FHA HOME LOAN: One of Frederick Ford's Favorite Home Loans For His Clients

An FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan which is provided by an FHA-approved lender. FHA insured loans are a type of federal assistance and have historically allowed lower-income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. Because this type of loan is more geared towards new house owners rather than real-estate investors, FHA loans are different from a conventional loan in that the house must be owner occupant for at least a year. Since loans with lower down-payments usually involve more risk to the lender, the home-buyer must pay a two-part mortgage insurance which involves a one-time bulk payment in addition to a monthly payment to compensate for the increased risk. 

Using an FHA loan for acquiring the first home is a very popular strategy with first-time homebuyers, as well as those with low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as they use it to buy a primary residence. 

If you are a new borrower, in order to use the FHA's 3.5% down payment program, you must have at least a 580 FICO score.  If you have a credit score that is below 580, you will be required to make a down payment of at least 10% of the purchase price. 

A FICO score of 500 is generally is the lowest that is acceptable for an FHA loan

It is not unusual to find that many lenders that participating in the FHA loan program require a FICO score of at least 620 to qualify for an FHA home loan. Generally, 620 is preferred as a minimum FICO score.  Simply because a lender has been approved to issue an FHA insured loan, does not mean it must make the loan at a FICO score of 580.  In essence, FHA is a program that a lender voluntarily participates in. The lender is free to make an FHA loan under a more challenging FICO score than is required by FHA.  

When the borrower's downpayment is less than 20 percent, FHA will require that the borrower get mortgage insurance.  This mortgage insurance consists of two types of mortgage insurance premiums -- (1) an upfront mortgage insurance premium and (2) an annual mortgage insurance premium:

• Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be financed into the loan amount.
• Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount, and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.

So, if you borrow $275,000, your upfront mortgage insurance premium would be $4,125.00 and your annual premium would range from $1,237.50 ($103.13 per month) to $2887.50 ($240.63 per month), depending on the term.

The FHA mortgage insurance premiums must remain for the entire term of the FHA loan and cannot be canceled in most situations.  However, the borrower can terminate paying the mortgage insurance premium simply by refinancing into a non-FHA loan at a later date; or selling the home.

FHA lenders may charge no more than 3 percent to 5 percent of the loan amount in closing costs. A very attractive feature of this type of loan is that FHA allows home sellers, builders and lenders to pay up to 6 percent of the borrower’s closing costs. So, certain fees that are related to the closing of an FHA loan such as the title search, the appraisal or credit report can be strategically eliminated for the borrower.  

 Your front-end debt ratio (monthly mortgage payments) should not exceed 31 percent of your gross monthly income. Lenders may allow a ratio of up to 40 percent in some situations. 

For example.    

Your monthly debt may be no more than 43% of your income.  The less your debt ratio is, the more favorable a lender will look upon your application for the FHA loan.

Your back-end ratio calculated by adding your proposed monthly mortgage payment with all of your monthly debt payments and dividing the sum by your gross monthly income.   

When there are very strong compensating factors present that would convince lenders that you would not be a risk, your back-end ratio may be allowed to be as high as 50 percent; but this is in rare circumstances. 

One of the very stringent requirements of eligibility to obtain the FHA loan is that the borrower must commit to making the new home their primary residence. Even if the home is a multi-unit dwelling,  the borrower must live in one of the units.

If you have filed bankruptcy, you must wait 12 months to two years to apply for an FHA loan.  There is a three-year wait period before you can apply after having experienced a foreclosure.

The great thing about qualifying for an FHA loan is that by its very nature, a borrower can be eligible for this loan in relatively a short period of time after having suffered unfortunate situations that caused a borrower to file bankruptcy or experienced a foreclosure. 

This article is written by

Frederick W Ford

Insurance, Mortgage and Real Estate Advisor

NMLS 640619

Direct: (888) 410.8853 

This article is intended for informational purposes only and is not an advertisement nor solicitation.