First Time Home Buyers
FHA loans have been helping people become homeowners since 1934. They are designed for first time home buyers through the FHA, or Federal Housing Administration, which provides mortgage insurance on loans made by approved lenders. The FHA (a government agency) then insures these loans on single family and multi-family homes. It is the largest insurer of residential mortgages, insuring tens of millions of properties. Since the loans are backed by the government, they require little down payment and qualify for low mortgage rates.
Please note: 15 Day closings can vary based on numerous factors related to borrower criteria.
FHA Loans: What You Need to Know
An FHA loan is a mortgage loan insured by the U.S. Federal Housing Administration (FHA) which is provided by an FHA-approved lender. FHA loans are popular with first-time home buyers who may have credit issues or little in the way of savings since they only require a minimum 3.5 percent down payment and a credit score of 580 or higher. The insurance the FHA offers lenders protects them in case the borrower defaults on the loan, which in turn allows lenders to offer favorable terms to borrowers who might not otherwise quality for a mortgage.
FHA home loans can be used for a variety of purposes, such as purchasing, renovating, or refinancing single-family (or multi-unit) homes, condominiums and certain types of mobile homes, as well as for the construction of a new home.
The Federal Housing Administration is a United States government agency, created as part of the National Housing Act of 1934, that sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building. The goals of this organization are to improve housing standards and conditions, to provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market.
Currently, the FHA insures loans for about 8 million single-family homes.
There are several types of FHA loans, from standard home purchase loans to loans that can accommodate very specific needs.
- Basic Home Mortgage Loan 203(b) – Fixed or adjustable rates, several home types eligible
- 203(k) Rehab Mortgage – Finances purchase and renovation in one loan
- Construction to Permanent (CP) Loan – Finances property purchase and home construction
- Title I Property Improvement Loan – Purchase of manufactured home or repair/renovate existing home
- Energy Efficient Mortgage (EEM) – For installing energy-efficient upgrades such as solar panels
Regardless of the FHA loan type, borrowers will have limits imposed on the amount of money to be loaned; limits vary by location. FHA loan limits in 2020 range from $331,760 to $765,600.
FHA Qualification Factors
To qualify for a FHA loan, you would need a minimum credit score or 500; the higher your credit score, the less of a down payment you will be required to make. A credit score between 500 and 579 may require up to 10 percent of the purchase price as a down payment; a score for 580 or above can result in a down payment as low as 3.5 percent. Down payment money can either come from savings or from gift money from a donor (such as a family member, employer, labor union or someone with a clearly defined and documented interest in the borrower. Gifts refer to the contributions of cash or equity with no expectation of repayment and all gift money will be scrutinized accordingly.
Also, to qualify for a FHA loan, you would need to have a debt-to-income ratio (DTI) of less than 50; in other words, your monthly debt could not exceed 50 percent of your income, pre-tax, including debts that you aren’t actively paying such as deferred student loans. In addition, any property you are attempting to buy would have to meet FHA property requirements, including an appraisal, to ensure that the loan is a solid investment.
If approved, a loan is insured by the FHA, which the borrower pays for on a monthly basis, alongside their regular mortgage payments. If your financial condition leaves you few options for home ownership, a FHA loan can be a boon to many potential first-time homeowners. Just bear in mind that lenders who work with the FHA may impose their own requirements and that rates and fees may vary, so be sure to use a licensed and knowledgeable professional.