FHA Refinance mortgages are one of the most popular options for home loans. They provide flexible underwriting guidelines and make it possible for buyers to qualify for a loan with just a low down payment. The Federal Housing Administration, which is an agency of the U.S. government’s Department of Housing and Urban Development (HUD), insures FHA loans.
However, the FHA does not provide loans to homebuyers. The following describes how the FHA program works:
Homebuyers apply for a home loan with an FHA-approved lender like a mortgage company, credit union, or bank. The application is evaluated based on guidelines from the HUD.
If the loan is approved, the lender then funds it and the FHA insures it. The homebuyer is required to pay for mortgage insurance. Since the mortgage is insured against default, the risk of a lender is reduced that a borrower will fail to pay. This means the lender can approve mortgages with lower down payments for homebuyers.
Keep reading for more information to help you determine if an FHA loan is best for you, which includes how FHA loans compare with conventional loans as well as an overview of FHA loan qualification requirements.
Pros & Cons of FHA Loans
There are both advantages and drawbacks to FHA mortgages. Borrowers need to compare conventional (nongovernment) and FHA home loans in order to select the mortgage that meets their needs the best.
Low Minimum Credit Score
Low Down Payment Requirement
Short Wait for Eligibility Following a Chapter 11 or 7 Bankruptcy
Borrowers Eligible in a Chapter 13 Bankruptcy
High Mortgage Insurance Expenses
More Difficult for Condos
Important FHA Mortgage Information
With all of their special terminology and requirements, FHA mortgages might be intimidating and confusing at times. The loans differ from conventional mortgages since they are backed by the government. When you know about these differences, it can help you avoid mishaps with your mortgage and get a better financing deal. The following are some important quick tips to help you understand FHA mortgages better.
FHA Approved Lenders
Not every mortgage lender is approved to fund or underwrite FHA home loans. To get an FHA mortgage, borrowers must get their loan through an FHA-approved lender. Lenders can display an FHA seal on their advertising and premises. The seal indicates that their complaint loans will be approved by the FHA.
FHA Mortgage Insurance
There are two parts to FHA mortgage insurance: an upfront premium, that can be either financed or paid out of pocket, along with a yearly premium that is divided by 12 and paid as part of every mortgage payment.
Homeowners with FHA, USDA, VA, and conventional home loans are able to refinance with an FHA mortgage. An FHA-to-FHA refinance is referred to as an FHA Streamline refinance. Before selecting an FHA loan, those homeowners who qualify for refinancing using conventional refinancing can compare the cost to see which one fits their needs the best.
FHA 203(k) Rehab Loans
An FHA renovation loan (also referred to as a 203(k) rehabilitation loan) ma be used for building or rehabilitating houses. The loans may be used for refinancing or buying a property or home. Property owners with no or little home equity might be approved based on what the value of the property is expected to be after construction or renovation.
This federal database tracks people who have defaulted on their government debt. An applicant for an FHA loan who is listed on CAIVRs will not be eligible for an FHA loan or any other type of government-backed home loan.
Applying for an FHA Loan
To apply for an FHA loan, an applicant will need their bank, investment, and retirement account statements, W-2s for the past two years and two pay stubs (for wage earners) or income tax returns (for commissioned employees and the self-employed). The lender will pull the applicant’s credit reports and help them get their loan application completed.
FHA Loan Limits
In 2019, the FHA loan limits for single-family homes ranged from $314,827 up to $726,525 (the limits are higher for four-unit and two-unit properties) and will depend on where the property is located. There are lower limits in areas with lower housing expenses and higher FHA limits for areas that have higher housing expenses.
FHA home loans can only be used on unit s that are in condominium projects that the FHA has approved.
The government does not set FHA mortgage rates. Private lenders approve and fund FHA loans. They set their own terms and interest rates. To get the best deal, FHA borrowers must compare offers from various competing FHA lenders.
Energy-Efficient Mortgage (EEM)
This type of mortgage allows homeowners and homebuyers to improve their home’s energy efficiency. An EEM also can be added to another FHA loan, which includes a 203(b) renovation loan. In order to qualify for this financing, the improvements that are proposed must be cost-effective – where the costs are eventually offset by the savings.
