If you’re thinking about buying a home in California, you may want to consider applying for a loan with the Federal Housing Administration (FHA). These are very popular loans, especially among first time homebuyers. At American Dream Realty, we’ve helped hundreds of people buy and sell their homes and our real estate agents also specialize in mortgage and financing services. In this article, we’ll dive deeper into FHA loans so you can be well prepared when it comes time to purchase a home.
What Exactly Is An FHA Loan?
An FHA loan is a type of mortgage that is insured by the Federal Housing Administration (FHA). Created in the 1930s to stimulate the housing market by making loans more accessible and affordable, this kind of loan was created in response to rash foreclosures and defaults. This is a common loan type for homebuyers because they provide borrowers with a low down payment of 3.5 percent for credit scores that are above 580. It’s important to note that borrowers with a lower credit score will have to pay a higher interest rate, as this protects the lender if you default on your payment. A minimum down payment is also required at the time of purchase.
FHA Loan Requirements For Homebuyers
Your credit score and down payment amount are just two of the requirements of FHA loans. Below is a complete list of FHA loan requirements which have been set by the Federal Housing Authority.
- In order to qualify for an FHA loan, all borrowers must have a steady employment history or they must have worked for the same employer for the past two years.
- New homebuyers must have a valid social security number and be a lawful resident in the United States. They must also be of legal age to sign a mortgage in their state.
- Borrowers are required to pay a minimum downpayment of 3.5 percent. This money can be gifted to the borrower by a family member as well.
- All borrowers must have a property appraisal conducted from an FHA-approved appraiser.
- A borrower’s front-end ratio, which includes his or her mortgage payment, HOA fees, property taxes, mortgage insurance, and homeowners insurance, must be less than 31 percent of their gross income. In some cases, you may be able to get approved with a percentage as high as 40 percent. In order for this to happen, your lender will be required to justify as to why they believe your mortgage presents an acceptable risk.
- A borrower’s back-end ratio, which may include his or her mortgage plus their monthly debt, credit card payments, car payments, and student loans, must be less than 43 percent of their gross income.
- In order to receive the minimum down payment of 3.5 percent, borrowers must have a minimum credit score of 580.
- Borrowers must have a minimum credit score of 500 to 579 for a maximum loan-to-value ratio of 90 percent with a minimum down payment of 10 percent. Oftentimes, FHA lenders will evaluate each loan on a case-by-case basis to determine the applicant’s credit worthiness.
- If you’ve declared bankruptcy in the past, you must be at least two years out of it and have re-established good credit in order to qualify for an FHA loan.
- If the home you are looking to purchase does not meet the minimum FHA standards at the time of the appraisal, it is up to you and the seller to decide who will pay for the required repairs.
The Perks Of An FHA Loan
Many new and returning homebuyers choose to apply for an FHA loan because it requires a low down payment and you can have a less-than-perfect credit score to qualify. Another advantage of applying for an FHA loan is that it is considered an assumable mortgage. This type of mortgage allows the buyer to take over the seller’s home loan with little to no change in terms and interest rate. In this kind of mortgage, the buyer agrees to make all future payments on the loan as if they took out the original loan themselves. Even people who have undergone bankruptcy or have been foreclosed upon may still be able to qualify for an FHA loan.
FHA loans are unique in that they require two kinds of mortgage insurance premiums. One is paid in full upfront, or can be financed into the mortgage, while the other is a monthly payment. FHA loans also require that the home you’re looking to buy meet certain conditions and it must be appraised by an FHA-approved appraiser. Below is a detailed description of the mortgage insurance premiums.
Upfront Mortgage Insurance Premium (UFMIP)
Your upfront mortgage insurance premium, or your UFMIP, is a one-time, upfront monthly premium payment. This means when you qualify for an FHA loan, you’ll be required to pay a premium of 1.75 percent of the home loan, regardless of your credit score standing. A good example of of this premium is if you purchase a 300,000 dollar home loan and multiple it by 1.75 percent, your UFMIP would come out to be 5,250 dollars. This money can be paid upfront at the closing as a part of the settlement charges or it can be rolled into your mortgage.
Annual MIP (Charged Monthly)
Your annual premium is a monthly charge that will be figured into your mortgage payment by a professional. The monetary amount of your mortgage insurance premium will be a percentage of your loan amount. This will be based on the borrower’s loan-to-value ratio, loan size, and the length of your loan.
At American Dream Realty, we’ve helped hundreds of people across California find and buy the home of their dreams. When you work with one of our trusted real estate agents, they’ll take the time to understand your unique needs before explaining the homebuying process to you. We also specialize in mortgage and financing services, making home buying even easier and quicker than ever. Contact us today to learn more about our real estate services!