ABCs of FHA Loans
Learn everything you need to know about Federal Housing Administration (FHA) loans with this easy-to-follow guide. Start from the beginning or jump in wherever you are to continue!
What are FHA Loans?
Federal Housing Administration (FHA) Loans are insured by Housing and Urban Development (HUD) which allows lenders to offer low down payment loans to homebuyers. FHA loans have been helping people become homeowners since 1934. FHA insures loans for first time home buyer mortgage loan, FHA streamline refinance, FHA regular refinance, cash-out refinance as well as home purchases by people who are NOT first-time home buyers. FHA however doesn’t provide loans directly. Borrowers need to work with an FHA-approved lender to qualify for the home purchase or refinance loan.
Credit Score Requirements
While FHA guidelines allow for much lower credit scores, most of the lenders require a minimum FICO credit score of 640.
In some cases, a borrower may qualify even with a lower credit score,
FICO scores are usually categorized as such:
- Good: above 700
- Average: 680-700
- Poor: below 620
Basic requirements, loan limits, and applying
Borrowers need to meet the following basic requirements to qualify for an FHA loan (please keep in mind that a particular lender may have their own set of guidelines):
- The property must be owner-occupied
- FHA loans are available for 1-4-unit houses including single-family
- A minimum down payment of 3.5% is required. The down payment can be gifted from parents, children, siblings, or other close relatives
- An impound account is required on all FHA loans. As part of the impound account, payment for property taxes ad home insurance are broken down into monthly payments and are paid to the lender along with mortgage payments every month. The lender then makes a payment directly to the county or to the home insurance company when it is due.
- Two-year employment history is required. However, if the borrower went to school immediately prior to starting employment, the school years can be counted towards this requirement as long as the job is in the same field as the education.
- A borrower should have enough income to meet the maximum debt-to-income ratio requirement of 43%. In some cases, the ratio can be as high as 50%.
- Upfront mortgage insurance (UFMIP) of 1.75% and annual mortgage insurance of 0.45% – 1.55% is required on all FHA loans.
- FHA offers 30-year-fixed, 15-year-fixed, and 5-year-ARM loans.
Now that we have covered the basic requirements, let’s look at the loan limits for FHA loans. For 2020, the FHA national “floor” limit for 1-unit houses was $331,760. This means that all counties in the country will at least have this as their loan limit. The FHA also classified several counties as “high-cost” – loan limits in these counties are higher than $331,760. The maximum loan limits in some counties can be as high as $765,600 and in others, it’s between the floor ($331,760) and the highest loan limit ($765,600). Click here to find out the FHA loan limit for your county.
Applying for an FHA Loan
To get an FHA loan, you need to work with an FHA-approved lender. If you would like to work directly with me to get pre-approved or get a rate quote, you can complete the FHA rate quote form here or complete the full loan application here
FHA Loans & Condominiums: What to Know
Buying Condominiums using FHA loans
Only FHA-approved condominiums are eligible for FHA financing. Some townhomes are also classified as condos and hence should be on FHA-approved project lists. To find out if a condo project is on an approved list, visit here.
Upfront and Monthly Mortgage Insurance Premium rates for FHA
FHA charges both an upfront mortgage insurance premium and monthly mortgage insurance on almost all the loans it insures.
Annual Mortgage Insurance Premium on Streamlined Refinance Endorsed before May 31, 2009
For a Streamline Refinance transaction that is refinancing FHA loans endorsed on or before May 31, 2009, the annual MIP will be only 55 bps regardless of the loan amount. For all other streamlined refinances, regular MIP rates will be charged.
FHA Monthly Mortgage Insurance Premium Calculator
Multiply the loan amount with the insurance factor and divide by 12 to get the monthly mortgage insurance payment. For example, if the loan amount is $400,000 and annual MIP is 120 bps, the monthly MIP payment would be – (400,000 x 0.0120)/12 = $400/month.
FHA Upfront Mortgage Insurance Premium (UFMIP)
The upfront mortgage insurance premium on all FHA loans is 1.75% of the base loan amount. This applies to all loan terms and LTV ratios. FHA does allow financing of UFMIP into the loan amount. For example, if the loan amount is $400,000, instead of paying 1.75% or $7000 as the closing cost, you can add that to the loan amount and make the principal balance $407,000.
FHA Reduced Upfront Mortgage Insurance Premium on Streamlined Refinance Endorsed Before May 31, 2009
For a Streamline Refinance transaction that is refinancing FHA loans endorsed on or before May 31, 2009, the UFMIP will be only 0.01% of the base loan amount. For all other streamlined refinances, regular UFMIP rates will be charged.
Annual Mortgage Interest Premium for FHA Loans
Here are the annual mortgage interest premiums for FHA loans:
|Term > 15 Years|
|Basic loan amt.||LTV||MIP|
|≤ $625,500||≤ 95.00%||130 bps|
|≤ $625,500||> 95.00%||135 bps|
|> $625, 500||≤ 95.00%||150 bps|
|> $625,500||> 95.00%||155 bps|
|Term ≤ 15 Years|
|≤ $625,500||78.01% – 90.00%||45 bps|
|≤ $625,500||> 90.00%||70 bps|
|> $625, 500||78.01% – 90.00%||70 bps|
|> $625,500||> 90.00%||95 bps|
|Term ≤ 15 Years|
|Any amount||≤ 78.00%||45 bps|