Interested in FHA loans? According to Ellie Mae’s Origination Insight Report, FHA loans account for about 20% of home loans in the U.S. Around three-fourths of those loans are being used for home purchases and one-fourth for the refinancing of existing mortgages.
There are a few distinct benefits that FHA loans can offer, and many details which can be confusing. To help you better understand FHA loans and if they are right for you, here is a list of 19 FHA frequently asked questions (FAQ).
1) What is the FHA?
FHA stands for the Federal Housing Administration, and it’s an agency of the United States Government which was established in 1934. Its main goals are to stabilize the U.S. mortgage market, improve housing conditions and standards, and provide an adequate home financing system.
It works to achieve these ends by providing mortgage insurance on loans made through its approved lenders and setting standards for underwriting and construction.
2) How do FHA loans work?
The FHA provides mortgage insurance to their approved lenders so that if a borrower defaults on their loan, the lender is reimbursed. The FHA does not directly offer the loans.
As the borrower, you will have to pay a one-time upfront mortgage insurance premium (MIP) that is rolled into the loan and an annual MIP that is divided by 12 and included in your monthly payments.
The premiums go into a fund which repays lenders if borrowers default. Mortgage insurance is required for the full length of FHA loans.
3) Who are FHA loans for?
FHA loans for are best for borrowers who are looking for a minimal down payment and who may have trouble getting approved elsewhere. Further, it will be important that the house you want to buy, falls within the mortgage limits.
4) What are the maximum mortgage limits on FHA loans?
Maximum mortgage limits for 2018 can be found on the FHA Mortgage Limits page. Here are the basic standard mortgage caps:
Limits will vary depending on your location, so you will need to look up the area where you plan to buy to get the maximum that applies to you.
5) How do you qualify for an FHA loan?
To qualify for an FHA loan, you will need to shop around and select an FHA-approved lender that best suits your needs. You will have to meet the lender’s and the FHA’s eligibility requirements to get approved.
It’s a good idea to review the requirements and work with a HUD-approved housing counseling agency to ensure you fully understand the program.
Basic qualification requirements for an FHA loan
- Have a social security number (SSN)
- Be of the minimum age to enter into a mortgage
- Meet income requirements
- Show two years of work history and income that will continue for the first three years of the mortgage
- Have qualifying debt-to-income and mortgage payment-to-income ratios (varies based on credit score and compensating factors)
- Hold a minimum credit score of 500 for the 10% down payment and 580 for 3.5% down payment (although many lenders require at least a 620)
- Must be creditworthy (i.e., no recent bankruptcies, liens, unresolved delinquencies or collection accounts, recent foreclosures, etc.)
- Have mortgage insurance
- Take the title in their own name or in the name of a living trust
- Live in the property as your primary residence within two months and for one year (exceptions do exist)
- Have no delinquent tax or non-tax federal debt
Additionally, the home must meet the “Property Acceptability Criteria,” and the loan must be under the FHA maximum limit for your area
6) What credit score do I need to get an FHA loan?
The U.S. Department of Housing and Urban Development (HUD) requires that borrowers have a Minimum Credit Decision Score (MCDS) of 500 to get approved for an FHA loan with a 10% down payment, and at least a 580 to qualify for the 3.5% down payment.
To get your MCDS, your credit reports will be pulled from all three credit bureaus, and the middle score will be used. If you only have two credit scores, the lower number will be used.
Keep in mind, that the credit score requirements of FHA-approved lenders can be more strict than the FHA guidelines. Tim Milauskas of First Home Mortgage Corp says, “Most lenders place overlays on top of FHA rules to prevent defaults.”
He adds that, in many cases, the minimum credit score accepted is 620. For this reason, it is good to check with multiple lenders when shopping for an FHA loan, especially if your credit score is below 600.
7) Are FHA loans for first-time home buyers only?
While popular with first-time home buyers, FHA loans are also available to those who have purchased one or more homes in the past. However, you can only have one FHA loan at a time, and it must be used to purchase a home that will be your primary residence.
8) How long does it take to close an FHA loan?
Many factors can influence the closing time of a loan. However, according to Ellie Mae, FHA loan closing times average around 50 days.
9) Can you buy a townhouse with FHA?
April Macowicz, Realtor at The MAC Group, adds, “Townhomes can qualify for FHA, but it depends on the association and how the property is classified. If it is classified as a PUD (Planned Unit Development), then in most cases it does qualify. However, there may be some homeowner association restrictions, so take caution.”
10) What are the pros and cons of FHA loans?
Compare the pros and cons to make a better decision.
