Learn All About FHA Loans
2020 FHA Home Loan and Streamline Guide
A Federal Housing Administration (FHA) loan is designed for low to moderate-income homebuyers and ideal for them due to the low minimum down payment and more lenient credit scores when compared to conventional loans.
This is a popular option among first-time homebuyers that FHA insures and because of the benefits, FHA loans cannot be used for other purposes such as vacation, investment properties, or other similar real estates.
There has to be an intent to occupy the home and the FHA borrower needs to do so within 60 days of closing the mortgage. From there, they have to occupy it for a year as the primary residence.
In the year 2020, your down payment can go as low as 3.5% of the home value with your FHA loan where 96.5% goes to the loan amount.
The minimum credit score to qualify for your FHA home mortgage is 580. Between 500 and 579, your minimum down payment then needs to be 10%.
Lastly, the FHA guarantees loan amounts. But in order to secure this guarantee, qualified borrowers for an FHA loan also need to purchase mortgage insurance payable to the Federal Housing Administration.
What is the FHA home loan?
A Federal Housing Administration or FHA loan is a home mortgage program that the Federal Housing Administration insures through their approved lenders.
Due to the many benefits of the FHA loan such as the high loan amounts (up to 96.5%), it is ideal for first-time homebuyers who fall under the low to moderate-income classification.
Among the many benefits are lower credit score requirements, lower down payment, and friendly FHA loan rates.
As it has higher loan limits and is superior to other loan options such as conventional, USDA loans, and VA loans, it is reserved only for first time home buyers who intend to occupy.
What kind of homes qualify for an FHA loan?
FHA home loans can be used to purchase the following types of homes:
- Single-family houses
- Two- to four-unit multi-family homes
- Manufactured homes
- Mobile homes
Moreover, there are specific types of FHA loans that can cover the costs of renovations and upgrades.
An Overview of FHA Loans
Apart from the traditional low down payment FHA loan, other types are available to you.
Home Equity Conversion Mortgage (HECM)
This loan program helps senior citizens at least 62 years old convert home equity into cash without giving away homeownership.
You can withdraw the funds as a fixed monthly amount, line of credit, or a combination of the two.
Section 245(a) Loan
This loan is perfect for borrowers who intend to pay higher monthly payments as time passes. The loan program starts with lower monthly payments and gradually increases with time.
As the name implies, this falls under section 245(a) under the Graduated Payment Mortgage.
FHA Energy Efficient Mortgage
The energy-efficient mortgage works much like the FHA 203(k), but covers the costs of technology upgrades you’ll make that impacts utility bills (e.g. solar panels or wind energy systems).
In other words, this is an FHA loan for anything that makes energy generation efficient and lowers your bills.
This is yet another means for FHA borrowers to retain more income month on month and further save by cutting down on utility bills.
FHA 203(k) Improvement Loan
The FHA 203(k) improvement loan is an all in one loan that funds your home purchase as well as the improvements that come with it.
This accounts for repairs and renovations and allows borrowers to remain liquid by paying for these as monthly payments.
Qualifying for an FHA Loan
You can apply for an FHA home mortgage when your score is at least 500. Between 500 and 579, you will need to make a down payment of 10%.
More than 580, you can qualify for a 3.5% down payment already. This makes your loan amount to 96.5% of the total.
You may still apply if you are self-employed. The same two-year rule applies here where you will just need other proof such as tax returns, balance sheets, and an income statement.
The middle ground here is if you’ve been self-employed for less than two years. If this is the case, loan eligibility hinges on having a good work and income history for two years prior to self-employment.
Here are other factors for loan eligibility:
- No existing FHA home mortgage. Once it has been paid off, you’ll need to wait 210 days at a minimum.
- Finish at least six monthly payments with your current FHA home mortgage.
- A spotless record of payments with no overdue payments if you have had your FHA loan for just less than one year. If it’s over a year old, the tolerance is one 30-day late payment within 12 months as long as it isn’t within the last 90 days.
