FHA LOAN 101
Here you are, looking for your first house. Hopefully, you’ve already established good credit, have some cash set aside, and have secured approval from your lending institution. With that approval will come spending range you’re approved for and with today’s current low-interest rates your buying power has increased!
However, not everyone is able to save up 20% down and luckily there are options available to you. An FHA loan may be just what the doctor ordered. I am going to walk you through:
- What is an FHA loan?
- FHA requirements?
- What are the FHA limitations?
- Your FHA application
WHAT IS AN FHA LOAN?
FHA stands for Federal Housing Administration. This entity, FHA, created in 1934, provides mortgage insurance on home loans made through FHA- approved lenders. This mortgage insurance insures single-family and multifamily homes in the United States and its territories. With an FHA loan, borrowers are able to purchase homes with a 3.5% down payment, that’s 16.5% less down payment than traditional bank mortgage loans.
An FHA loan is a great option for first-time home buyers and may be a viable option for those with a bankruptcy or have had a foreclosure.
FHA REQUIREMENTS
Image by As you are filling out the FHA loan application, you will see they will require information on your FICO credit score. Your FICO credit score must be a minimum of 580. This credit score of 580 or better awards you the privilege of only having to put 3.5% money down. Anything less than 620, you will be required to put 10% down. Good credit equals lower interest rates, bad credit equals higher interest rate.
FHA will want to know how you’re obtaining the monies for your down payment. Some people obtain this money through gifts, and supporting documentation must be applied:
- A family member or close friend – provide supporting documentation of their interest in you the borrower.
- Charitable Organization
- Government or local agency providing low-interest loans to low-income/moderate-income first time home buyers
FHA will accept cash you’ve saved in a lending institution savings account, money saved at home, checking accounts, private savings clubs, IRA’s, 401K’s and money from sales of private property. This is just a short list, there are other approved sources as well.
FHA RATES
As of August 17th, 2022, a 30-Year FHA Loan Rate 5.630%; APR of 5.530%
FHA LIMITATIONS
There are a few limitations to the FHA loan. The loan itself will have a lending limit. This limit is dependent on your state and county location as well as the type of home you are buying, be it single, duplex etc. Some people may be forced to look into a different county to get a higher spending limit or larger home.
You will need to have a <43% debt to ratio income. Steady income and proof of employment are required, as well as the home you are wanting to get a loan for must be your primary residence.
As mentioned before, if you have bad credit, bankruptcy, collections, judgements, late payments or foreclosure- these can negatively affect your application approval.
BE AWARE! FHA mortgages are different than traditional bank mortgages. FHA requires the payment of an Up Front Mortgage Insurance Premium and an annual Mortgage Insurance Premium (MIP). Are you able to have funds available to do this?
YOUR FHA APPLICATION
When filling out your FHA application you will need to provide the following:
- FICO credit score
- Complete Income Tax Returns for the past 2-years.
- W-2 & 1099 Statements for past 2-years.
- Pay-Check Stubs for the past 2-months.
- Self-Employed Income Tax Returns
- YTD Profit & Loss Statements for the past 3-years for self-employed borrowers.
- SSN verification
- Driver’s License
Here is a great pdf to print off with a complete list of necessary documents needed for your application. The FHA loan has 5 steps:
- Pre-approval
- Application
- Property appraisal
- Underwriting
- Mortgage approval.
Once you have been pre-approved, you can move forward and look at homes within your price range. When you find your home and make an offer, you will fill out your FHA application (some offices charge an application fee or place the fee into the closing costs). Your FHA lender will hire an appraiser to look at the home, after receiving the appraisal and it agrees with the offer you have made for it you’ll move forward. If the appraisal comes in lower the process will come to a halt.
Once your appraisal is accepted by the FHA lender, you will move on to the underwriting and documentation review. Finally, if everything holds up through the documentation review your mortgage will be “cleared to close”.
THE CLOSING
Each FHA office sets its own closing amounts by what they deem reasonable and customary for their region. Here are just a few costs you can expect to pay for:
- Lender’s origination fee.
- Attorney’s fees.
- Appraisal fee/ Inspection fees.
- Cost of title insurance and title examination.
- Property survey.
- Recording fees, and taxes.
- Home inspection fees
An FHA loan is beneficial for first time home buyers who are unable to make the traditional mortgage 20% down. FHA interest rates can be lower than traditional banks and the payment will be lower as well, along with longer terms. United Country and Midwest Lifestyle Properties wish you the best and looks forward to helping you find your dream home.
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