It is not breaking news that FHA loans are some of the most popular on the US market today. Why? FHA loan programs are backed and insured by the Federal Housing Administration. These FHA loan qualifications feature more flexible underwriting requirements and rates, as well as lower down payments. All of these features make FHA loans a great option for millions of Americans.
How to qualify for an FHA loan and which FHA program is best for you? Please keep reading to learn more.
What Is an FHA Loan? And How Are the Guidelines Flexible?
How many home buyers today have 20% down when they get a mortgage? With homes in many markets averaging well over $200,000, it is harder for many people to bring that much money to the closing table without emptying their savings account. The FHA loan down payment requirements starts at 3.5%, so you may be able buy a home with less money down than you thought.
Because FHA mortgage loans with approved lenders are backed by the FHA, lenders are willing to allow you to bring as little as 3.5% down when you close on your loan.
If you buy a house for $200,000, that is a mere $7500 to close the deal. That is very affordable for most Americans and allows many people to get into a home of their own.
Low down payment is just one of the flexible benefits of the FHA mortgage. You also get very flexible underwriting standards. If you have a credit score as low as 620, you may be able to qualify for an FHA loan with 3.5% down.
Debt to income ratios are also very flexible, so most people can qualify for an FHA loan mortgage as long as they can prove that they can pay the mortgage and their other bills.
How the FHA Loan Program Works
The FHA started in 1934 when the country was just coming out of the Depression. Most Americans at that time were renting. It was very difficult to get approved for a home loan, with 50% down payments and very short loan terms.
The government decided it wanted to support home ownership because people who own homes make more stable neighborhoods and it is better for the US economy overall than a nation of renters.
The most important feature of the FHA loan program is the Mortgage Insurance Premium or MIP program. This is an insurance fund that each borrower pays into with an upfront insurance premium and an annual premium that is part of your monthly mortgage payment.
If you default on your mortgage, the insurance kicks in and reimburses the lender. Because it is a low risk loan for FHA lenders, more of them are willing to extend reasonable mortgage terms to people with lower income and borderline credit.
Today, the FHA back approximately 20% of all mortgages underwritten in the US. Learn more from the Department of Housing and Administration’s website with frequently asked questions on FHA.
How to Qualify for a FHA Loan
You can get an FHA mortgage from any government approved FHA loan company. It will always pay to shop around however. There are many lenders and brokers who may offer different rates for largely the same mortgage products.
Also, many different banks use different criteria in their underwriting. So you could be turned down by one bank and approved by another.
Many FHA Loans to Choose From
If you are going to do an FHA loan, you will probably wonder which is the best type of FHA loan program for you. Like any mortgage product, you can get a mortgage in many different flavors.
FHA is best known for the classic 30 year fixed rate loan. The FHA also has however 15 year fixed rate loans and several adjustable rate products.
You also can get a purchase and improvement loan if you want to buy a house in need of repairs. This is called a 203k loan.
If you want to refinance your loan into a lower rate, you can get a variety of FHA loan products. For people who already have an FHA loan, you can choose an FHA Streamline Refinance.
This convenient program allows the borrower to refinance with minimal paperwork, including no new appraisal, no credit check in many cases, and no income verification.
For borrowers who want to refinance and pull out cash, there are options with FHA as well.
FHA Loans Can Be Assumed
When it comes time to sell, you are in luck if you have an FHA loan. The agency will allow a buyer to assume the existing mortgage. The new buyer must qualify under existing terms and interest rates, but if interest rates are going up, this can be a very attractive feature to get your home sold.
FHA Allows Gift Funds
There are few lenders out there who will allow you to get your down payment in the form of a gift. It is ok with FHA. The only requirement is that you provide a letter that states that the money is a gift from friends or relatives and does not need to be paid back.
Trump Admin, HUD and the FHA
The Trump administration generally supports the transfer of government programs to the private sector.
Regarding the Federal Housing Administration or FHA, the Trump budget calls for cutting the budget for Housing and Urban Development by 13%. This would be a blow to some bankers, who argue that affordable housing programs are critical to their work.
However, the FHA would not see any cuts, according to the budget proposal. The FHA loan program is seen by many experts as a critical part of making buying homes in the US affordable.
FHA does not actually lend money to home buyers. Instead, it guarantees the loans of mortgage providers that meet FHA loan criteria. If the buyer of the home does not pay the mortgage, FHA will pay back the lender most of the cost of the mortgage.
This guarantee is of great value to home buyers because it means more mortgage lenders will extend generous credit terms to people who might not qualify for a conventional mortgage. Qualifying for a FHA loan is fairly easy if you have the documented income to prove you can pay the loan back.
FHA loan qualifications are very flexible; a typical credit score to be approved for an FHA loan program is 640 and even into the low 600s. It is actually possible to get an FHA loan with a 500 credit score, although you will need to put down a bigger down payment.
The Bottom Line
Probably our favorite home financing product is the FHA loan. These loans feature very low rates, low down payments and are easy to qualify for. The only down side with them is mortgage insurance. You must pay for mortgage insurance the entire life of the loan. That is not fair to us; once you have 20% equity, you should be able to cancel the insurance.
Perhaps this rule will be revisited under the Trump administration. If not, we would recommend that you refinance out of your FHA loan into a conventional loan if you can when you reach 20% equity.
But for many borrowers with low cash availability and marginal credit, you cannot beat an FHA mortgage to get into a home.