Great Pick for First-Time Buyers
FHA loans have flexible qualification requirements and low down payment options, making them a great option for first-time homebuyers.
Low interest rates
Down payment options as little as 3.5%
Fast close – 14 to 21 days from contract to keys
Can use gift funds for down payment & closing costs
Minimum credit score of 580
Minimum down payment of 3.5%
Up to 56% debt-to-income ratios
Primary residences only
What is an FHA loan?
An FHA loan is a government-backed loan program with more lenient credit and down payment requirements and is intended to help homebuyers who may not qualify for conventional financing.
With less stringent underwriting guidelines, FHA loans are very popular among first-time buyers, and this loan program pairs well with Homepad’s fast 14-day closing timeline.
What is FHA Mortgage Insurance?
As opposed to conventional loans, where mortgage insurance (MI) is added for loans with less than 20% down, FHA mortgage insurance is required for all FHA loans, regardless of the down payment. A down payment of less than 10% means that FHA mortgage insurance will remain for the life of the loan. You can remove the mortgage insurance by refinancing into a conforming loan once you reach at least 20% equity – or by paying off the loan entirely. Typically FHA buyers lower or remove their mortgage insurance by refinancing within 5-10 years of their purchase date.
- FHA mortgage insurance is composed of two parts: an Upfront Mortgage Insurance Premium (UFMIP) that is traditionally financed into the loan, and a monthly Mortgage Insurance Premium (MIP) paid each month.
- The Upfront Mortgage Insurance Premium is equal to 1.75% of the loan amount.
The monthly Mortgage Insurance Premium is based on an annual rate of 0.45% to 1.05%, depending on the loan amount and down payment.
We often have buyers use FHA financing to get into their homes with the lowest down payment possible and refinance into a conventional loan once they reach 10-20% equity in the property. This will allow them to reduce their monthly payment significantly, or eliminate the mortgage insurance completely.
Nuances of FHA Loans
Condominiums must be approved ahead of time, which can make purchasing a condo with FHA financing tricky.
Any spousal liabilities appearing on the credit report (think car loans, student loans, credit cards, etc.) must be incorporated into the qualification for non-borrowing spouses, even if they will not be on the loan.
FHA County Loan Limits
FHA county loan limits can be lower than their conventional counterparts. This can limit your purchasing power when compared to a conventional loan.
Gift funds must be documented with the most recent two months of bank statements from the gift donor to ensure that funds have been properly “seasoned.” Most other financing types will allow lenders to skip this documentation if the funds are wired directly to escrow, but FHA has stricter sourcing requirements for the gift donor’s ability to provide the funds.
Who are FHA loans best suited for?
If you have a credit score too low for conventional loan approval.
620 is the minimum credit score required for conventional financing, but with multiple “risk factors” (high debt ratios, low down payment, etc.) you may not be able to receive approval for conventional financing with a score below 700. FHA financing will allow credit scores as low as 580.
If you have a lower down payment.
FHA financing lets buyers put down as little as 3.5%. To help cover the additional costs of obtaining your loan, you can opt for a higher rate and take a large lender credit to help offset closing costs, instead of paying for these out of pocket.
If you are considering buying a multi-family residence.
FHA loans are also useful if you are targeting 2-unit properties, as the 3.5% minimum down payment is far lower than the 15% down needed for conventional duplexes. For 3-4 unit properties, the 3.5% minimum down payment also applies, but these properties are required to meet a “cash flow” requirement, which can be hard to satisfy in today’s market.
If you have an appraisal shortfall.
FHA financing offers a strong alternative for buyers who encounter an appraisal shortfall and wish to restructure their loan. Going from a higher down payment requirement with conventional financing to a 3.5% down payment can free up funds to cover an appraisal shortfall.
Debunking the Stigma of FHA Loans
Some real estate agents can have a false impression that FHA financing is a “lesser” quality financing option than conventional financing. Although FHA financing does have some slightly stricter requirements for appraisals and additional protections in place for borrowers, by no means is it an inferior financing option.
The more lenient requirements associated with FHA financing are meant to encourage first-time homeownership. Additionally, these lenient guidelines allow Homepad Lending to close FHA loans in as fast as 14 days!