FHA Guide

What is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). An FHA insured loan allows down payments as low as 3.5% with a 580 FICO score or higher. FHA loans help buyers who may have limited savings or lower credit scores.

The Federal Housing Administration insurance protects lenders in case of default. Which is why FHA lenders are willing to offer favorable terms to borrowers who might not qualify otherwise.

Borrowers may use an FHA loan to purchase a single family property up to a four-unit multi-family property. There are also FHA-insured loans that can be used for home renovation or building a new home.

*Note: The average closing costs for an FHA loan is between 2%-4% and are usually rolled into the loan and not required to be paid by the buyer upfront. The seller may also pay up to 6% of the closing costs if agreed to in the purchase contract.

FHA loans also require mortgage insurance premium (MIP). There is an Upfront MIP and an annual MIP. The annual MIP rates range from 0.80% to 1.05%, dependent on LTV (loan to Value) and amount of the loan. You may find this breakdown here. The UPMIP (up front MIP) is currently at 1.75% of the base loan amount.

FHA Loan Limits

FHA loan limits may change, check for updated information by checking the FHA Site. As of 2020, the countries average limit for a single family residence is $331,760. While this can be as high as $765,600 for high-cost counties. You can check the exact limits for your county by visiting Lending Tree‘s page where they have a drop down menu to easily select your state and county.

FHA Loan Requirements

• 500-579 Credit Score = 10% down payment
• 580 Credit Score = 3.5% down payment
• No more than one late payment in the past 12 months
• Cash reserves equal to 1-2 mortgage payments
• No bankruptcies, foreclosures, or short sales within the past 36 months
• DTI ratio below 43%
• Steady employment (2 or more years with employer recommended)
• Two years of tax returns, W2’s, and paycheck stubs
• Non-occupying co-borrowers allowed
• Must be a Legal resident AT least 18 years of age
• Must reside in property no more than 60 days after the close of the loan
• Must be primary residence

Best Perks of an FHA-Loan

• As low as a 3.5% down payment for a FICO score of 580 or higher
• Down payment may be gifted from others
• Low mortgage rates
• Non-Occupying cosigners/co-borrowers allowed on the loan
• 15 to 30 year loan term available
• Debt-to-income ratios up to 50% allowed

Know Your Rights

• Borrower Rights: Know before you owe!
• Fair Housing: Equal Opportunity for All!
• Real Estate Settlement Procedures Act: (RESPA) The Act requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process.

FHA Inspection and Appraisal Process

First, what is a home appraisal?

• A Real Estate Appraisal is required by most mortgage lenders. The appraisal helps lenders gauge the risk of making the loan. It is an unbiased estimate of current fair market value for what the home is worth.
  • For FHA loans, the U.S. Department of Housing and Urban Development (HUD) requires an appraisal.

Now, what is the FHA inspection?

• The FHA inspection is also a requirement for the loan.
• The inspection is to make sure the home meets minimum safety, security, and soundness standards.
• The FHA inspection must be done by a HUD-approved inspector.
  • Health and Safety are the number 1 priority for FHA and HUD.

Looking at Homes and What to Watch for

Save time and money by knowing what to look for ahead of time that may have your FHA loan denied.

FHA-Inspection CHECKLIST: Red Flags that may have the property denied for an FHA loan.

• Access and Location
  • Near a public waste site
  • Too close to high voltage power lines or explosive sites
  • Heavy traffic or near train, airports, or other heavy noise
  • Home must have reasonable access for emergency vehicles
• Structure
  • Severe structural damage (i.e. foundational cracks)
  • Roof Leaks or Leaky faucets
  • Termite damage
• Safety Hazards
  • Asbestos
  • Contaminated soil
  • Lead Paint (Homes built before 1978)
• Roofing
  • Roofs with less than a life of 2 – 3 years left
  • Leaks
  • Roofs over 3 layers
• Heat, Electricity, and Water
  • Exposed wires
  • Water heater must meet local building codes

*_{This list is not a complete list of all things an FHA-Appraiser or FHA-Inspector look at. Each home is unique and requirements may change. It is important to check with an FHA-approved Inspector or Appraiser for more details.}

What to do if a home doesn’t pass

Of course, we must know why it didn’t pass in order to fix the issue. If the seller is willing, it can be negotiated in the contract to complete the necessary repairs in order for the loan to be approved. It is also possible to raise the purchase price to cover the needed repairs.

When to move on: If there is severe structural damage, like a cracked foundation, it may be best if the home is sold to someone not getting an FHA loan.

Conclusion

For a FHA financing there is minimum requirements that must be met in order to qualify. When looking for a home to buy, it is important to know what to look out for so that you save yourself time and money by only looking at properties more likely to pass the appraisal and inspection.

If you have any other questions, please don’t hesitate to ask!