- The FHA refinance you’re applying for must lower both your monthly principal and interest payments, also known as a net tangible benefit. Refinancing into a new mortgage with shorter terms will also qualify as a net tangible benefit.
Finally, you’ll need to be a legal resident of the United States, have a valid Social Security number, and fall within legal age for making the FHA mortgage.
Requirements for an FHA Loan
Before anything, an FHA borrower needs to wait out two years if he/she experienced bankruptcy of any kind and if any of this happened, you will need proof that these happened due to uncontrollable events.
For mortgage foreclosure events, you need to wait three years from the event and show progress towards establishing good credit once again.
This includes but not limited to credit card and loan statuses
Also, if the FHA borrower is delinquent with income taxes or federal student loans, he/she cannot qualify for the home mortgage.
Moreover, your home mortgage lender will look at your credit report (credit card and debt-income ratio), work history, or payment history for the past two years to see how you have established good credit.
Generally, the lower your credit score, the lower your chances of successfully filing an FHA home mortgage application.
How FHA Streamline Refinancing Works
This refinance option is your best alternative to getting a rate reduction and overall lower monthly payments. You can apply for one as a loan if you have an active FHA mortgage.
Another advantage with FHA Streamline is that you only need a little paperwork for the application.
Furthermore, the borrower is not subjected to verification processes or home appraisals and can enjoy lower closing costs making it not only a cheap option but also a faster one versus other loans with FHA insurance to boot.
As you can see from the benefits, this is not your ordinary refinance option. As such, this is reserved only for homeowners with an active FHA mortgage.
FHA Streamline Refinance Rates
Here is a rundown of the benefits of the FHA Streamline program:
Low refinance rates — These are averaged at 3.94% as of the latest info from October 2019
Lower MIP rates — Applying for an FHA loan between 2010 and 2015 would have gotten you lower annual home mortgage insurance premium through the use of this refinance option.
MIP refund – Homeowners who took advantage of this refinance option may receive refunds up to 68% of the prepaid home mortgage insurance through a MIP discount on the new loan application.
No appraisal needed — You can apply for an FHA Streamline Refinance even if your current home mortgage is in shambles.
No job or income verification — You can qualify for the refinance even if you are between jobs, took a pay cut, or your business isn’t doing too well.
No credit score check — Your low credit score will not bring down your application for the refinance program. This is hardly possible at all with other types of refinance options.
With all this said, the FHA Streamline Refinance is your best option coming from an FHA home loan if you are looking for a rate reduction. It is simply one of the best considering the benefits and requirements.
FHA Streamline Refinance Rates
The average FHA rate for a 30-year program is 2.25%. However, you may still add 0.85% to this due to the annual insurance fee and FHA Streamline refinancing is not exempted from this.
Overall, this still leaves you at 3.10%, less than 4%. Not many refinance options can get you that interest rate much less beat it.
Overall, Federal Housing Administration Home loans are some of the best in the market when you’re looking for the lowest down payment and overall low rates.
It is also a mortgage loan that FHA insures, so the insurance premium is lower than most other options.
However, this simply won’t do for succeeding home loans and only helps to fund the first home purchase for occupancy and not other forms of real estate used as a vacation home or investment property.
If the overall benefits of FHA home mortgage options are not enough, try to consider the several variants available to you – Home Equity Conversion Mortgage, Section 245(a), FHA Energy Efficient Mortgage, and FHA 203(k) Improvement Loan.
For first time home buyers, these easily beat the rates of conventional loans, USDA loans, and VA loans.
This way, you get the most out of FHA loans and tailor-fit the loan program to your specific needs.
Lastly, consider Streamline Refinancing whenever you can. The lenient procedures considering the benefit are superior to most other options in the market.
Just be sure to clear up the requirements as these may differ from one home mortgage lender to another.
