Definition of Federal Housing Administration (FHA) loan

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FHA loans vs conventional loans
FHA LOAN CONVENTIONAL LOAN
Minimum credit score 500 620
Advance payment 3.5% with a credit score of 580+ and 10% for a credit score of 500 to 579 3% to 20%
Loan conditions 15 or 30 years old 10, 15, 20 or 30 years old
Mortgage insurance Initial MIP + Annual MIP for 11 years or loan term, depending on LTV and loan term None with at least 20% down payment or after loan repayment at 78% LTV
Mortgage insurance premiums Upfront: 1.75% of the loan + Annual: 0.45% to 1.05% PMI: 0.5% to 1% of the loan amount per year
Deposit gifts 100% of the deposit can be a gift Only part can be a gift if the deposit is less than 20%
Down payment assistance programs Yes No

Special considerations

Mortgage insurance premiums

An FHA loan requires you to pay two types of mortgage insurance premiums (MIP): an initial MIP and an annual MIP (which is billed monthly). In 2020, the initial PIM is equal to 1.75% of the base loan amount.sese

You can either pay the initial PIM at the time of closing, or it can be incorporated into the loan. For example, if you get a home loan of $ 350,000, you will pay an initial MIP of 1.75% x $ 350,000 = $ 6,125. These payments are deposited into an escrow account set up by the US Treasury Department; if you end up defaulting on your loan, those funds are used to make the mortgage payments.

While the name is somewhat misleading, borrowers actually make annual MIP payments every month. (In other words, annual MIP payments are not made annually.) Payments range from 0.45% to 1.05% of the base loan amount. Payment amounts also differ depending on loan amount, loan term and original loan-to-value ratio (LTV). The typical MIP cost is usually 0.85% of the loan amount.sese

For example, if you have a loan of $ 350,000, you will make annual MIP payments of 0.85% x $ 350,000 = $ 2,975 (or $ 247.92 per month). These monthly premiums are paid in addition to the one-time initial MIP payment.

You will make annual MIP payments for 11 years or for the duration of the loan, depending on the length of the loan and the LTV.sese

You may be able to deduct the amount you pay in premiums; However, you need to itemize your deductions rather than taking the standard deduction to do this.sese

Eligibility for an FHA loan

Your lender will assess your qualifications for an FHA loan as they would any mortgage applicant. However, instead of using your credit report, a lender can review your employment history for the past two years (as well as other payment history records, such as utility and rent payments). As long as you have restored good credit, you can still qualify for an FHA loan if you have filed for bankruptcy or been subject to foreclosure. It’s important to keep in mind that as a general rule, the lower your credit score and down payment, the higher the interest rate you’ll pay on your mortgage.

In addition to the credit score and down payment criteria, there are specific FHA mortgage requirements outlined by the FHA for these loans. Your lender must be an FHA approved lender and you must have a stable employment history or have worked for the same employer within the past two years.

If you are self-employed, you need two years of successful self-employed experience; this can be documented by tax returns and year-to-date balance sheet and income statement. If you have been self-employed for less than two years but more than a year, you may still be eligible if you have a strong work and income history in the two years prior to self-employment (and the self-employment is in the same or related profession). You must have a valid Social Security number, legally reside in the United States, and be of legal age (according to the laws of your state) in order to sign a mortgage.

Usually, the financed property must be your primary residence and must be owner occupied. In other words, the FHA loan program is not intended to be used for investment or rental property. Single and semi-detached homes, townhouses, townhouses, and condominiums within FHA-approved condominium projects are all eligible for FHA funding.

Your initial ratio (your mortgage payment, HOA fees, property taxes, mortgage loan insurance and home insurance) must represent less than 31% of your gross income. In some cases, you can be approved with a 40% ratio.

Your background ratio (your mortgage payment and all other monthly consumer debt) must be less than 43% of your gross income. However, it is possible to be approved with a ratio as high as 50%. Additionally, you need a property appraisal from an FHA approved appraiser, and the home must meet certain minimum standards. If the house does not meet these standards and the seller does not agree to the required repairs, you will have to pay for the repairs at the fence. (In this case, the funds are blocked until repairs are made.)

One limitation of FHA loans is that they have outside limits on the amount you can borrow.seThese are set by the region you live in, with low cost areas having a lower limit (called a “floor”) than the usual FHA loan and high cost areas having a higher figure (called a “ceiling”). ).

In addition, there are some “special exceptional” regions – including Alaska, Hawaii, Guam and the US Virgin Islands – where very high construction costs make the limits even higher. Elsewhere, the limit is set at 115% of the median house price for the county, as determined by the US Department of Housing and Urban Development.sese

The table below lists the 2020 loan limits:

FHA Loan Limits 2020
TYPE OF PROPERTY LOW-COST ZONE
‘FLOOR’
HIGH COST ZONE
‘CEILING’
SPECIAL EXCEPTION
ZONES
A unit $ 331,760 $ 765,600 $ 1,148,400
Two units $ 424,800 $ 980,325 $ 1,470,475
Three units $ 513,450 $ 1,184,925 $ 1,777,375
Four units $ 638,100 $ 1,472,550 $ 2,208,825

FHA loan relief

Once you have secured an FHA loan, you may be eligible for loan relief if you have encountered legitimate financial hardship, such as loss of income or increased living expenses, or if you are struggling to make your monthly mortgage payments. The FHA Home Affordable Modification Program (HAMP), for example, can help you avoid foreclosure by permanently lowering your monthly mortgage payment to an affordable level.sese

To become a full participant in the program, you must pass a trial payment plan in which you make three scheduled payments, on time, at the lowest changed amount.

The bottom line

While an FHA loan may sound great, it’s not for everyone. This will not help those with a credit score below 500. For those with bad credit, a Personal loan may be a better option to consider. In contrast, aspiring homeowners who can afford a large down payment may be better off with a conventional mortgage. They are more likely to be able to save more money in the long run thanks to the lower interest rates and mortgage insurance premiums offered by conventional lenders.

FHA loans were not created to help potential homeowners who buy at the high end of the price range. Rather, the FHA loan program was created to support low and moderate income home buyers, especially those with little money for a down payment. ”

When buying a home, you may be responsible for additional expenses, such as a loan assembly costs, attorney fees and appraisal costs. One of the benefits of an FHA mortgage is that the seller, home builder, or lender can pay some of these closing costs on your behalf. If the seller is having trouble finding a buyer, they may offer to help you with the closing to encourage the transaction.


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