FHA Home Loans
Advantages of the FHA loan
There are many advantages to FHA loans. They require very low down payments, as low as 3.5% which means less money out of pocket. FHA loans also allow for the down payment to be paid by the seller or even gifted, and have more liberal credit score requirements than other loan programs.
Maximum Loan Amount
FHA loan limits will vary from state to state and even from one county to the next. They also change over time so for the most current and accurate information on FHA home loan limits in your area, it is best to go to the FHA website.
At this time in Spokane County the limit for an FHA loan on a single family home is $271,050. FHA will lend money on multifamily homes up to four units as long as the owner occupies one of the units. The FHA loan limit for a duplex in Spokane County is $347,000, a tri-plex is $419,425, and a four-plex is $521,250.
Debt to Income Ratio
How much you can borrow with an FHA loan depends on your debt to income ratio. With FHA loans, there are two important numbers, expressed as 29/41.
The first number is your total housing expenses divided by your gross monthly income. Total housing expenses include principal and interest payment, property taxes, homeowners insurance, mortgage insurance, and any homeowner's association dues. This total must not exceed 29% of your gross monthly income.
The second number is total monthly recurring debt divided by gross monthly income. Total recurring debt includes all the housing expenses from above in addition to auto loans, student loans, credit card payments, and any other monthly recurring debt. The total on these expenses may not exceed 41% of your gross monthly income. Your gross monthly income is your total income before taxes.
FHA home loans have some of the lowest credit score requirements available. There are many additional factors that are considered in loan qualification but the minimum FICO credit score for an FHA home loan is 580. This is the minimum credit score established by the Federal Housing Administration and of course, may change over time.
Not all lenders are going to offer FHA loans with a 580 credit score, as a matter of fact it would be quite difficult to find a lender that would. It is more likely that you would need a minimum FICO score of about 620 or 640. This is because the lenders are also extending a risk when offering this loan. Often times there will be a minimum loan requirement set by a government agency and the lending institution will set a tighter standard. This is called an overlay.
With co-borrowers both people on the loan need to have qualifying credit scores. It is acceptable to only have one name on the loan and two names on the title if one person has credit issues. If one person is not on the loan though, their income does not count towards qualifying for the loan. For more information on credit scores, refer to the article titled "Your Credit Score".
Down Payment Requirements
The low down payment is one of the biggest advantages of the FHA home loan. They require a down payment as low as 3.5% in some cases. If the home appraises for a lower amount than the sale price, the FHA loan's maximum loan to value ratio of 96.5% will be based on the appraised value.
The seller can even pay up to 6% of the value towards the buyer's down payment and closing costs. This is a very high allowable seller contribution and may be changed in the future. The down payment may also be gifted. The gift of the down payment would need to be from a family member, the borrower's employer or a nonprofit organization. The gift could not be required to be repaid, as this would make it a loan and not a gift.
There are closing costs associated with a FHA loan, but most of them can be rolled into the loan and paid over the life of the loan. The amount of the closing costs varies from loan to loan. Some of the costs are fixed and some depend on the amount of the loan. Some closing costs even depend on when you close. You can estimate an additional 3% to 4% on top of the borrowed amount for closing costs on a FHA loan. Closing costs are discussed in greater detail in the article titled "Closing Costs".
The buyer pays mortgage insurance on all FHA loans. Mortgage insurance ensures the lender against loss when a foreclosure sale does not bring enough to pay the off the debt.
Recently there has been a change to the FHA loan that requires the borrower to pay mortgage insurance for the life of the loan. In the past, the borrower was not required to pay mortgage insurance after they had built up enough equity in their home.
For more information on this subject, please refer to the article on "Mortgage Insurance".
Types of Property
FHA Loans are intended for the purchase of owner occupied residences, and can be used to buy condominiums or houses, and manufactured homes with land. They may not be used to buy a manufactured home on leased land, such in a mobile home park.
FHA loans can also be used to purchase multi-family homes up to four units. One of the units is required to be occupied by the owner.
You may even use FHA home loans to buy fixer-uppers. There is a provision in the loan to finance the needed repairs. For more information on these loans, take a look at the article on "203K Loans".
FHA loans are for owner occupied homes, therefore the owner is expected to take occupancy of the home within six months of purchase and live there for a minimum of one year.
written by:Todd Hays