Let us fill you in on the latest trends and FHA mortgage rates to get you started with exploring the benefits of the several options you have for your FHA home mortgage.
3 Types Of Homebuyers Who Can Benefit From FHA Loans
Homebuyers For The First Time
Approximately 46% of first-time homebuyers in 2017 had assistance from an FHA loan to make their purchase. FHA loans have very low down payments of 3.5%, while standard mortgages have anywhere from a 5% to a 20% downpayment on a home. This small adjustment makes all the difference for people looking to make the transition from renting to owning for the first time. While an FHA loan in Redding would be very useful for first-time buyers, borrowers who have previously owned a home or even used an FHA loan in the past can still qualify for an FHA loan for a new home.
Homebuyers With Low Credit Scores
A low credit score can bar many people who are looking to buy a home. While a typical mortgage would require a borrower to have a credit score in the range of good to great, an FHA loan with a 10% down payment requires only a credit score of 500. A loan with 3.5% down requires a score of at least 580. Those with credit scores under 500 are typically ineligible for FHA loans, but the agency will occasionally make exceptions for applicants who have credit histories that are nontraditional or insufficient if they meet the other requirements.
Homebuyers With A Low-Income
Anyone can have the dream of owning their own home, but those with lower incomes often find obstacles in the high down payments and debt to income ratios. As previously stated, the down payments for FHA loans are typically low. Lenders have been able to approve up to a 50% DTI ratio for hopeful applicants. This allows those who manage debt from other loans and credit cards well to possibly buy a home.
FHA Loans 101
An FHA loan is a mortgage that is insured by the Federal Housing Administration. These loans are designed for people who are unable to make a large down payment. A borrower must have a credit score of 600 or higher to qualify for an FHA loan for a mortgage with a down payment as low as 3.5%. If you think you may be eligible for an FHA loan, this article will go into more detail about how they work and what are some of the requirements.
How Do FHA Loans Work?
A borrower has to have mortgage insurance for an FHA loan to be approved. The two types of mortgage insurance premium (MIP) that are required for an Upfront Mortgage Insurance Premium (UFMIP) and an Annual MIP. You can finance the UFMIP at 1.75%; the monthly mortgage insurance is 0.85%. The upfront MIP is paid at the time of closing, and the annual MIP is paid monthly. These payment amounts can vary depending on the loan amount and length. There are many benefits of FHA loans, and one immense benefit is that the seller, builder, or lender is allowed to pay some of the closing costs associated with the purchase of a home.
FHA Loan Requirements
There are additional lending requirements for FHA loans. One requirement is that the borrower must have a steady employment history. The borrower’s payment to income ratio is required to be less than 45%, and the debt to income ratio should be from 50-57% depending on the client’s credit profile. Borrowers who are self-employed need to show two years of tax returns and a profit and loss statement.
Another requirement is that borrowers must be out of bankruptcy for at least two years. Furthermore, borrowers must be able to demonstrate they were working towards re-establishing good credit.
Lastly, the FHA board must approve of the lending institution the borrower is using. This is because borrowers don’t receive the money from the FHA. Instead, they receive the money through the lender, and the FHA guarantees the loan. Because of this, lenders have flexibility in setting their standards for determining eligibility.
FHA loans are not for everybody. No one loan is the same, depending on a borrower’s credit score and down payment options. With that in mind, it’s important to do your research when you’re looking into home loans to figure out which one is right for you.
Protect Your Future Investment with an FHA Loan
FHA loans aren’t just affordable for first-time buyers – they’re safe, too. The Federal Housing Administration has taken measures to ensure that FHA loans are designed to survive even when the real estate market is in turmoil. These measures mostly take the form of guidelines for buyers. And while some of these guidelines make it more difficult to secure a loan, they ensure that everyone who has an FHA loan is protected.
