FHA home loans: Features, benefits and eligibility
Some new homebuyers don’t consider government-backed mortgages because they think they’re for people with lower incomes and credit scores. Sure, government loans are indeed wonderful options for less-qualified borrowers, but they also feature a number of benefits for other consumers. Take a closer look at the FHA home loan, backed by the U.S. Federal Housing Administration and managed by the U.S. Department of Housing and Urban Development (HUD). This increasingly popular mortgage requires a lower credit score to qualify, and gives you the option to put as little as 3.5% down.
It’s always best to consult with a mortgage expert when deciding if an FHA loan is right for you and your life situation. In the meantime, prepare for that all-important conversation by using the FHA mortgage breakdown below.
FHA loans have no geographical or income restrictions like USDA loans, nor do they require military service like VA loans. Among government loans, FHA mortgages are especially appealing because more borrowers can apply! Indeed, word is spreading among the younger set: In January 2017, FHA loans accounted for 35% of Millennial home purchases.¹
As with conventional mortgages, lenders need to see minimum credit figures to validate FHA loan approval. FHA loans offer a higher chance of approval, however, because they allow borrowers with lower credit scores to become homeowners. For conventional loans, lenders typically look for a credit score of 620 or above.² Most FHA-approved lenders look for a score of 580 or more to qualify for the 3.5% down payment.ᶟ
One of the best aspects of FHA loans is the low interest rates that lenders offer, often very competitive with conventional mortgage rates. FHA products can take the form of fixed rate and adjustable rate mortgages (ARMs), and the conforming loan limit is the same as conventional loans (established by Fannie Mae and Freddie Mac at $424,100 for most of the country). With a 3.5% down-payment option, low rates and product flexibility, FHA home loans are incredibly attractive to those who qualify.
The FHA allows for both streamline and cash-out refinancing. With the streamline option, the goals are to get a lower rate and make a lower monthly payment, so the value of the new loan won’t be more than the current loan. In this scenario, establishing the home’s value isn’t factored, so an appraisal isn’t necessary. In the cash-out option, the new loan will be larger, so the home’s value and borrower credit status will have to be re-evaluated.
The FHA offers home renovation loans that can be used during purchase or refinance transactions. Called 203k loans, they come in two versions: The limited, or “streamline” 203k, and the full, or “consultant” 203k. The limited 203k is for smaller repairs and improvements that won’t require off-site habitation or exceed $35,000, whereas the full 203k is for major projects without a financial limit that likely require alternative living arrangements. This “consultant” 203k is so named because it requires the input and attention of a HUD representative throughout the renovation.
FHA home loans require a 1.75% upfront mortgage insurance fee and an annual insurance payment that ranges from .25% and .60%, depending on the loan term, amount and down payment.⁴ These premiums can be rolled into the monthly mortgage payment to make it easier on borrowers.
FHA home loans usually only apply to primary residences, but exceptions can be made when purchasing second homes. Among them are vacating a jointly-owned property or relocating to another area not within reasonable commuting distance.
To learn more about FHA home loan benefits, contact a knowledgeable mortgage expert today!