FHA loans are a great option for first time home buyers that don't have the money normally required for a conventional loan. They are a great option for people looking to start building equity rather than continuing to pay rent.
Dime wants to do everything we can to make your home loan more affordable from start to closing. So we're giving you a $5001 credit towards closing costs.
FHA loans are insured by the Federal Housing Administration (FHA). These types of loans are popular among first time home buyers as they allow down payments of 3.5% as long as you have a credit score above 580. If your credit score is between 500-579, you can still qualify for an FHA loan as long as a 10% down payment is made. Borrowers will also be responsible for paying the mortgage insurance premiums, which will protect the lender in case the borrower defaults.
Conventional mortgages typically require a credit score of 620 or higher. If your credit score is lower than 620, an FHA loan may be your only option. In some instances, if your credit is score is higher than 620, an FHA loan might give you lower monthly payments than a conventional mortgage.
While it is easier to qualify for an FHA loan than a conventional loan, the Federal Housing Authority has an extensive list of loan requirements:
Typically, lenders will look for a credit score above 580, but if your credit score is above 500, you may qualify. Don’t know where you stand? Checking your credit score won’t hurt your current score and could save you thousands on your mortgage.
The minimum down payment for an FHA loan is 3.5% as long as your credit score is 580 or higher. For a credit score between 500-579, the minimum downpayment is 10 percent. The money for a down payment may also be gifted by a relative.
Borrowers must have a steady employment history or must have worked at the same employer for the past two years.
A borrower’s front-end ratio (mortgage payments plus HOA fees, mortgage insurance, homeowners insurance, mortgage insurance, and property taxes) needs to be less than 31% of their gross income. It is possible to get approved with a percentage as high as 40%, but your lender will be required to provide justification as to why they believe the mortgage is an acceptable risk and include any additional compensating factors that were used for loan approval.
A back-end ratio (mortgage plus all your monthly debt, i.e. student loan payments, car payments, etc.) needs to be less than 43% of the borrower’s gross income. Again, lenders may approve a borrower wiit has high a percentage as 50 percent, but will need to provide justification and the additional factors that were used for the loan approval.
The borrower cannot cancel FHA mortgage insurance if a downpayment of less than 10% was made.
The location of your home will determine the maximum FHA loan size. The limit directly correlates with the housing market – lower rates in the least expensive housing markets and higher in the most expensive markets.
If you have given up your property’s deed or have had a foreclosure within the last three years, you will not be able to qualify for an FHA loan. There are exceptions, like serious illness or the death of a wage earner that can be taken into consideration.
Borrowers must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if borrowers have been out of bankruptcy for more than one year and there were extenuating circumstances beyond your control that caused the bankruptcy and good credit has been re-established.
Borrowers must have a valid Social Security number and will need to provide proof of U.S. citizenship, legal permanent residency or eligibility to work in the U.S. Borrowers will also need to be of legal age to sign a mortgage under your state’s borrowing laws.
The property must be appraised by an FHA-approved appraiser and must meet certain minimum standards at appraisal. If the home does not meet the standards and a seller does not agree to the required repairs, your only option is to pay for the required repairs at closing. The home will then be held in escrow until the repairs are complete.
We’ve mentioned mortgage insurance a couple times here. For clarification, because an FHA loan does not have standards as strict as a conventional loan, it requires two kinds of mortgage insurance premiums. One can be paid in full upfront or be financed into the mortgage and the other is a monthly payment. FHA loans also require that the house meets certain conditions and has to be appraised by an FHA-approved appraiser.
What are some common mortgage insurance items for an FHA loan?
This is a one-time upfront monthly premium payment. This means borrowers will pay a 1.75% premium of the home loan regardless of their current credit score. For example, if your loan is $300,000, the borrower would have to pay $5,250 ($300,000 x 1.75% = %5,250) upfront or add that total to the closing costs of the mortgage.
Known an annual premium, this is a monthly charge that will be figured into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount based on the borrower’s loan-to-value (LTV) ratio, loan size, and length of the loan. The duration of the annual MIP will depend on the terms and ration of your loan origination date.
The maximum limits set by the Federal Housing Authority vary depending on the state and county where you purchase your home.
Purchasing a new home is a huge milestone, but can be overwhelming. Dime is here to help you find the best home loan solution that fits your needs. No matter what your goals are, our mortgage officers are ready to answer any loan questions you may have and make your home buying experience as smooth as possible. We want to do everything we can to make your home loan more affordable from start to finish