How the federal housing administration protects your investment
First of all, FHA loans require two-part mortgage insurance. This consists of a one-time payment when first purchasing the loan (of 1.75% of the loan value) and then an annual payment of less than 1% the loan value (the exact amount is dependent on the length of the loan and how much money was put down).
Though this is often presented as a drawback of the FHA loan, it serves as protection against events like the stock market crash last decade. Mortgage insurance premiums allow the FHA to provide loans to people with worse credit scores without putting everyone’s money at risk.
This doesn’t only protect the banks – it protects you as well.
FHA loans also have strict income limits. In Shasta County, they cannot be used to purchase single unit properties valued at more than $275,665. This keeps people from using government-backed funds to purchase properties that they cannot afford, and allows the FHA loan to serve its intended purpose – helping first-time home buyers and low income people.
Finally, refinancing options for FHA loans are very flexible compared to other loans. Should you need to refinance, you may find it easier to do so than with a conventional loan, for example. No appraisal and very little documentation is required.
FHA loans have a few other requirements that are designed to reduce the risk of default on the part of the buyer.
For instance, homes financed by the FHA must conform to certain standards of safety, security, and habitability. The home must be “ void of any physical deficiencies or conditions that could compromise its structural integrity.” Beyond mere structural problems the home must be in good repair. Exposed electrical wires, inadequate roofing, and code violations of any kind must be repaired before the loan is originated.
The burden for this does fall on the loan originator, though the FHA will make inspections, and potentially assist with the cost of repairs in the case of certain loan types. But it’s important to note that these requirements are for the homeowner’s benefit. If they take out a loan on a house that turns out to have serious problems, then whatever equity they acquire will become worthless.
All in all, FHA loans are not necessarily more secure than conventional loans, but they are definitely the most secure type of loan that is affordable for a first-time home buyer. If you want a loan that you can trust in Redding, an FHA loan may just be the best product for you.
MEGASTAR FINANCIAL CORP. is an Equal Housing Lender. DBO Lic # 603 G365 NMLS Lic # 235828(3043)*
Licensed by the Department of Business Oversight (DBO) under the California Finance Lenders Act * NMLS # 1162668.
As prohibited by federal law, we do not engage in business practices that discriminate on the basis of race, color, religion, national origin, sex, sexual preference, marital status, age (provided you have the capacity to enter into a binding contract), because all or part of your income may be derived from any public assistance program, or because you have, in good faith, exercised any right under the Consumer Credit Protection Act. We are regulated by the Fair Housing Act (overseen by HUD) and the Equal Credit Opportunity Act (overseen by CFPB), Washington, DC, 20580.
Example of 30 year mortgage:
$300,000 sales price, $60,000 down payment, $240,000 loan amount, 360 months, 3% interest rate, 3.132% APR, $1,029 Principle and Interest monthly payments, Payment does not include taxes, insurance premiums or HOA dues. The actual payment amount will be greater. Rates shown valid on publication date of June 29th, 2020. This example is for a conventional, not jumbo, mortgage product; there are restrictive upper loan amounts for conventional loans based on the property’s location. Example given requires a minimum 740 credit score with a debt to income ratio of under 45%. Applicant must be employed. This is not a promise to lend. All terms and conditions are based on the subject property, the applicant’s credit worthiness and the applicant’s ability to repay the loan.
15-Year Fixed-Rate Mortgage:
The payment on a $300,000 15-year fixed-rate loan at 2.723% and 80% loan-to-value ratio (LTV) is $1,626. The annual percentage rate (APR) is 3.178%. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Rates shown valid on publication date of June 29th, 2020. This example is for a conventional, not jumbo, mortgage product; there are restrictive upper loan amounts for conventional loans based on the property’s location. Example given requires a minimum 740 credit score with a debt to income ratio of under 45%. Applicant must be employed. This is not a promise to lend. All terms and conditions are based on the subject property, the applicant’s credit worthiness and the applicant’s ability to repay the loan.