When you’re ready to purchase your next home, you may want to consider an FHA home loan for your financing. FHA government-insured home loans offer the benefits of lower current FHA rates and possible for bad credit. It also includes FHA construction loans, less cash needed, and the (dubious) benefit of a higher DTI ratio.
An FHA loan could be your best choice to finance the purchase of your next home.
The FHA Home Loan
FHA government-insured loans began with the National Housing Act of 1934. Later, the Federal Housing Administration (FHA) became part of the Department of Housing and Urban Development (HUD).
Congress created the Federal Housing Administration during the Great Depression. And FHA helps the housing industry to make homeownership available to more people. Lower and moderate-income customers who need a lower down payment benefit the most. As a result, FHA is an attractive option for bad credit home loans.
This was one factor contributing to making homeownership available to more people. At the end of 2019, the homeownership rate was at 65.1%, according to the Federal Reserve Bank of St. Louis.
Most people use the low rate FHA mortgage for a traditional home purchase. Even bad credit home loans can work with FHA. In addition, you can build a house with the FHA construction loan. The FHA 203(k) rehabilitation loan finances the purchase and upgrade of a home that needs some work before moving in. The FHA “Streamline Refinance” refinances one FHA loan into another FHA mortgage. Reverse mortgages are also FHA loans.
You can generally qualify more easily for an FHA loan than for a conforming loan. And conforming loans are mortgages that conform to Fannie Mae or Freddie Mac guidelines.
Currently, low FHA rates improve your possibility of qualifying. And the program’s greater acceptance of bad credit home loans helps even more.
You will need the typical mortgage approval personal and financial documents. And this includes your valid Social Security number. In addition to that, you also need proof of U.S. citizenship. Proof of legal permanent residency or eligibility to work in the United States also works.
FHA loans come with lower credit requirements and a minimum credit score allowed. But bad credit can work. A score of 580 or above will allow a 3.5% down payment. However, a credit score between 500 and 579 requires a 10% down payment.
FHA financing will also allow loans for no credit score or credit history. In this case, lenders can use alternate forms of credit history. But you can prove your acceptable credit history with these documents.
- utility bills
- cell phone bills
- car insurance payments
- apartment rent
Your debt-to-income (DTI) ratio is the ratio of your total loan payments to your monthly income before taxes.
This needs to be 43% or less, although up to 50% is possible. A DTI ratio of over 43% up to 50% requires compensating factors for loan approval.
These compensating factors could include:
- a great credit score
- significant savings available
- or a larger down payment
We caution you against going as high as a 50% DTI ratio, even though approval is possible.
A high DTI will make it very difficult for you to ever be free of a mortgage or to have true freedom in your life. So be in control of your loan and consider a high DTI very carefully before ever committing to it. Let your fully-trained Real Mortgage Consultant coach you on it.
The DTI includes debts that you aren’t actively paying.
For example, deferred student loans. The FHA loan underwriter will include 1% of the loan total as the monthly payment amount.
For loans that you aren’t currently repaying, underwriters use 5% of the loan’s total for DTI.
It is best to do everything possible to keep your DTI as low as possible. Lower FHA interest rates will help. Moreover, it will also be easier to recover from a past record of bad credit with the FHA home loan.
FHA financing is only available for your primary residence. Consequently, this means that you must live on the property.
Most properties are available for FHA loans. And the simple requirement is that you live there. These properties include a:
- single-family home
Condos and townhouses also qualify. In addition, FHA also has two types of financing available for manufactured housing, Get the facts here.
The lender wants to know that the property is worth what you’re paying for it. So they need to ensure that it meets basic safety and livability standards. Here are the property standards for FHA mortgages.
The lender requires an FHA-qualified appraiser. This appraiser reviews the property before the lender approves your financing. The property must meet minimum standards for FHA financing. And these standards can sometimes be more stringent than conforming financing will allow.
For an FHA 203(k) loan, the property needs two separate appraisals. An “as is” appraisal appraises its current state. An “after improved” appraisal estimates the value after the completed work.
Income and employment
You will also need to prove that you have a steady income and employment. This requires recent W-2 forms and pay statements. And the lender requires copies of your last two years of tax returns if you are self-employed.
FHA financing allows as little as a 3.5% to 10% down payment. Your down payment funds can come from various sources.
- your own savings
- a financial gift from a family member
- your employer
- an approved charitable group
- or a down-payment assistance program grant.
The gift donor provides a gift letter to document the gift. And this letter must contain the following information:
- Their contact information
- Their relationship with you
- The amount of the gift
- A statement the money does not have to be repaid
These requirements make the gift funds legitimate for your purchase transaction.
