The Federal Housing Administration has been making home loans to veterans, first-time home buyers, and young families for a long time, and it has seen its share of ups and downs. Following the housing crisis of a few years ago, there was concern that the problems had become too large to handle, and that the national “insurance program” for home loans would come to an end, effectively locking some young or low-income buyers out of the market permanently.
It did not happen.
Today, FHA and its wide array of home purchase and refinance programs are seemingly ber than ever, and a new generation is taking advantage of low-cost and relatively-easy-to-secure home mortgages.
What Are the FHA Loan Requirements?
The most popular FHA loan is the 203(b). It allows buyers to qualify for a loan with a low down payment;Â today the requirement hovers around the 3.5% mark. Loan terms can be up to 30 years, and interest rates are comparable to or lower than other types of mortgages. There are a wide variety of specialty loan programs under the FHA umbrella. And buyers are not limited to a single FHA loan, but they cannot own multiple properties with FHA-insured mortgages.
Because, you see, FHA is really an insurance program. You will pay a portion of that insurance, but the rates are very low, and are included in your monthly payment.
Because of that guarantee, the requirements are less stringent than for conventional mortgages.
Guidelines at a Glance:
For an FHA loan, borrowers must have:
- A FICO credit score of at least 580 in order to qualify for the low-down-payment advantage. That means you can buy a house with as little as 3.5% in cash to use as a down payment.
- Fees that are charged to the borrower are limited by the FHA so your closing costs will most likely be lower than with other types of financing.
- Interest rates may be lower, but they will almost certainly not be higher than the average market rates.
- Underwriting standards are less stringent, because the loans are backed by the full weight and force of the government. Even with a past foreclosure or bankruptcy, you may still qualify as long as you can demonstrate current responsibility and an ability to repay.
- Under certain circumstances, you can apply for an FHA loan without the normally required two lines of credit. If you are just beginning to establish credit, ask a mortgage counselor about the alternate qualifying forms that are available.
How Much Can You Borrow?
There is a limit, and it depends on where you live, and where you want to buy a home. Borrowing limits in most small-to-medium-size cities in most counties in most states is $271,050, with correspondingly higher limits for purchasing duplexes, tri-plexes and 4-unit properties.
However, and it makes a big difference, if you live in major metropolitan areas with higher average housing costs, you can expect the FHA limits to be higher as well. For example, in Sitka, AK, your FHA loan limit will be $451,950; in Juneau, the limit is set at $409,400; and in Portland, ME, you’ll be limited to a loan amount of $302,450.
Marin County, CA, with some of the highest priced real estate in the country in San Francisco, Oakland and Hayward, carries a single family FHA limitation of $625,500; and you’ll be limited to $448,500 if your dream home is in Naples, Immokalee or Marco Island, FL.
These limitations represent the amount of the loan, not the sales price of the home.
Qualifying For FHA Financing
The stated minimum credit report FICO score for an FHA loan is just that. A better score makes qualification somewhat easier, but even a lower number doesn’t completely knock you out of the game. Under 580, however, you will be required to have at least 10% of the sales price available for a down payment.
Depending on your individual situation, it might be worth the time and effort to improve your credit score, rather than trying to save up the additional cash.
Under FHA guidelines, your credit-worthiness and demonstrated ability to manage your monthly obligations counts for more than a past foreclosure or even a bankruptcy. All applications are individually underwritten and a few credit problems does not mean renting forever. But you will be wise to take an advance look at your credit report — always good advice — to make sure there are no errors and that you can explain the whys and hows of any late payments or disputes.
While fixed-rate loans account for the majority, you can also look into adjustable-rate mortgages, designed to help low-and moderate-income families transition into home ownership. Payments that start out low are adjusted over the term of the loan to become more in line with traditional mortgages. There are additional options, such as securing a co-borrower, if you are unable to qualify for an FHA loan, so be sure to check out all possibilities if you have your heart set on a home.
The best advice, no matter what your situation, is to consult with a Realtor before you start looking for your dream home. It’s also wise to gather your financial documents and employment information, including bank records and tax returns, so that you are prepared to make a preliminary loan application. A pre-approval, whether for an FHA loan or other financing, will make you house-hunting much easier.
2 Point Highlight
FHA loans were designed to spur the economy after the Great Depression, helping young families and first-time home buyers; the program now serves a large percentage of the population with a wide variety of financing options.
If you have limited cash and a less than stellar credit score, you can still buy a home if you have regular income and can show a pattern of paying your bills on time.
