An overview of Federal Housing Administration (FHA) loans and their requirements.
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. This simply means that the organization protects your lender against loss if you default on your loan.
- FICO score at least 580 = 3.5% down payment.
- FICO score between 500 and 579 = 10% down payment.
- MIP (Mortgage Insurance Premium) is required. You can finance on top of the base loan amount or pay out of pocket.
- The home must be the borrower's primary residence.
- The borrower must have a steady income and proof of employment.
- Gift funds can be used for an entire down payment.
FHA loans are designed to help people with bad and below-average credit scores and those who do not have a good size down payment. The loan is insured and backed by the government because “regular (conventional)” lenders are not excited about taking up these types of customers.
You’re able to get a mortgage with lower requirements compared to conventional loans. Lower credit scores are allowed, with a minimum of 500 required. Down payments can be much lower at 3.5%, and the interest rates are lower than conventional mortgages.
FHA loans have premium mortgage insurance (PMI) that must be paid monthly, and mortgage insurance premium (MIP) which must be paid upfront. These two fees are very expensive.
PMI monthly is .8-.85% of the loan amount which is hundreds of dollars each month. This fee also will not fall off, whereas conventional it will go away once you have 22% equity built in.
MIP Upfront is 1.75% points fee, while this fee is a lot, this can be financed on top of the base loan amount
- Calculated Base (Purchase price - 3.5% down = Base loan)
You can sell your home whenever you like, but in the event you are in the first 90-day period of your FHA loan, this will restrict the new buyer from getting a FHA loan.
There is no limit on how many FHA loans you can take, but it must meet certain criteria. For example — it must be a primary home, and if you want to keep your existing home (with an FHA loan) the new home must be 100 miles away from the original home.
FHA loans are designed for only primary home use. However, in the event that your first home has an FHA loan and you buy a property 100 miles or more distance, they will allow you to keep the FHA loan on your current residence and take another FHA loan on the new home.