Guide to FHA financing

Guide to FHA financing
March 8, 2013


What is an FHA Loan?

Federal Housing Administration (FHA) Loans are made by local lenders, but insured by The Department of Housing and Urban Development (HUD), so that homebuyers can obtain a mortgage with a smaller downpayment, and a competitive interest rate. FHA loans have been helping people become homeowners since 1934. FHA insures loans for first time home buyer mortgage loan, FHA streamline refinance, FHA regular refinance, Cash-out refinance and also home purchase by people who are NOT first time home buyers. FHA however doesn’t provide loan directly. You need to work with an FHA approved lender; most banks are FHA approved, as are most mortgage brokers. From February of 2012 to February 2013 more than half of the total transactions in Southwest Michigan involved FHA financing. Conventional financing has become more difficult to obtain, so FHA has picked up the slack, FHA loans are a great way for buyers in Southwest Michigan to finance the purchase of their primary residence.

What is the credit score requirement for an FHA Loan?

While FHA guidelines allow for much lower credit scores, most of the lenders require a minimum of 640 fico score.

How to qualify for an FHA Loan?

You need to meet the following basic requirements for qualifying for an FHA loan (this is not an exhaustive guideline and a particular lender may even have their own set of guidelines):

  • Property must be owner occupied.
  • FHA loans are available for 1-4 units houses including single family residence, town-homes, condominiums and even manufactured homes.
  • A minimum downpayment of 3.5% is required. The downpayment can be gifted from parents, children, siblings or other close relatives.
  • Impound account is required on all FHA loan. As part of impound account, payment for property taxes and home insurance are broken down into monthly payments and are paid to the lender along with mortgage payments every month. The lender then makes a payment directly to county or your home insurance company when its due.
  • A two years employment history is required. However, if you went to school immediately prior to starting your employment, the school years can be counted towards “two years” requirement as long as your job is in the same field as your education.
  • You should have enough income to meet the maximum debt to income ratio requirement of 43%. In some cases, that ratio can be allowed to as high as 50%.
  • Upfront mortgage insurance (UFMIP) of 1.75% and annual mortgage insurance of 1.20% – 1.50% is required on all FHA loans. There is only one exception for annual mortgage insurance – 15 year fixed loans with LTV 78% or lower.
  • FHA offers 30 year fixed, 15 year fixed and 5 year ARM loan.

What are FHA Loan limits?

For 2013, the FHA national “floor” loan limit for 1 unit house is $271,050. This means that all counties in the country will at least have this as their loan limit. FHA also classified several counties as “high-cost” meaning the loan limits in those counties are higher than $271,050. The maximum loan limits in some counties can be as high as $729,750 and in other counties it’s between the floor i.e. $271,050 and the highest loan limit i.e. $729,750. 

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