit and a hefty down payment to become a homeowner. The FHA has flexible loan options that can get you in the house of your dreams sooner rather than later. You just have to know what programs are out there to make it happen.