Down payment assistance
Various down payment assistance programs are available. They can reduce the actual amount of cash you will need at the closing of your purchase with an FHA loan. And these funds are often available as a non-repayable grant, a forgivable loan, or a low-interest loan.
Programs vary depending on the location. Local governments often offer these programs. They enhance homeownership in their communities. Most importantly, these programs can work even for home loans to good people with bad credit. Check with your Real Mortgage Consultant for the smart choice available for you.
Often, these programs require a homebuyer education course before approving the loan. More education is a good thing when buying your home, so this is an advantage for you.
Lenders approved by the Federal Housing Administration lend the money. They underwrite, approve, and fund your FHA financing. Moreover, the lenders work within the guidelines and insurance provided by FHA.
Maximum loan amounts
FHA states maximum loan amounts that it will insure.
The property’s location determines these lending limits. And they update the calculations each year.
The type of property also affects the lending limit.
Your approval for an FHA mortgage works like any conventional mortgage financing.
Of course, your very best choice is to work with a Real Mortgage Consultant at Winner’s Mortgage who gets the job done. Our exclusive Winner’s Mortgage Program gets you started the right way and won’t let you down. And it keeps you well on course so you can WIN with your mortgage instead of losing as most people lose.
Losing your mortgage does not mean that you have bad credit to get a home loan. You could have bad credit or good credit. Losing means that you were set up by a typical run-of-the-mill loan officer. Therefore, that means to pay on your home loan so that it sucks the financial life right out of you.
WIN, not lose
FHA home financing is an opportunity. It opens homeownership to more people but it comes with more risk. If you don’t manage that risk well, using FHA financing could be a huge mistake for you. You simply can’t afford to let just any typical run-of-the-mill loan officer do an FHA loan for you.
Your FHA mortgage approval follows the same process. But there can be specific exceptions for FHA financing.
For example, there is more leniency built into FHA financing. You may find that you do not need a traditional credit report with regular credit scores. Moreover, an FHA government home loan will consider other credit factors. These include utility payments, rent payments, among others.
A record of a previous bankruptcy or foreclosure may be more forgiving with FHA. Past late payments, collections, judgments, and federal debts may still be a problem.
Having bad credit does not have to stop you from getting a home loan so you can be a homeowner.
You can learn if an FHA government home loan is right for you. Or maybe another financing option is better. Perhaps you would be better off continuing to rent for now.
Your dependable Real Mortgage Consultant will coach you on how to prepare for homeownership.
If bad credit is the reason you need to wait, your Real Mortgage Consultant will work with you. This long term assistance helps you qualify for your home loan. Here’s the straight talk, a typical run-of-the-mill loan officer who only cares about getting paid now will never do this for you.
Your Real Mortgage Consultant at Winner’s Mortgage guides you through the process. Then you can WIN with the best choices for you for the years to come.
FHA rates are generally lower than conforming financing. Currently, the market interest rates are low. Above all, it’s a good time to check your options with your dependable Real Mortgage Consultant and see what is right for you.
FHA loans require two types of mortgage insurance premiums.
At closing, you pay an Upfront Mortgage Insurance Premium (UFMIP). This premium can be added to the loan amount. And by rolling it into the loan amount, your loan amount increases. This increases your monthly payment. As a result, you finance the UFMIP and turn it into a monthly payment.
You pay an additional Annual Mortgage Insurance Premium (MIP). The Annual MIP breaks up into twelve monthly payments. And this MIP is also added to your monthly payment.
You must pay MIP as long as you have the FHA mortgage. This applies to loans over 90% loan-to-value. Refinancing or selling are the only ways out.
MIP is deductible from income taxes along with mortgage interest. Verify with your tax advisor. With the new tax law in 2018, most people will not have enough deductions. In most cases, it will not help with taxes.
Lower current FHA rates will help offset the higher mortgage insurance premiums.
FHA Mortgage Interest Rates
The extra mortgage insurance premium requirements of FHA will increase your monthly payment.
FHA loans often have lower interest rates than conforming 30-year mortgage financing. So, that helps keep your monthly payment more affordable.
The stated interest rate for FHA can be lower. But the APR on an FHA home mortgage is generally higher.
APR means annual percentage rate. The government requires this calculation. APR takes into account fixed costs for the loan.
The higher fixed costs of an FHA mortgage will increase the APR. And this usually becomes higher for FHA than the APR for a conforming 30-year loan.
Use an FHA Home Loan for income
FHA financing does not qualify for income-producing property. But here is a great exception, and recommended, if you’re willing and able.
You can use an FHA mortgage to purchase a duplex, triplex, or fourplex. But you must live in one of the units since an FHA loan requires the owner to occupy the property.
