6 - What is an FHA Loan?

Sometimes called the first time home buyers loan, FHA loans are one type of loan that you may come across during your research. We’ll take a closer look at what an FHA loan is and how it might benefit you as a first-time home buyer. 

We'll cover the following topics:

• An Introduction to FHA Loans
• What types of FHA loans are there?
• What Are the Benefits of an FHA Loan?
• What additional fees are associated with an FHA loan?
• What are the income and loan limits for an FHA loan?
• What homes are eligible for an FHA loan?
• Are there other loan options with lower down payments than an FHA loan?
• Other types of FHA loans

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An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA), a government agency that  is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans are available to all kinds of borrowers, including first-time home buyers with limited credit histories. This type of loan is attractive to first-time home buyers because it has more flexible lending requirements than a conventional mortgage. 

Transcript

Philip: 0:00

Welcome new and returning listeners to the first time home buyers podcast today, I want to talk about FHA loans. They're one of the most common loans used by first time home buyers, and I've done a good number of them. I'm Phil Mastroianni and I'm a licensed mortgage loan originator as well as a licensed real estate agent. I'm happy to help answer any questions you have head over to loanpros.io for my contact info, as well as any additional resources that you might want. We're always adding more., my goal is to make you a more informed buyer. So feel free to listen to all of our episodes, including the basics of buying a home from start to finish. I think that one really helps you understand the overall process. Buying a home is a big decision. So if you're a first time home buyer, which most of my listeners are, you may be feeling overwhelmed by all of the options out there. One type of loan though, that you've probably come across during your research is an FHA loan. I want to take a closer look at what that is and how it can benefit you as a first time home buyer. So looking at what is an FHA loan? It's a mortgage that's insured by the federal housing administration. They're a government agency. That's part of the us department of housing and urban development. HUD. FHA loans are available to all kinds of borrowers, including your first time home buyers, people with limited credit histories. This loans really attractive though, to first-time home buyers, simply because it has more flexible lending requirements than say a conventional loan. FHA loans are only offered by approved lenders. But most lenders have this because they're like the most common loan type to qualify for an FHA loan. You'll typically have to have a credit score of at least 580. And you have to demonstrate that you've got steady income and employment history, FHA loans aren't available for those with a credit score under 500. Down payments for FHA loans can be as low as three and a half percent of the purchase price of your home. So that's great because that's a lower amount normally than your conventional loans, which usually are 5%. For credit scores below 580. So if you're between that 500 and 580, you still can qualify for an FHA loan. But you're going to be required to make a larger down payment. Usually of 10%. This can vary on a lender by lender client by client basis. So make sure you speak with multiple lenders. If you do have that lower credit score, and you'd like to see about getting the best programs available. Now FHA loans. Aren't really just for first time home buyers. In fact, anyone who meets the credit and income requirements can apply. Even if you've declared bankruptcy, you've got a home foreclosed in the past. You can still be eligible for an FHA loan. FHA loans though are only going to let you have typically one at a time. So if you already have an FHA loan, you'll need to pay that off before taking out another, there are cases where if you have a job relocation or a big change in family size, you can apply for a hardship. But in general, FHA is really just for your primary residence. And it's not really used for second or investment homes. Now I want to talk about the different types of FHA loans out there. There's like eight, 10 different types of FHA loans. The most common is for your single family, but they also do an adjustable rate mortgage, home equity conversion mortgage, which has reversed mortgages. They do a streamlined refinance. They also do condominium mortgages., disaster victims mortgage. So for your home was destroyed in a disaster. This actually have a whole program specifically for that energy efficient mortgages. So if you're working on getting a house in needing to upgrade it to more energy efficient. And then rehabilitation mortgages. This is a section 203k often called a rehab loan. these are really great. If you're buying a home, that's going to need a lot of work. You can actually roll some of that into the loan itself. And I'll talk more about that later. So now what are the Like why would I want to get that over a different type of loan? Well, one of the biggest benefits of an FHA loan is it can help you get into a home with less money down and a lower credit score. It's really helpful if you don't have a lot of money saved up for a down payment and because the FHA loans are backed by the government, many lenders are much more willing to work with borrowers. Who really wouldn't qualify for a conventional mortgage Because of this, there's more fees associated with an FHA loan. So I'm going to talk a little bit about some of those fees. The first of these fees is mortgage insurance premiums and upfront mortgage insurance. Mortgage insurance premiums are charged monthly, and they're going to be included in your monthly mortgage payment. Now if you're putting 10% down or more, and Your