FHA Loan Overview
An FHA loan can be used to buy a house or refinance an existing mortgage. You can buy a house with a lower down payment than a conventional loan, or use a streamline refinance to refinance your current mortgage in order to lower your current payment, with less documentation than a traditional loan.
For 2020, individuals may borrow up to 96.5% of the value of a home with an FHA loan, leaving only 3.5% of the home’s value to put down. The FHA loan limit for most of the country is $331,760 and up to $765,600 in high cost areas.
What Is an FHA Loan?
An FHA home loan is a mortgage insured by the Federal Housing Administration. These mortgages are backed by the federal government, which helps FHA-approved lenders extend home financing to buyers who are unable to qualify for a conventional home loan.
The FHA doesn’t issue mortgages, the agency provides insurance on mortgage payments, so more borrowers are able to attain home financing through an FHA-approved lender such as a bank. Mortgage insurance premiums are the cost of having the FHA guarantee your loan, which is used to protect the lender from loss if you are unable to pay the loan back.
FHA loans are designed to make home ownership more affordable. Though they were originally intended for borrowers with less than perfect credit, they are now popular with a wider group of borrowers.
FHA Loan Requirements
Since there are many FHA home loans, and FHA loan requirements vary depending on the loan type, usually the credit stipulations are more lenient while the loan requirements are stricter.
- Less than perfect credit is not disqualifying
- Maximum financing available with 580 FICO
- Low down payments
- Gifts or grants allowed toward down payment
- Sellers, builders, or lenders may pay some of borrower's closing costs
- Higher home inspection standards
Those with a credit score between 500 and 580 may still qualify for FHA loans but will need a down payment of 10% instead.
Can self-employed individuals qualify for FHA loans?
For those who are self-employed, you will need two years of tax returns and an up-to-date balance sheet and profit and loss statement to qualify for an FHA loan. If you have been self-employed between one to two years, you may still be eligible for an FHA loan if you have a good work and income history for the two years leading up to becoming self-employed and you are in the same or related occupation.
Even if you have filed for bankruptcy or been foreclosed upon, you can still qualify so long as you’ve rebuilt your credit, usually the waiting period is 3 years after a foreclosure and 2 years after a bankruptcy. Generally speaking, the lower your credit score and down payment, the higher your interest rate will be.
Although most loans will require mortgage insurance payments if the down payment is under 20%, all FHA loans will require borrowers to pay an upfront mortgage insurance premium of 1.75%, as well as monthly mortgage insurance.
FHA Loan Benefits
FHA loans enable more people to achieve home ownership by allowing borrowers who have less than perfect credit, no credit history, or who may have experienced some financial missteps, like a foreclosure or bankruptcy, to qualify.
The program has become popular with first time home buyers and move up buyers because you can buy a house with a lower down payment, and has more flexible underwriting standards.
With lower down payment options, and flexible lending guidelines this loan type is a top choice for today's buyers.
FHA MIP is what makes FHA loans possible.
- Wide Variety of FHA Loan Options: Whether it is a 30 year fixed or a 15 year fixed, FHA has you covered.
- FHA Allows Low Down Payments: With a low down payment option, more people can buy a new house. This is great for first time home buyers, and those who have little money to put down.
- FHA Allows 100% Gift Funds: In addition to a low down payment, those funds can come from a gift.
- FHA Insures Various Types of Properties: They are available for single-family detached homes, 2-4 unit homes, condos, and manufactured homes.
- FHA Streamline Refinance: One of the unique features of an FHA loan is the ability to Streamline Refinance. This is the easiest way to refinance as there is no credit qualifying, no income verification, and no appraisals required if you refinance your FHA loan.
One big advantage of FHA loans is that FHA permits the seller of the property to pay some of the closing costs (origination fees, attorney fees, appraisal costs, etc.) on your behalf. Sellers can choose to further incentivize the purchase of their home if they’re having trouble finding a buyer.
