FHA Loan to Purchase or Refinance your Home
What is an FHA Loan?
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders. These loans help those who may not otherwise qualify for a mortgage, especially first-time home buyers.
Why FHA instead of Conventional for purchase?
FHA loans offer lower down-payment options compared to conventional loans. The credit expectations are more reasonable. And the income requirements are more flexible.
Cash-out FHA loans
The FHA also provides cash-out refinancing for those who need financing for things such as college or major home improvements. An FHA cash-out refinancing mortgage may offer lower interest rates than traditional home equity financing loans. You may qualify for one of two FHA mortgage plans which offer cash-out plans. FHA refinancing loan offers amounts up to 85% of the appraised value. Each program has its own specific requirements and rules; talk to us about your options under FHA cash-out refinancing mortgages.
Why FHA instead of Conventional, or Non-Prime for Refinance?
FHA refinance loans can help people get out of toxic debt situations.
How FHA loans compare to Non-Prime loans
FHA loans usually have a lower rate, but they do come with upfront and monthly Insurance Premiums for the life of the loan, so it would be good to compare the two options.
FHA or Federal Housing Associated Mortgages are guaranteed by the US Government, similar to VA or Veteran Administration and RD or Rural Development loans. The FHA mortgage typically has a minimum 3.5% down payment, for qualified borrowers based on income, credit, and the property. Their requirements for borrowers with not-so-perfect credit or higher debt-to-income ratios.
FHA does require 2 fees or Mortgage Insurance. The 1st Fee is an upfront mortgage insurance, which is a percentage of the loan amount, that is added to the loan amount. The second FHA mortgage insurance fee is a monthly mortgage insurance. This is part of a borrower’s escrow account, and each month a certain amount is collected in the mortgage payment. Both of these fees are then sent to FHA, and it pays out foreclosures in case that happens. Even if you put more than 20% down, on an FHA mortgage, you will still have to have FHA Mortgage Insurance.
General FHA Guidelines
$420,680 for a one-unit property — or up to $970,800 in particularly expensive areas.
For a two-unit home, the standard FHA mortgage limit is $538,650. For a three-unit home, it’s $651,050. $809,150 is the cap for a four-unit home. FHA Mortgage Limits can be found here https://entp.hud.gov/idapp/html/hicostlook.cfm
There are 30 or 15 years fixed rate terms to choose from.
The minimum credit score is 500, but that would limit the loan amount to 90% Loan to value.
You need 580 for a 97.5% Loan to Value purchase or 85% refinance.
1-4 Unit Single Family Residences. Condominiums are subject to HUD approval.
The Loan-to-Value can go up to 96% based on an appraisal.
Employment must be verified.
There is a minimum of two-year employment, and Traditional Income Documentation is required.
An FHA loan is a government-backed conforming loan insured by the Federal Housing Administration. FHA loans have lower credit and down payment requirements for qualified home buyers. For instance, the minimum required down payment for an FHA loan is only 3.5% of the purchase price. The FHA mortgage examples here would include additional costs in the estimated monthly payment. Such as a one-time, upfront mortgage insurance premium (MIP) and annual premiums paid monthly.
Here is an estimated monthly payment and APR example: A $175,000 base loan amount with a 30-year term at an interest rate of 4.125% with a down-payment of 3.5% would result in an estimated principal and interest monthly payment of $862.98 over the full term of the loan with an Annual Percentage Rate (APR) of 5.190%.
FHA Home Loans
FHA or Federal Housing Associated Mortgage are guaranteed by the US Government, similar to VA or Veteran Administration and RD or Rural Development loans. The FHA mortgage typically has a 3.5% down payment requirement and allows for borrowers with not-so-perfect credit or lower income.
FHA does require 2 fees or Mortgage Insurance. The 1st Fee is an upfront mortgage insurance, which is a percentage of the loan amount, that is added to the loan amount. The second FHA mortgage insurance fee is a monthly mortgage insurance fee. This is part of a borrower’s escrow account, and each month a certain amount is collected in the mortgage payment. Both of these fees are then sent to FHA, and it pays out foreclosures in case that happens. Even if you put more than 20% down, on an FHA mortgage, you will still have to have FHA Mortgage Insurance.
Frequently Asked Questions
What documents are required to apply for a FHA loan?
Your loan approval depends heavily on the documentation that you provide at the time of application. Depending on your employment, credit and asset situation, the following documentation would likely be requested.
- Complete Income Tax Returns for the past 2-years
- W-2 & 1099 Statements for past 2-years
- Pay-Check Stubs for the past 2-months
- For Self-Employed borrowers – Income Tax Returns and Year-To-Date Profit & Loss Statements for the past 2-years
- Complete bank statements for all accounts for the past 3-months
- Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.
- Recent bills & statements indicating account numbers and minimum payments
- Landlord’s name, address, telephone number, or 12- months canceled rent checks
- Recent utility bills to supplement thin credit
- Bankruptcy & Discharge Papers if applicable
- 12-months canceled checks written by someone you co-signed for to get a mortgage, car, or credit card, this indicates that you are not the one making the payments.
- Drivers License
- Social Security Card
- Any Divorce, Palimony, Alimony, or Child Support papers
- Green Card or Work Permit if applicable
Refinancing or Own Rental Property
- Property Tax Bill
- Homeowners Insurance Policy
- A Payment Coupon for Current Mortgage
- Rental Agreements for a Multi-Unit Property
How do FHA loans compare to conventional home loans?
The main difference between an FHA Loan and a Conventional Home Loan is that an FHA loan requires:
Lower Down Payment
Credit qualifying criteria for a borrower is not as strict.
This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy, discharged 2-years ago, can work around past credit problems.
- Relies heavily upon credit scoring
A rating is given by a credit bureau such as Experian, Trans-Union, or Equifax. If your score is below the minimum standard, you may not qualify.
- Requires more of a Down Payment
If you have less than 20% as a downpayment the lender needs to get the top 20% of that loan insured in order to sell it on the secondary market. That insurance is either done by the Lender or by private mortgage companies. Either way, that is why a 20% downpayment is the typical milestone for buyers.
What kind of properties can I finance with an FHA loan ?
- 1-4 Unit Properties
- Doublewide Manufactured Housing
- Manufactured Condo
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