minimum is three and a half, but you could put more down, but if you're into two, 10% or more, your mortgage insurance premium is going to last for 11 years of your loan. If you're putting less than that down. If you're doing, let's say three and a half percent, maybe four or five, six, your mortgage insurance premium is going to last the lifetime of the loan. The only way to remove it is if you refinance Upfront mortgage insurance is a one-time fee that's due. When you close on your loan set, this is separate from the other insurance that I was just talking to you about. This is 1.75%, and it can either be paid out of pocket at closing, or you can finance it interior alone. I typically see that it gets financed into the loan. So think of what your purchase price is. And you're going to add 1.75% to that, and that's going to add your overall principal. There are a few things that can impact your mortgage insurance costs. Your credit score, the size of your down payment. The higher your credit score, the lower your mortgage insurance premiums will be. Additionally, the more money you put down. The lower your premiums could be. So if you're able to save up for a larger down you'll likely end up paying less in mortgage insurance premiums. The better your credit the less your market insurance premiums again better credit more money in the bank more savings. Let's talk about some of the income and the loan limits for an FHA loan. First of all, there's no income limits when it comes to FHA loans. So you can make $50,000 a year, a hundred thousand dollars, a million dollars a year. It doesn't matter. However, there are a loan limits and the maximum loan amount varies depending on where you live. And actually it's based on the county, the home you're purchasing. Now the average loan limit in 2022 is in about the mid 400 thousands, the limits range. For one family properties around 420,680 up to a ceiling of 970,800. It's all based on the cost of living in location. So if you're looking to purchase a higher priced home that exceeds that FHA limit, you're going to have to apply for either a conventional mortgage instead of FHA loan. Or you'll need to make up the difference with more money down. Now the fha loans also have a dti or debt to income limit this is primarily based on your credit score and this affects your total buying power that you have. If you don't know what a DTI is, it's really the ratio of your debts to your income. As a percentage. I'll go into this more in another podcast where we really dive into dtis different ratios and how they affect your buying power So if you are on that lower end there of credit scores, between 500 and 579. The maximum DTI. Your debt to income ratio is 43%. If you have additional cash reserves, meaning money in the bank, this may be able to be raised to 47%. A loan officer like myself can definitely help you determine exact numbers for your situation. For credit scores, 580 and above the maximum DTI is 50% though. It does require that you have a certain amount of cash reserves, which again is money in the bank. After your loan, closest to your credit can really affect your buying power and also how much money you're going to have in the bank. After the loan closes can affect that as well. So we see that there's a limit on how much you can buy. Of course, that's based on the location of the home you're looking at and your debt to income ratio, which is primarily based on your credit score. But what I get asked all the time, What can I actually buy with an FHA loan? Are they limited? What kinds of homes are available for fha loans? So we'll look at what's called a section 2 0 3 B financing. That's your kind of standard FHA loan. It's limited to one to four unit properties, if that's something that you're looking for up to four units. They have to be owner occupied what that means is for an FHA loan, you have to live there. If you're on the loan, if it's a multiunit home, like at duplex, you're allowed to rent out the other unit, but you still have to live in one you can't rent out all of them. The homes that are FHA eligible. Can be detached or semi-detached properties, townhouses. Row houses, individual units in an FHA approved condominium and manufactured homes. Now the house has also have to meet HUD to minimum property requirements, MPR and minimum property standards, MPS. They also have to be appraised for least the loan amount in order to qualify for an FHA loan. An FHA appraisers going to go onsite and actually create an appraisal detailing the home. And its value. Now there are some conditions like standing water in the foundation. Or excessive, damp situations, hazardous materials on site. If there's defective systems or pest infestations are similar, they can all cause issues with the loan approvals. They may need to be remedied or repaired prior to the loan getting approved. When the appraiser goes out there, they're going to be looking for a few things and they're going to make sure that the house has all of Uh, sufficient continuous supply of safe water with enough pressure for the size of the house. It's going to have to have a working bathroom with a toilet sink and either a bathtub or a shower. Enough room for a comfortable living conditions and heating hot water and electricity for lighting cooking and the equipment necessary to live there so basically the house has to be able to be lived in right away. If it doesn't have running water, if there's no electricity, if there's nowhere to cook, there's going to be a lot of issues trying to get that loan approved. As a home buyer, how are you supposed to know if a home meets these requirements and that's where you really want to lean on your real estate agent? Typically their systems are going to be able to look up, to see if the home is already FHA eligible, according to the listing agent. And they can usually get a good idea of what types of things are needed in order to pass the FHA appraisal in order for that loan