FHA Home Loan
FHA loans are available for residents or would be residents, looking to buy a house in the State. More often than not, FHA provides options for those who would otherwise not qualify for conventional mortgage loans. Not all banks and mortgage lenders offer FHA loans. A lender must have a Direct Endorsement and must go through a comprehensive HUD approval process to do so. Contrary to popular belief, FHA does not directly offer the loan. The Federal Housing Administration (FHA) insures the loans to improve housing standards and conditions.
Types of FHA Loans:
• FHA 203b –
The FHA 203b Fixed Rate Home Loan Program is the most common and widely used FHA purchase loan program in the market. The standard FHA loan guidelines apply with a minimum down payment requirement of 3.5% of the Sales Price. Gift funds are allowed to be used as a down payment by prospective homeowners. They can finance up to a maximum loan-to-value (LTV) of 96.50%.
• FHA 203k –
The FHA 203k loan program is the type of loan where the property will require or need repairs or renovation. This allows the home buyer to get the money needed to make necessary repairs included in the total loan amount to be financed. The borrower typically borrows the sum for the Sales Price plus the estimated costs of repair.
Standard 203k or Consultant Program:
The standard 203k is reserved for homes that require more than $35,000 in repairs and renovation. This is typically used for homes with a more extensive work and must have at least $5,000 in repairs. A 203k Consultant will inspect the property and the work progress that is required to bring the property up to the FHA standards.
Limited 203k or Streamline Program:
The Streamline program is designed for homes that may only need cosmetic repairs or upgrade. This is commonly known as the Streamline 293k, a home improvement loan that needs no more than $35,000 in repair or renovation.
Each one of them has their distinct features, benefits, and guidelines. On Streamline 203k, there is no minimum amount, but there is a maximum repair amount that can be added to the loan. For Consultant, no maximum repair amount can be added to the loan.
Eligible properties are one-to-four single family homes that have been completed for at least a year. You can buy a house that’s been torn down as long as the most of the existing foundation structures are still in place or good condition. Every property has to qualify as an FHA approved property under the FHA home loan requirements.
The County specific maximum loan requirements will apply to all 203k home purchase loans. Terms are for 15 or 30 years, although most 203k borrowers find that a 30-year term is the most advantageous due to lower monthly payments.
All FHA loans will require a Mortgage Insurance Premium (MIP). Mortgage Insurance protects the lender in the event of future loan default by the homeowner. This mortgage insurance cost is the sole responsibility and shouldered by the borrower. There is an upfront mortgage insurance premium (UFMIP) which is equal to 1.75% added to the loan amount or can be paid by the borrower at closing. The monthly mortgage insurance premium (MIP) is calculated based upon: (a) the loan term, and (b) loan-to-value. The mortgage insurance premium applies for the entire term of the loan, regardless of term or amortization type or loan-to-value (LTV).
FHA Loan Benefits and Advantages:
• Lower Interest Rate:
As compared to conventional loans, FHA carries a lower interest rate. Since HUD insures the loan against imminent default, it is offered a lower rate.
• Lower Down Payment:
The minimum requirement for an FHA loan is only 3.5% compared to 5% on conventional loans. The borrower can also get a “gift” from family members to be used as a down payment on the house.
• Lenient Credit Qualifying:
The required credit score for an FHA loan is lower compared to the conventional counterpart. We can offer an FHA loan to borrowers with middle credit scores as low as 580 FICO. FHA loan approval is more relax and easy.
• Higher Debt-to-Income Ratio:
The standard FHA loan guideline for DTI is 50% and may go all the way to 55%. FHA loans can go as high as 57% debt-to-income (DTI) ratio with an automated underwriting system approval. Conventional loans can only go as high as 45% DTI. What does this mean? This allows the home buyer to purchase a more expensive home. For the most part, the debt-to-income ratio determines if a borrower qualifies for a home loan or not.
For more information on FHA loans, please contact our FHA Home Loan Specialist.