- Lower credit score requirements
- Low down payment and gifts from friends are accepted
- Sellers are allowed to pay some of the closing costs
- Allows for co-borrowers that don’t live in the property
- Lower interest rates
- You have to pay a private mortgage insurance
- Mortgage limits
“FHA is a great option for many borrowers who either have limited funds for a down payment or less-than-perfect credit history. The benefit is generally an interest rate that is below a comparable conventional interest rate,” says Joe Caltabiano, a mortgage and finance expert who has written over $2.5B in loans.
Other pros include the 3.5% and 10% down payment options, low credit score requirements, and the ability to use a gift as the down payment.
FHA is a great way to acquire a property, then a couple of years later you should look to refinance”
“The con for FHA is the PMI (private mortgage insurance) associated with the loan will never go away or drop off regardless of how much you pay the loan down or how much the property appreciates.
I explain to clients that FHA is a great way to acquire a property, then a couple of years later you should look to refinance once you have 20% equity in a property,” says Caltabiano.
Additionally, the mortgage limits may be lower than some borrowers would like.
11) Who pays the closing costs in an FHA loan?
It depends on the agreement between the buyer and seller. FHA rules allow for the seller to pay up to 6% of the lesser between the property’s purchase price or appraised value towards closing costs.
This is in comparison to the 3% allowed on conventional loans. It’s worth negotiating with the seller to at least pay half of the costs. If you do end up paying some or all of the closing costs, you can pay them out-of-pocket or ask about financing them into your loan.
12) What kind of mortgage insurance is required for an FHA loan?
All FHA loans require you pay an upfront and annual mortgage insurance premium regardless of the amount of your down payment. The annual premium continues for the entire length of the loan.
Upfront mortgage insurance premium (UFMIP)
The UFMIP is paid at the time that the loan closes and is equal to 1.75% of the base loan amount. Note that it must be entirely financed into the loan or entirely paid in cash. The proceeds are placed into an escrow account set up by the U.S. Treasury Department to protect the government if you default on your loan.
Annual mortgage insurance premium (MIP)
MIP is due annually but can be paid on a monthly basis. Proceeds go to the FHA to cover the loss for the lender if you default.
13) Why is mortgage insurance required on an FHA loan?
Mortgage insurance is required on an FHA loan to protect the government and the lender against losses. FHA loans enable higher accessibility to home ownership by lowering credit and financial requirements. As a result, lenders face a higher risk. Mortgage insurance helps to mitigate that risk.
14) Can I get help in paying my down payment on an FHA loan?
Yes. HUD and the FHA allow you to use gifts and assistance programs to get the funds needed for your down payment. However, the gift must be from an eligible person who doesn’t have a financial interest in the transaction (i.e., family, a friend, employer, etc.). The seller, builder, or real estate agent would not be an eligible gift giver. Further, the gift must be given without any expectation of repayment.
15) Can I use an FHA loan to buy a property that has been flipped?
Flipping property refers to buying property and reselling it within a short amount of time to earn a sizeable profit. If you want to use an FHA loan to buy property that has been flipped, you will have to wait until the current owner has owned the property for more than 90 days. Note, some exceptions do apply.
If it has been over 90 days but less than 180 days, you can use an FHA loan to buy the property, but it will need to undergo a second appraisal to verify the increased value.
16) Does HUD require a home inspection for FHA loans?
HUD does not require a professional home inspection but highly encourages it. However, it does require an appraisal by a HUD-certified appraiser who will perform a light inspection to ensure the house it habitable.
17) Can you refinance an FHA loan?
Yes, just like any mortgage, an FHA loan can be refinanced. Further, the FHA offers a streamlined program that makes refinancing very simple.
18) What are the interest rates on FHA loans and how are they determined?
Both fixed and adjustable interest rates are available on FHA loans. The average rates in the market will depend on current economic activity, and the rate you get will further depend on your credit and financial profile.
Lenders will evaluate the level of risk you present and will offer the best rates to those presenting the least amount of risk (i.e., high income, good credit, cash reserves, etc.).
Be aware that interest rates can vary by lender, so it is smart to shop around with at least three lenders.
19) How do I find an FHA lender?
You can search HUD’s database to find a list of lenders that serve your state, county, city, etc. You can also search various lenders to find out if they are HUD-approved. This article explains how to find FHA-approved condos.
Is FHA right for you?
Many top lenders offer FHA home loans. Head over to our home loans review page to read real-user reviews and compare lenders side-by-side.
Be sure to look at their eligibility requirements, create a shortlist of your top choices, and get a few quotes to find out which will offer you the best deal.
FHA offers a great alternative to conventional mortgages. It may help you get into the house of your dreams or save on the one you’re already in. Carefully review the pros and cons to decide if it’s the best route for you. And if you have any doubt, reach out to a counseling agency or trusted real estate agent.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.