Are you excited to buy a house in 2018? You may be able to afford a low rate FHA home loan program for several reasons. FHA home loans are insured by the Federal Housing Administration, and feature more flexible underwriting standards than conventional loans. FHA home loan requirements are easier than most conventional loans and that’s why they are so popular with first time buyers who have past credit problems and who are seeking lower down payment options.
If someone suggest a FHA loan, you may be saying to yourself, how much can I afford with FHA and what are these mortgages are all about? These FHA mortgages have been helping renters become homeowners for over eight decades with competitive interest rates, low fees, low down-payment requirements and forgiving credit standards. Keep reading to learn more about the basics of FHA home loans.
FHA Home Loan Requirements Are Obtainable
Most home owners today do not have the funds to put 20% down on a home. The cost of a home in many parts of the country is $300,000 or more. If people needed to put down 20%, very few of us could buy a home!
People turn to FHA house loans in part because they only require in many cases a mere 3.5% down payment. This allows millions of more people to be able to buy a home.
Many who want to buy a home choose FHA home loans because you can have a low credit score and still buy a home. For example, if you have at least a 580 FICO score, you will be able to usually get a home with only that 3.5% down payment.
With a low credit score, FHA home loans also give you access to low interest rates. These days, you might be able to score an interest rate on an FHA mortgage fixed for 30 years in the 4% range. You can get such a low rate because the loan is guaranteed by FHA. If you do not pay, FHA pays back the lender much of the loan.
Other Benefits of FHA Home Loans include:
- Being able to get a FHA loan with no credit score. Who would think that you would be able to get a home loan without any credit? HUD does not allow FHA to not consider you for a loan because you do not have a credit score. It is possible to have nontraditional credit as the basis for a home loan, such as payments for rent, utility bills and cell phone bills.
- Larger loan limits for higher priced areas. You might think if you want to buy a home in an expensive area that FHA would not insure the loan. However, FHA has different sizes of loans it will guarantee, depending upon the cost of real estate in that area. In a cheaper area such as Pittsburgh, you can get an FHA loan for a home up to $294,000. But in San Francisco, you may get a FHA max loan amount for a home that costs more than $700,000.
- FHA home loans can be used for most property types. You can get a single-family home, a duplex or a triplex, or a condominium. Modular homes and manufactured houses may also be eligible.
- You can assume an FHA home loan. An FHA mortgage may be assumed by a new buyer. This is a big advantage when interest rates are going up. It is possible to keep a much lower rate from years ago if you buy a home with an FHA loan in place. You do need to qualify for the FHA home loan, though.
- You can do a streamline refinance with no appraisal if rates drop. If you have an FHA mortgage and want to get a lower rate, you can do an easy refinance with minimal checks of your income or credit.
How Much Home Can You Afford with FHA?
When you apply for a FHA mortgage, your lender will determine how much home you can afford by looking at your debt to income or DTI ratios. Lenders will calculate your DTIs so they can ensure that you have enough income to cover the mortgage as well as your other bills.
There are two DTIs that you need to understand so you know how much home you can afford on your income. The first is the front-end ratio. This is your expected monthly mortgage payment and all other costs that go with your mortgage payment.
The other is the back-end ratio. This is your total monthly housing payment plus all of your other installment loans, including student loans, credit card bills, car payments etc.
To determine how much home you can afford, your FHA mortgage company will look at these two aspects of your monthly income:
- Front end DTI: The total amount of the monthly mortgage payment, real estate taxes, home owner’s insurance and real estate taxes cannot be more than 31% of your gross monthly income, in most cases. If you have a higher down payment or credit score, you may be able to have that percentage a bit higher.
- Back end DTI: The sum of your monthly mortgage payment, real estate taxes, home owner’s insurance and real estate taxes, PLUS your other monthly debt payments, cannot exceed 43% of your gross monthly income.
It is possible in some cases to get approved for a DTI as high as 50% for some FHA home loan programs. But you will need a high credit score, a lot of savings, or at least a 10% down payment.
A FHA home loan is an excellent choice to buy a house for many Americans. FHA home loans are guaranteed by the Federal Housing Administration, which means that lenders are more likely to offer loans to people with lower incomes, lower credit and higher debt to income ratios than average.
While the FHA home loan program is a great deal for millions of Americans, there are certain restrictions you need to be aware of. One of the big ones is lending limits for loans that FHA will guarantee. FHA has maximum loan amounts for each state and for certain cities that are higher and lower than others. If you want to get approved for a FHA home loan, the home that you want must be within that limit for the area you are considering.
If you are interested in a home that is above the maximum limit for your area, you cannot get an FHA home loan. You will need to qualify for a conventional loan in that case. Or, you would bring more cash to the table so that you could qualify for the maximum FHA loan amount.
Other Limits on FHA Home Loans
The FHA mortgage also has other limits for the types of properties that it will insure. For example, the condition of the property is relevant as far as what will qualify for a FHA home loan. FHA will allow you to buy a house that needs rehab, but it will not insure houses that are in tear down condition.
Properties that have been foreclosed by FHA can become re-eligible for FHA. Typically, these homes should need less than $5,000 in repairs. A home that does not qualify for FHA backing usually needs more than $5,000 in repairs. It can be sold through HUD but it is not eligible for backing by FHA.
Note that the lender itself has the final say on whether a loan should be approved or not. But the appraiser’s opinion of the property is vital to the decision-making process by FHA. The lender may require that some of the deficiencies on the property be repaired before the loan is approved. For example, the approved FHA lender may mandate that the home is treated for termites if the appraiser determines that there is termite damage to the home that affects the soundness of the structure.
The home also could be rejected by FHA if it does not meet the guidelines related to the type of property it is. For instance, condo loans can only be made with a FHA home loan for complexes that are approved by HUD. The complexes that are eligible are listed on the HUD website. Manufactured homes also are held to certain standards. The manufactured home for example has to be permanently attached to its foundation.
FHA home loans are a very valuable option for many Americans. This type of loan allows you to get a home of your own instead of paying rent for years while waiting to qualify for a conventional loan with a higher credit score and down payment. However, you must make sure that the property does not go above the maximum amount for your area of the country.
The FHA home loan is an excellent product for people with lower credit scores and down payments. If you can keep your DTI to the parameters mentioned above, you may be able to buy your own home in 2018!