Unlock Homeownership: FHA Mortgage Program Simplified
If you want to buy a new home but do not qualify for a conventional mortgage, you can take advantage of the FHA mortgage program.
An FHA mortgage is a home loan issued by a bank or other lenders approved by the Federal Housing Administration (FHA). This home loan is insured by the government but administered and underwritten by FHA-approved mortgage lenders.
It is a popular home loan option for first-time or repeat home buyers with lower credit scores and limited savings for a down payment.
It is easier to get approved for an FHA loan than a conventional loan given your lower credit score and limited down payment. However, an FHA loan comes with some extra rules and costs.
FHA loans are available in 15-year and 30-year terms with fixed interest rates. One requirement for this home loan is for borrowers to have FHA mortgage insurance because the down payment is less than 20%
Benefits: Why Choose an FHA Loan?
Unlike conventional loans, it is easier to qualify for the FHA mortgage program. These FHA loan benefits make an FHA loan a better option for many home buyers:
- Lower Down Payment
You can buy a home with a down payment of as little as 3.5%. Even with a lower credit score, you can still qualify for an FHA loan with a 10% down payment.
- Lower Credit Score
A conventional home mortgage would need a 620 credit score and a 740 or higher credit score to qualify for the lowest mortgage interest rates.
If you have yet to work on your credit score or you have had some past issues with making on-time payments, you may not qualify for a conventional home mortgage.
A credit score of as low as 500 – 579 can qualify you for the FHA mortgage program. With this credit score, you will be in good standing with most lenders approved by the FHA.
The FHA mortgage program was designed for borrowers who find it challenging to secure home loans from private lenders.
With FHA mortgage insurance, banks and other lenders are willing to extend home loans to homebuyers with little cash for a down payment and low credit scores. This is so because your FHA loan is insured by the federal government.
- Easier to Buy a Home
Instead of renting a home while working on improving your credit score or saving more money for the down payment, the FHA mortgage program can make homeownership possible sooner.
An FHA loan is the most affordable mortgage option, especially for first-time homebuyers.
Understanding FHA Loan Limits
FHA loan limits are the maximum amounts the FHA will insure properties in different counties of each state. Loan limits vary depending on type of property type and local housing prices.
Loan limits are updated annually. The calculation of loan limits conforms with the loan limits set by Fannie Mae and Freddie Mac (a company operating under a congressional charter to ensure an affordable and reliable supply of mortgage funds).
For 2023, FHA borrowers have bigger loan limits. The U.S. Department of Housing and Urban Development (HUD) hiked FHA home limits for most counties due to the increase in home prices.
The floor and ceiling limits of FHA loans vary depending on the cost of living in an area which means counties may have different loan limits. High-end areas have higher FHA loan limits except for housing in Hawaii, Alaska, the Virgin Islands, and Guam where housing is more expensive.
FHA Mortgage Insurance: Protecting Your Investment
FHA mortgage insurance is required for each mortgage approved by an FHA-approved lender including an upfront mortgage premium and an annual premium.
- Upfront mortgage insurance premium (UFMIT). This is paid when the borrower secures the loan. The premium, 1.75% of the loan amount, can be part of the financed loan amount.
- Annual mortgage insurance premium (MIP). This is paid in 12 monthly installments. It is equivalent to 0.45% (15-year loan term) and 1.05% (30-year loan term) of the loan amount and the initial loan-to-value ratio (LTV).
The FHA mortgage insurance premiums are canceled after 11 years if the financed amount is 90% or less and you are up-to-date with your monthly mortgage payments.
If your LTV ratio is greater than 90% you will need to pay insurance premiums until your mortgage is fully paid.
The FHA insures single-family, multifamily, and manufactured home loans approved by FHA-approved lenders.
Banks and other lenders are willing to take the risk of approving FHA loans because the mortgage insurance premiums paid by borrowers protect them in case of mortgage default.
The FHA Loan Application Process: Step-by-Step
The application process for an FHA loan is similar to other home loan programs. You will need to comply with the lender’s requirements and have money for the down payment.
- Meet the minimum requirements for an FHA home loan.
- Credit history
- Credit Score of between 500 and 580.
- Down payment
- Loan-to-ratio value
- Debt-to-income ratio
- Shop around for an FHA-approved lender.
Most banks, credit unions, and mortgage companies are FHA-approved lenders. If you have a lower credit score, make sure it is acceptable to the lender. Apply for pre-approval from multiple lenders so you can compare loan estimates.
- Apply for an FHA home loan.
After finding the right lender, submit your loan application. Provide these basic details:
- Full Name
- Social Security Number
- Driver’s license or any state-approved ID
- Employment history
- Income information
- Property address
- Purchase price
- Down payment amount
The lender will also ask for some financial documents to verify your income, debts, and savings.
- Property inspection and appraisal
This is done by a certified appraiser who will inspect and give his opinion of the fair market worth of the property. He will also inspect the house to determine if it complies with the Housing and Urban Development (HUD) occupancy requirement.
- FHA Underwriting an approval
An underwriter will review your loan application. As soon as the underwriter verifies that your loan application meets FHA’s and the lender’s requirement, a close follows.
- Sign and Pay Closing Fees
The loan paperwork work and closing expenses are the last steps. Closing fees may range from 3.5% to 4% of the total loan amount.
Property Requirements for FHA Loans
The home you are planning to buy should be your primary residence and your loan amount should not exceed current FHA loan limits.
FHA Closing Costs: What to Expect
Closing costs include:
- Title investigations
- Surveying fees
- Legal Costs
- Underwriting costs
- Real estate taxes
- Advance interests
- Processing fees
- Insurance fees
- Prepaid interest
Closing costs are a small percentage of your total loan amount. FHA allows sellers and home builders to shoulder some of the closing costs. Some lenders include closing costs in your loan amount.
Refinancing with an FHA Loan
The most common reasons you may want to refinance your FHA loan include:
- To lower or increase your monthly payments.
- You may want to apply for a fixed-rate mortgage.
- You may want to trade your FHA mortgage for a conventional mortgage.
To qualify for FHA loan refinancing, you must qualify for a new FHA loan or another type of home loan.
Tips for a Smooth FHA Loan Process
To ensure a smooth FHA loan process, create a checklist of the requirements and information you need for the application and closing.
Discuss the items on your checklist with your loan officer and realtor to make sure you are not forgetting anything. Being prepared, organized, and systematic will ensure that after the closing, you will be able to move into your new home.
When you avail of the FHA mortgage program you can buy a home even with a lower credit score and limited funds for a down payment.
Your loan home will be covered by FHA mortgage insurance so it will not be difficult to find possible lenders.
Greater Alliance Federal Credit Union can help you own the home of your dreams. You can avail of our FHA mortgage program even with a lower credit score and a minimum down payment of 3.5%.
Click on the button and pre-qualify today!