Rent out the other units. These other units can contribute to the costs of your home. Consequently, you get to live in your home without housing costs.
Plus, this is a great experience for becoming a landlord. It can help you decide if you want to expand later as a landlord. And you could add more residential rental properties as you grow your business.
Renting homes to other people is a great way to generate income. This can make you financially independent.
Plus lower current FHA rates will make it more profitable.
And starting this way lets you gain experience with rentals. It’s a valuable opportunity before you would try expanding.
Disadvantages of the FHA Home Mortgage
These disadvantages can also be advantages for you. They can prevent you from getting financing that you would be better off not receiving. Let your top-drawer Real Mortgage Consultant at Winner’s Mortgage help you decide what is best for you.
The mortgage insurance premium of FHA loans can make home financing available to you. While this is true, it can be expensive.
FHA financing has two premiums, where other loans only have one premium.
Upfront Mortgage Insurance Premium is a one-time fee at closing. You can include it in the loan amount.
You pay the Annual Mortgage Insurance Premium one month at a time. And the lender divides the annual amount by 12 and adds that to your monthly mortgage payment.
FHA loans have loan limits that depend on the location of the property. While this seems like a disadvantage, it could be an advantage for you. In fact, it can help keep you from borrowing more money than would be good for you.
Of course, your Real Mortgage Consultant will definitely coach you with knowledge and expertise in mortgages. This will help make sure your new mortgage is really good for you. How can it be a blessing for you and not a financial anchor?
The Federal Housing Administration requires minimum standards for the property they will accept. These standards are often more stringent than conforming financing will allow.
If you were planning to fix up the house while you live in it, FHA may not allow it. That is a great strategy if you’re willing and able. So you may need different financing that will allow it.
FHA Construction Loans
Two types of FHA construction financing are available.
FHA 203(k) Rehab Loans
When you find a property with great potential, but it needs more work before you live in it, you have an option. Before FHA or any other lender would loan on the property, it needs repairs.
An FHA 203(k) rehab loan will work in this situation. You can borrow the money you need in one loan for the purchase and renovation.
The FHA construction to permanent loan
FHA construction loan financing funds building your new home, not buying an existing property.
It combines loan features. A short-term FHA construction loan pays to build the house. And then a standard long-term FHA home mortgage converts it to regular payments.
In most ways, qualifying and approval are the same as standard FHA financing. Lower FHA and market interest rates add more value.
The difference is in how the process works.
You buy the land, then contract with a builder to build your home for you.
You need to be pre-approved for an FHA government construction home loan. First, pre-approved with your experienced Real Mortgage Consultant. Then choose the lot and builder.
Before approval, the lender will order an appraisal. The appraiser determines the value of the finished home. The construction costs plus the land must fall within the loan to value guidelines.
If the appraiser’s analysis checks out, you can close on the construction financing.
Then the construction can begin. The builder receives payments from your FHA construction loan. This happens on a schedule that was pre-determined with the loan approval.
When construction concludes and the appraiser signs off on it, it moves to the next step. Then the lender closes out your FHA construction loan and converts it to a permanent mortgage.
FHA government loan construction financing is an option to build your next home. You would use FHA when conforming construction financing is not available.
Keep this one caution in mind. FHA construction loan financing is more expensive. So it requires extra steps and works to administer the loan.
Don’t be deceived by the three mortgage illusions:
Refinancing an FHA Loan
There are only two ways out of the required mortgage insurance premium on an FHA loan. That is to say, this is true when you borrow more than 90% of the home’s value.
You can either sell your home or refinance the mortgage. The refinance only removes the mortgage insurance premium on a regular refinance. And it is only when you refinance from an FHA mortgage to another type of mortgage. For example, a traditional conforming loan would work.
FHA Streamline Refinance
The Streamline Refinance works when interest rates have declined. And that gives you the option of an FHA Streamline Refinance.
This is a streamlined method of refinancing your mortgage to a lower interest rate. You can refinance with reduced approval requirements.
The lender does not have to verify your income and an appraisal is not required. As long as you have made your last three home loan payments on time, bad credit will not be a factor. So you can refinance with an FHA government home loan Streamline Refinance. And most importantly, you can do it faster and at a slightly reduced cost.
Benefits of the FHA Streamline Refinance
Lower MIP premium
FHA mortgage insurance premiums have decreased since the 2010-2015 years. FHA financing received then, enjoy a reduced mortgage insurance premium.
You could receive a refund as part of your prepaid mortgage insurance. This applies to a Streamline Refinance. And this is available if you refinance within three years of your original FHA mortgage.
As stated above, an appraisal is not required. This saves you the cost of the appraisal. This is a benefit in two specific situations. The value of your home decreased. Or the value is not enough to otherwise qualify for the financing. FHA financing values your home at its original purchase price. And this is true with a Streamline Refinance regardless of your home’s value at the time.