FHA Mortgage Alternatives
There are other options that are available to individuals who want to purchase a home with a small down payment besides the FHA program. The following are other options that can be considered.
Conventional vs FHA Loan That offer a 3 Percent Down Payment
Both Freddie Mac and Fannie Mae offer eligible first-time homebuyers 97 percent mortgages. These loans, like FHA mortgages, offer underwriting guidelines that are flexible. However, there are also a couple of advantages compared to FHA loans:
- 3 percent down payment
- Lower annual premiums and no upfront mortgage insurance
- Once the balance of the loan has dropped to 80 percent of the home’s original value, borrowers can ask for mortgage insurance to be canceled.
If you owned a house over the past three years, then you will not qualify for the loan. However, you might be able to obtain a convention loan still with just a 5 percent down payment. It is very important that you compare which type of loan is best for your financial situation.
There are some home sellers who will finance their properties. A home buyer might be able to avoid home buying costs such as title insurance and lender fees. Compared to a mortgage lender, a seller might be more willing to overlook income or credit issues. However, a buyer who is purchasing an owner-financed house should get an appraisal done in order to avoid paying too much for the property. Title insurance and inspections are also a good idea to help protect the buyer and hiring a real estate attorney to review the terms of the loan is also wise. Since individuals sellers are not subject to the same rules that licensed mortgage lenders are, so that means borrowers do not have as many protections.
VA and USDA Home Loans
There are other government mortgage programs besides the FHA program. USDA and VA home loans provide a number of different advantages over an FHA loan for people who are eligible for them. Mortgages are insured by the U.S. Department of Veteran Affairs for eligible veterans, service members, and family members, in some cases. There are no down payment requirements for these loans, and monthly mortgage insurance does not need to be paid by borrowers. USDA loans are often given in rural areas and allow qualified borrowers to obtain a mortgage with no down payment when purchasing a house in an area that is eligible. Around fifty percent of all citizens of the U.S. live in an area that is eligible for obtaining a USDA loan. There are 2 percent funding fees on USDA mortgages, which may be financed, and annual mortgage insurance is required. However, the premiums are lower compared to FHA insurance.
Questions and Answers on FHA Loans
For first-time buyers is an FHA loan their best option?
The FHA mortgage has been designed to meet homebuyers’ needs who need a smaller down payment – no matter how many houses they owned in the past. A homebuyer with at least a 10 percent down payment and who has decent credit will probably do better getting a conventional (non-government) mortgage. Homebuyers will a small down payment may be better off still getting a conventional loan – it will depend on the overall package. The total cost of FHA and conventional offers from various lenders should be compared by the homebuyers to ensure they choose the least expensive option that will meet their unique needs the best.
Are FHA loans less expensive?
It depends. Private lenders, and not the government, set the rates for both conventional and FHA mortgages. Rates and costs vary by an average of 0.25 – 0.50 percent among mortgage lenders. Terms and rates can change often. Also, over time, mortgage insurance costs change. When shopping for mortgages, homebuyers who have less than a 20 percent down payment should compare both FHA and conventional loans.
How can I tell if an FHA loan is right for me?
When it comes to FHA loans, the general rule of thumb is they are better for people who have a smaller down payment, higher debt-to-income ratio, or lower credit score. However, there are not any hard-and-fast rules since private mortgage lenders offer FHA home loans, and they are able to set their own fees and rates. Higher standards can also be imposed by FHA lenders than what is required by the FHA – which are referred to as overlays.
How difficult is it to qualify to obtain an FHA loan?
When it comes to mortgage underwriting, some of the most forgiving in the industry is with FHA loans. Your credit history needs to be acceptable, meaning no recent serious derogatory events, a credit score over 579 (on a 96.5 percent loan), stable, sufficient, and ongoing verifiable income, funds for covering closing costs and the down payment, and a debt-to-income ratio no higher than 43 percent. These are the basic requirements. Applicants who exceed the minimum qualifications will have a lot higher chance that their loan will be approved compared to people who barely meet the guidelines who might need to work a lot harder to obtain a loan.
How long does closing on an FHA loan take?
