While the vast majority of Americans look to mortgage programs for home loans, many cannot afford the high down payments conventional loans require. The Federal Housing Administration was created in the 1930’s originally to provide opportunities for Americans with lower incomes. Since then millions of first-time homebuyers have taken advantage of FHA loan programs. Though the government does not make FHA home loans itself, it does insure loans from banks for consumers.
What is an FHA loan?
An FHA loan is a loan offered to consumers for the express purpose of buying a home. It differs from a conventional home loan because it is backed and insured by the federal government. This allows many people, especially first-time homebuyers to qualify for financing they would not otherwise be able to get. The government agency sets specific guidelines for consumers and lenders to follow in order to be eligible for FHA loan programs.
FHA Loan Requirements
While homebuyers that apply for FHA loans must get approval by the bank or lending institution offering the loan, there are several requirements consumers must meet.
LTV Ratio – Currently homebuyers must purchase a home where the loan-to-value ratio is no more than 96.5%. This means that the FHA home loan amount, after applying the down payment is no more than96.5% of the purchase price, or appraised value (whichever is lesser) of the home.
FHA Loan Down Payment – A down payment for a home under FHA guidelines is currently a minimum of 3.5%. If purchasing a home for $100,000 for example, the down payment must be at least $3,500 to obtain the loan. Under FHA regulations, there are no “zero down” options or agreements for consumers. Any FHA costs or closing costs must not be included in the 3.5% down payment either.
FHA Loan Limits – The maximum loan amount that the Federal Housing Administration allows differs for different regions of the country and the type of home the FHA insures. Single-family home limits are smaller than duplex’s for example.
To determine the maximum amount of an FHA loan offered in a given area, consumers can check online with the administration at,
https://entp.hud.gov/idapp/html/hicostlook.cfm. An FHA loan calculator, available online can also assist consumers in determining the loan amount and monthly payment they can afford.
FHA Loan Rates – Interest rates for FHA mortgages are competitive and differ between lenders.
Closing Costs – These are costs paid to the lender for a variety of services associated with the purchase of the home. While the seller of the home may pay some or all of these, they will include:
* Origination fee by the lender
* Verification of deposit fees
* Attorney’s fees
* Inspection fees
* Appraisal fees
* Property survey
* Title insurance and examination
* Preparation of documents by a third party
* Home inspection fees up to $200
* Credit report
* Recording fees, transfer stamps and taxes
* Test and certification fees
Mortgage insurance is required for an FHA loan as well. The buyer must pay 1.5 percent of the mortgage amount at the time of closing and 0.5 percent of the mortgage balance divided by 12 monthly. This is referred to as PMI, which stands for Private Mortgage Insurance.
This insurance required for an FHA loan covers the balance of the loan in the event the consumer defaults on the loan. As homebuyers pay down on the loan and a certain level of equity in the house is achieved, PMI insurance can also be removed.
Loan Term – FHA home mortgages can be taken out for a term of up to 30 years. There is no penalty for early pay off and homebuyers can also get loans for shorter periods, such as 15 or 20 years.
Employment History – While the FHA does not actually require a minimum of time on one particular job; it does verify employment history for the preceding two years. If there are gaps in employment lasting more than one month, under FHA loan qualifications the consumer is expected to provide an explanation.
Borrowing money to purchase a home is one of the biggest financial decisions most consumers will ever make. Understanding the requirements by lenders and the FHA, and how they may differ is crucial to making the right choices for financing a home.