FHA and Retirement
Many people may not consider how important it is for seniors to have the freedom to move to a new home. Whether the reason is to be closer to family, relocate to your dream city, or simply to buy a smaller home that is easier to take care of, seniors actually move quite frequently. In regards to refinancing, if you chose to stay in your current home after retiring and don't plan on moving anymore, taking cash-out can be a great way to take advantage of gaining additional funding towards traveling and living a stress-free life. However, when applying for a loan, a lender will need to see a job history to prove there is a steady income that will allow for the mortgage to be paid and this is where many retired borrowers feel deterred in seeking out a new loan.
When calculating debt to income ratio, the lender must follow the specific guidelines set up by the U.S. Department of Housing and Urban Development. When it comes to retirement pay, including pension and 401k funds, the lender is required to follow up with the borrower's former employer to verify how much and for how long the retirement pay will continue. Social Security incomes must also be verified by the Social Security Administration, and if these benefits are scheduled to expire within the first three years of the loan, this income must only be considered as a compensation factor, thus disqualifying this borrower from obtaining a loan, unless they can prove that they are getting an income from either a part time job or another qualifying source.
Equal Credit Opportunity Act
But there is a light at the end of the tunnel. As long as your 401k, pension, or Social Security benefits are scheduled to continue for over three years, getting an FHA loan can be a fairly straight forward process. In fact, your age or retirement status should not even be a factor in getting a loan as long as your finances fit into the FHA guidelines. The Equal Credit Opportunity Act has made it illegal for a lender to discriminate against age for any qualified borrower.
FHA Benefits for Seniors
FHA loans can be great for seniors because they generally offer lower interest rates, lower down payments, approve lower credit scores, and sometimes cover closing costs. Fannie Mae and Freddie Mac both offer retirement fund annuitization procedures that require lenders to divide 70% of the value of a borrower's fund over 360 or 180 months of the loan's terms. This could significantly boost the amount of income in the senior's 401k account. Not all mortgage companies offer this product, so many sure you ask your loan officer if this is something available to you. The AARP website has great information about all of the special programs for seniors, click here for more info.
FHA Loan Options
FHA Fixed Rate Mortgages
FHA 15 Year Fixed Rate Loan:
- All the benefits of a 30 Year Fixed Rate Loan
- Save thousands in interest over the life of the loan
- Build equity faster
- Pay your house off sooner
FHA 30 Year Fixed Rate Loan:
- No prepayment penalties
- Low down payment options
- Gift funds allowed
- Ability to Streamline Refinance
FHA Adjustable Rate Mortgages
FHA 5/1 Adjustable Rate Mortgage:
- Keeps interest rates low for 5 years
- Introductory interest rates are typically lower than fixed rates
- Good for buyers who plan to own the home for a short time or refinance in a few years
FHA Streamline Refinance Loans
FHA Streamline 30 Year Fixed Rate Refinance Loan:
- Lower your payment by lowering your current interest rate
- Convert an FHA Adjustable Rate Mortgage into a fixed rate mortgage
- FHA Streamline refinance loans require less documentation than a traditional loan
- No appraisal required
- No income documentation
- Easier to qualify
- No appraisal required
FHA Streamline 5/1 Adjustable Rate Refinance Mortgage:
- FHA 5/1 ARM establishes a lower initial interest rate for the first five years, then the market determines your rate
- Adjustable Rate Mortgages typically have lower interest rates than fixed rate loans
- Useful if you plan on selling your home in the near future.
Other FHA Loan Considerations
For FHA loans, typically the property being financed is to be your primary residence and the loans can’t be used for investment or rental properties. However, eligible residences include semi-detached homes. townhouses, row houses, and certain condominiums.
For approval, you will need to show that your mortgage payments, HOA fees, property taxes, mortgage and homeowner’s insurance are under 31% of your gross income. You will also be required to have the property appraised by an FHA-approved appraiser. You will be forced to pay for repairs at closing if the home does not meet certain FHA standards and the seller refuses to make repairs.
Lastly, it will need to have been at least two years since any Chapter 7 bankruptcy filing, and you will need to have re-established good credit or chosen not to incur new credit obligations. If you have been foreclosed upon, it must have been no more recent than three years ago
Have more questions on FHA loans? Take a look at our FHA vs Conventional page.