Applicants who are well-prepared normally will be able to close quickly if they are able to provide the lender with an accurate and complete application, no employment or credit issues, and proof of asset and income documentation. A majority of home loans (which include FHA loans) are underwritten using an automated underwriting system (AUS) that can deliver a decision within seconds. People whose circumstances are less common include those with identity theft, all-cash down payments, and no reported credit history that will need to be manually underwritten and can take longer to complete. Home loans on average, close in around 40 days. It is recommended by experts that buyers become preapproved before they shop for houses in order to make the closing process easier and smoother.
If I use an FHA loan, is it more difficult to purchase a house?
Only when the seller’s agent does not have an accurate understanding of FHA loans. There are some people who believe that higher property standards are required by the FHA and require the buyer’s costs to be paid by the sellers. However, that is not true. There are some that object to the FHA Amendatory Clause, that allows a buyer to cancel their purchase if the house does not appraise for the sales price at least. Unless a property is overpriced, that will not be an issue. Some view FHA borrowers as being borderline and more difficult to approve – which is an impression that may be overcome by obtaining loan approval prior to shopping for a house.
Over the long-term is an FHA loan more expensive?
A disadvantage that FHA home loans have is borrowers are unable to drop their FHA mortgage insurance, even when their loan-to-value ratio falls under 80 percent. If the homebuyer keeps their FHA loan for the whole 30-year term, then it can be expensive. However, the average homeowner who is under 50 years old keeps their homes for five to eight years, and a lot of them refinance sooner than this. Not many homeowners these days keep their mortgage for the entire 30-year term.
Why is my lender trying to push me to get an FHA loan?
A mortgage broker or loan office does not earn more when they sell an FHA loan (under federal law, basing compensation on terms of the loan is prohibited). There is a good chance that the professional feels it is the best loan for your personal situation or the loan that you are most likely to get approved for. However, a reputable lender should explain to you why they are recommending an FHA loan to you. You should feel like you are pushed to buying any product. Be sure to ask your loan advisor why they favor the FHA loan, and then see whether or not the explanation sounds sensible to you. It is also a good idea to talk to multiple lenders about what options are available to you and then compare several mortgage quotes before making a final decision.
If I am interested in getting an FHA loan, where should I start?
The first thing you should do os get a couple of FHA mortgage quotes from several lenders. You can visit in person, call companies, or check online. Then go back to a few of the lenders with the best quotes and talk to their loan officers. That will allow you to gauge the service provided by the lender and make sure that you can qualify for their FHA program (remember that individual lenders may add stricter requirements than the basic underwriting restrictions of the FHA, so it is best to ask about that ahead of time). Finally, the loan professional should guide you through their application process. A majority of lenders will interview the applicant, get the forms completed online, electronically submit the application and give a decision within a couple of minutes. You will then be given a list of the items that are needed for the approval to be finalized.
To obtain an FHA loan do I need to be a U.S. citizen?
FHA loans are also available to qualified non-resident aliens who work in the US and to foreign national who are permanent lawful resident aliens. while many conventional loans require noncitizens to have 30 percent or higher down payments, qualified borrowers on an FHA loan are only required to put down 3.5 percent.
If I have bad credit can I still qualify to get an FHA loan?
That will depend on just how bad your credit history is. The FHA does insure loans for individuals who have a bad credit history when it was not or their fault, or they have been able to overcome their financial problems and re-established an acceptable credit score and positive credit history. According to the FHA, a lender is required to document analysis of any delinquent accounts, which includes whether or not any later payments have been based on:
- Factors that were beyond the control of the borrower
- An inability to properly manage debt
- Disregarding financial obligations
If the credit history of a borrower, despite having an adequate income for supporting their obligations, shows delinquent accounts, judgments, and continuous slow payments, then significant compensation factors will be needed for approving the loan, such as paying a higher downpayment.
Who should consider obtaining an FHA loan?
People with high debt-to-income ratios, credit issues, or smaller down payments, should look at FHA when comparing various mortgage programs. Individuals who are interested in buying a fixer-upper property should research the FHA 203(k( program, particularly if they only have a limited amount of money for repairs. FHA loans should also be considered by foreign nationals who would like to avoid having to make a high down payment. Homebuyers wanting an assumable loan also should seriously consider an FHA loan.