No verification of job or income
You could be approved for a Streamline Refinance with a lower income. Moreover, the Streamline Refinance does not require verifying your income.
No credit check
If you have issues of bad credit lately you can benefit. That is, you’re one of the many good people with poor credit. A low credit score or poor credit history does not have to prevent you from getting a lower rate with a bad credit home loan. An FHA government Streamline Refinance home loan can be the answer. A Streamline Refinance does not need a credit check.
Eligibility for an FHA Streamline Refinance
On-time mortgage payments
Your payment record must show that your last three mortgage payments were on time. So, there cannot be any late payments in your last three payments. There is no credit check. With qualifying mortgage payments, you qualify for your home loan Streamline Refinance. This is true even if you otherwise have bad credit.
Time since your last refinance
There must be at least 210 days elapsed since your last refinance with at least 6 mortgage payments.
This must be the case with an FHA government home loan Streamline Refinance. It needs a clear Net Tangible Benefit to refinance your loan. Usually, this is a lower current FHA interest rate at least a one-half percent reduction. FHA also considers refinancing from a 15-year loan to a 30-year loan to be a benefit as well. But they do not allow moving from a 30-year loan to a 15-year loan. Moving from an adjustable to a fixed-rate mortgage is another Net Tangible Benefit.
Some lenders do require more stringent exceptions to these eligibility requirements. One example would be enforcing credit score minimums.
Cash-out refinancing (where you receive cash to use for some other purpose) at closing is not allowed. But, your loan balance can increase. This increase covers the new Upfront Mortgage Insurance Premium. The costs of the refinance cannot roll into the new loan. This means you do need to have cash available to pay the refinance costs at closing. You save the cost of the appraisal, though. (You can get cash out with an FHA government home loan refinance, but not as a Streamline Refinance. In that case, the loan balance for cash out maximizes at 80% of your property’s value.)
Your current home value will not be a factor. The Federal Housing Administration insures your government home loan Streamline Refinance anyway.
Documents needed for a Streamline Refinance
An FHA Streamline Refinance is a low documentation loan. In most cases, this requires only the following documents.
A loan application. You can start here with our field-proven “Get Started!” Client Questionnaire.
A current mortgage statement. The lender will check your mortgage payment history. Above all, it must show on-time payments for the last three months.
Employer contact information. The lender may contact your employer to verify your employment. They do not verify your income.
Bank statements. These statements show that you have enough cash on hand. This covers your refinance closing costs.
Utility bills. You must live in the property to have FHA financing. To prove it, the lender requires that you provide utility bills in your name.
Should you use a Streamline Refinance for your FHA Home Loan?
You need to pay the closing costs for an FHA government home loan Streamline Refinance. This comes out of your own pocket. Analyze whether a Streamline Refinance makes sense for you. Compare this to the potential benefit you can receive. It begins with lower current FHA rates.
The best way to do this is with your Real Mortgage Consultant at Winner’s Mortgage. Your Real Mortgage Consultant, with a proven track record, helps you decide if this refinance makes sense for you. Or you will learn if some other option could be better for you.
Your Real Mortgage Consultant works consistently with you as it is best for you, coaching you through the process. This gives your best advantage so you can WIN.
Is the FHA Home Loan Right for You?
Your Real Mortgage Consultant with Winner’s Mortgage looks out for you and doesn’t settle for less. That is your best way to help you decide.
It’s not about just trying to earn a commission. That is what a typical run-of-the-mill loan officer would do.
This is about educating and coaching you. It is about helping you through the largest financial transaction of your life. That is an essential part of your Real Mortgage Consultant’s service for you.
FHA loans are often a great choice. However, this is only true when used the right way. Younger or first-time homeowners who are getting started receive the most benefit.
FHA government-insured financing can help overcome limitations. And these include less money for a down payment and costs. FHA helps with the need for a bad credit home loan and poor credit history. In addition to that, it also provides the (dubious) flexibility of allowing a higher debt-to-income ratio.
Interest rates for FHA government home loans are an advantage. Currently, this is a low-interest-rate environment. Moreover, FHA has generally lower rates compared to conforming loans. FHA could be a good choice for you.
If you’re thinking of building your new home, the FHA construction loan could your the best way to go.
A traditional conforming mortgage can be a better option for you. This is especially the case if you have good credit and more cash available.
“Get Started!” here with our Client Questionnaire. Let your Real Mortgage Consultant provide the best help. You can WIN with our exclusive Winner’s Mortgage Program. You expect the best. We demand it!
Winner’s Mortgage is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA, or the Federal Government.