two-storey house

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
  • Condominiums
  • 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

hand with keys

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.

 

Final Thoughts

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.