to go through. So I would definitely rely on your. Real estate agent To really filter out the home so you're just seeing ones that will work with an fha loan Now you're probably listening and saying that seems like there's a lot of restrictions. Are there other programs that have similar lower down payment programs, maybe work with people with not so perfect credit. Well there are. For example, a conventional mortgage may require down payment as little as 3%. But keep in mind that the requirements for a conventional mortgage are much more stringent than those for an FHA loan, even though the home requirements aren't as stringent. So you'll need to have a higher credit score and oftentimes just more money in the bank. There are also usda and va loans which are government backed and have 0% down payment options. USDA has income and location restrictions while VA loans are only for veterans, active duty service members and their spouses. You definitely want to ask your loan officer about the different types of loan programs that they offer. If you're a veteran. The va loan programs are amazing if you're in a more rural area the usda loans can be a great option for you as well Feel free to reach out to me if you'd like, I'm happy to answer any questions that you have help point you in the right direction Now want to talk a little bit about other types of FHA loans. So we talked about what most people are looking at very standard. single family homes, but I wanted to talk about other types of FHA loans. So one of those is an adjustable rate mortgage often called an arm. Arms are held to the same standards as FHA loans, that different qualifications and property conditions. But what they do feature is a lower initial interest rate and that lower initial fixed rate period of 1, 3, 5, 7 or 10 years are followed by an annual interest rate adjustment. What that basically means is that you start out at this lower interest rate. But after that set period of time the rates increase This can be a really good choice if you know that you're not going to be living in that house for more than a few years. Usually that initial fixed rate period. Otherwise you're going to typically want to refinance the loan before that rate increases The next type of loan I want to talk about is the section 2 0 3 K rehab loan. This loan allows you to purchase or refinance a home that's in need of rehabilitation or renovation, and you get to include the improvement costs in the principal amount of the loan. So here's some of the things that, , you could use that loan for. So the first is structural changes. If you're converting a single family home to multifamily or the other way multi-family to single family. Modernization or functional improvements. We see this a lot with kitchens bathrooms. Elimination of health and safety hazards, reconditioning replacement, or installation of plumbing or well septic systems., roofing gutters and floor work significant landscape or site changes, accessibility for persons with disabilities and improvements for energy conservation or efficiency Now if you're already in the home and you want to renovate you can actually refinance through the two or three k program. No repairs, remodeling minimums are $5,000. Your funding cannot be used to build a new swimming pool. I get that asked all the time. No, you can't do a swimming pool. It's considered a luxury But if you have an existing swimming pool that is in need of repair. That can be done. So. Your repair work though is typically limited to six months, but one really nice aspect of this is that you can complete your own work. You just can't be paid for the labor time. Now the next one is a home equity conversion mortgage., this is often referred to as a reverse market. It allows you if you're of the right age and you have a lot of equity in your home. That you can actually take that and get payments sent to you from a lender. It's a really interesting program. but the reverse mortgage borrowers receive these payments, but there are some requirements you have to be 62 years old. You have to either own the property completely, or you have to have paid down a considerable amount. You have to occupy it. And you can't be delinquent on any kind of debt or federal debt. Now a reverse mortgage. Isn't something I usually talk much about on a first time home buyer podcast. But I think it's good for you to kind of get a good idea of what programs are out there. And especially when you're thinking long-term when you reach that retirement age. Really make sure you have something paid down or paid off. It's all about creating that generational wealth, but also having something with equity. That can help you into your retirement years. The other thing is you may actually be purchasing a home that has a reverse mortgage on it and i want you to just know as a buyer you don't have to worry about that it's just another type of loan or lien that's on the home and it'll all get resolved through escrow so when you purchase it's just like a regular home Purchasing a home is a major financial decision. So it's important to educate yourself on all of your options before committing to anything. If you're looking for a type of loan that has flexible requirements. An FHA loan might be right for you with an FHA loan. You could potentially qualify for a mortgage with a lower credit score and down payment than with a conventional mortgage. And you may qualify when you didn't think you could. As always speak to a licensed lender, have them compare different loan types and options. Find the best program fit for you. I'm happy to help answer any questions you have head over to loan pros.io for my contact info as well as additional resources that we add all of the time I really do hope that this podcast is helping make you a more informed home buyer, again, feel free to reach out. Let me know what you think of these, or if you have any questions. I would love to help answer them have a great day