An FHA loan is insured by the Federal Housing Administration and can be issued by any lender that is FHA-approved. The FHA was established by Congress in 1934 to help lower-income borrowers according to The Truth About Mortgage. It then became part of the Department of Housing and Urban Development (HUD) Office of Housing in 1965. The government backs these loans to protect lenders from defaults while at the same time making it possible for them to offer borrowers more competitive rates on loans that have traditionally been considered to be high-risk. In comparison to other loans, qualifying is a bit easier.
What It Takes to Qualify
If you have a credit score of at least 580, then you can qualify for a 3.5% minimum down payment. However, if you are 579 or lower, you will have to put down a minimum of 10%. If you are familiar with the mortgage process, then you are aware of closing costs. These can be the dreaded kicker that puts a property just out of reach from someone. However, you can actually bundle your closing costs with your loan, reducing the amount of money you need to close.
Limitations and Requirements
Although FHA loans are very advantageous for some borrowers, they do not come without their own kicker. On other types of loans where the borrower has to purchase mortgage insurance if they put less than 20% of the amount being borrowed down, you can usually get rid of it after you have paid down 80% or more of the appraised home value. To learn more about how to get rid of private mortgage insurance (PMI), read our article here. In the case of FHA loans, the mortgage insurance stays for the life of the loan.
The costs associated with mortgage insurance starts with a one-time mortgage premium equal to 1.75% of the loan amount to close. The ongoing mortgage insurance will come in the form of an annual premium that is tossed in with your monthly mortgage payments. It can range from .45% to 1.05% of the loan amount and can vary depending on the loan term as well as the size.
You have two options regarding the one-time mortgage premium. As we have mentioned, you can pay it at closing. But you also have a second option. If you do not want to pay it at closing, you can add it to the borrowed amount and have the lender pay for the FHA on your behalf. However, this will result in a higher interest rate over the life of the loan.
FHA loans also have limits that will vary based on your location and property type. They are calculated as 115% of a county’s median home price according to Nerd Wallet. Moreover, reverse mortgages are limited to $625,500, with the amounts being based on the borrower’s age and current interest rates. To figure out what the mortgage limit is in your area, Nerd Wallet has a nifty tool you can use.