Maybe you just got the news from your loan officer that you need an FHA loan in order to qualify for your home purchase. "Oh brother," you say, another acronym, additional lending jargon and still more ways to be confused about the whole mortgage process. Or not? What are the differences between an FHA loan and a "regular" or conventional mortgage? Let's take a look at some of the most frequently asked questions that swirl around FHA loans and cut right to the chase of what you need to know in order to determine if an FHA loan is a good fit for you.
Q) Is an FHA loan different than a regular mortgage?
A) Not really. At the end of the day, you'll probably find yourself in a 30-year fixed rate loan. In fact, the core loan program is no different than a conventional or "conforming" mortgage but when you get an FHA loan, the lender who makes the loan to you is "insured" by the Federal Housing Administration.
Q) Do I have to be a first-time buyer to get an FHA loan?
A) No! There are no first-time buyer requirements for FHA borrowers. Shoot, you can even refinance an existing conventional mortgage with an FHA loan if it ends up being the best option.
Q) What's the minimum down payment requirement for an FHA loan?
A) 3.5% in most cases. And even in high-cost areas where FHA loan amount maximums on a single-family home get to $726,525 (as of May, 2019), you can still put down only 3.5% if you qualify.
Q) Do all FHA loans have mortgage insurance?
A) Yes, they do, but there are some key things to know about how it works. First, when you obtain an FHA loan, the lender will add UFMIP (up front mortgage insurance premium) of 1.75% of the loan amount to the loan balance but not to the loan-to-value. In effect, this form of insurance is paid as part of your regular payment of principal and interest because it is added to the initial loan balance. Then, you will also have monthly MIP (mortgage insurance premium) as an additional component of your total monthly housing payment. The amount of MIP and the duration for which it will stay depends on your scenario. Ask me or your loan officer if you have questions about this. FHA loans require an impound account for taxes and insurance so when you make your payment each month, the MIP will be included in the total (along with principal and interest, property taxes and homeowner's insurance).
Q) Are the rates good on FHA loans?
A) Yes! Comparatively speaking, you'll find that FHA rates are excellent.
Q) My credit isn't the best. Will I still qualify?
A) FHA has a very forgiving tolerance for lower FICO scores, as well as some of the shortest seasoning periods from a past bankruptcy, foreclosure or short sale. If you have credit challenges in your past, an FHA loan might just be the best fit for a mortgage with decent terms.
Q) Are there any prepayment penalties on an FHA loan?
A) Never. And if rates get better in the future, you may be able to avail yourself of an FHA streamline refinance.
Q) Can I use a non-occupant co-borrower to help me qualify?
A) Yes. Also known as "co-signers," FHA loans permit a family member, for example, to assist with your qualification if you are unable to go it alone.
Q) Are gift funds allowed for my down payment?
A) Yes, and they may constitute 100% of the down payment.
Q) I have a lot of student loan and credit card debt. Is that OK?
A) All of your obligations are considered in an FHA qualification, but we allow a maximum total debt ratio of 57%, which is very forgiving (conforming loans max out at 49.99%). Be mindful of the fact that if you live in a community property state (like California) and you are married, the liabilities of your spouse must be considered as well, even if that person is not on the loan itself.
Q) Can I finance a condo with an FHA loan?
A) Yes, but the condo project must be FHA approved and not all will be on the FHA approved list, which you can find HERE.
Q) Can I get a renovation loan through the FHA?
A) Yes. The FHA 203K loan is specifically designed for renovation projects.
Q) I found a two-unit home that I love. Will FHA permit multi-unit real estate?
A) Yes, the FHA program allows properties between one- and four-units. You can use the rental income from the other units to help qualify, though some restrictions and important guidelines apply. If you are considering a multi-family dwelling, be sure to discuss this with your loan officer.
Q) Can I use an FHA loan for an investment property?
A) No. FHA loans are limited to primary residencies only.
Of course, you may have other questions about FHA mortgages that are not addressed here and that's an invitation to get in touch at any time and let me know what's on your mind. The FHA program has helped countless buyers realize the dream of responsible home ownership and if you think it may be a good fit for you, we look forward to being of service.
Frequently asked, seldomly imitated...
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.
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