If you're looking to buy a home in the near future, then it's important that you know about FHA loans. The Federal Housing Administration (FHA) is a government agency that provides mortgage insurance on loans made by lenders and insured by them. FHA loans are popular because they offer flexible credit guidelines and low down payment options for buyers with lower incomes or less than perfect credit histories. In this blog post, we will discuss the various types of FHA loans and what they can do for different types of buyers.
What is the FHA?
The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development (HUD). It was created during the Great Depression to help increase homeownership rates, which had fallen drastically since the start of World War I. To do this, the FHA offered low down payment loans to buyers who may not have qualified for traditional loans. The program has fluctuated and adapted over the years, but still provides a variety of loans to support all kinds of home buyers.
How does an FHA Loan Help Buyers?
FHA Loans are popular with first-time homebuyers because they only require a minimum of a 3.5 percent down payment. This is great news if you don't have much saved up or cannot put down the 20 percent of conventional loans. Another benefit that's hard to beat is the flexible credit guidelines.
Most people will be able to qualify for an FHA loan even if they've had bad credit in the past or struggled to make payments on other types of loans. The final perk worth noting is that your monthly mortgage insurance premiums can be included in your overall monthly payment so you won't owe anything extra.
What are FHA Loans?
There are five types of FHA loans: Traditional mortgage/first-time homebuyer AKA 203b, Home Equity Conversion Mortgage AKA Reverse Mortgage, 203(k) Mortgage - Renovation or Rebuild, Energy Efficient Mortgage, and Section 245(a) Loan. Let's dive in to learn how each one works and who they can benefit.
Traditional Mortgage
This is what most people think of when they talk about an FHA loan. This loan is often utilized by lower-income or first-time homebuyers. This loan covers properties that will be used as the borrower's primary residence. This loan is especially helpful for young borrowers, people with poor credit history, and those with fewer funds for a down payment.
203(k) Improvement Loan - Renovation & Rebuild
This loan factors the cost of certain repairs and renovations into the loan. It allows you to borrow money for both home purchases and home improvements, which can make a big difference if you don't have much cash on hand after making a down payment.
This type of FHA requires that the house being purchased meets certain conditions before application approval. For example, it must meet a minimum amount of livable square footage and a maximum number/type of upgrades.
203K loans focus on home improvements and repairs. They allow the buyer to finance up to $35,000 in approved hard costs AND receive additional financing from the government for soft costs. These may include closing costs or design fees. However, it is limited to one per property, so borrowers can't do major renovations and then sell it months later.
In other words, these aren’t meant for “fix and flip” properties. They are simply a way for homeowners to purchase and renovate a property to use as a residence when they would otherwise not have the means. This loan type also requires an inspection to prove work has been completed
This type of loan can also be for those looking to buy a run-down or abandoned property and then completely rebuild it. For example, you may find your dream house, but the roof needs to be replaced ASAP. With this FHA loan option, you can skip straight to doing what's necessary first -and get reimbursed- before closing on the home. This saves time which means less stress!
There are several guidelines borrowers need to meet to qualify for such a loan. This includes 20 percent or more equity built within 12 months prior, and at least one-year of ownership history.
Section 245(a) Loan
This is a program for borrowers who expect their incomes to increase. Under the Section 245(a) program, the Graduated Payment Mortgage starts with lower initial monthly payments that gradually increase over time. As such, the Growing Equity Mortgage has scheduled increases in monthly principal payments that result in shorter loan terms. The only requirement is that borrowers in the 245 program must occupy the home as a primary residence. The 245 loan cannot be used for investment properties.
Home Equity Conversion Mortgage (HECM) AKA Reverse Mortgage
These loans allow seniors to borrow against their home equity without having to make any monthly payments until they move out or pass away. Borrowers are required to pay off property taxes, insurance premiums, and homeowners association fees if applicable before receiving money from the government. This program is specifically designed to help seniors ages 62 and older convert the equity in their homes to cash while retaining the home's title.
FHA Energy Efficient Mortgage
This program is a similar concept to the FHA 203(k) Improvement Loan program, but it’s aimed at upgrades that can lower your utility bills. For example, new insulation or the installation of new solar or wind energy systems. The idea is that energy-efficient homes have lower operating costs, which lowers bills and makes more income available for mortgage payments. It’s a wonderful way for lower to moderate-income homeowners to make environmentally friendly upgrades to their homes without a bunch of upfront capital.
Honorable Mention: Streamline Refinance Loan
Technically an FHA Streamline Refinance is only available to homeowners with a current FHA mortgage, which is why we are only including it as an honorable mention. This loan is a good option for those who have an existing FHA-insured mortgage and want to pay it off.
In fact, even if you are behind on your payments, the lender may be able to help you get back up to date before closing. The process itself can take as little as 30 days from start to finish. Thus, making this type of FHA loan very attractive if you need fast cash flow or home equity assistance.
There are many benefits to this refinance loan. For example:
- Low refinance rates — FHA loan rates currently average 2.5% (3.478% APR). This is an incredibly low rate compared to most of the mortgage industry.
- Lower MIP rates — If you got an FHA loan between 2010 and 2015, you can access today’s lower annual mortgage insurance premiums using FHA streamline refinancing.
- MIP refund — Homeowners who use the FHA Streamline Refinance may be refunded up to 68 percent of their prepaid mortgage insurance, in the form of an MIP discount on the new loan.
- No appraisal — You could use the FHA Streamline Refinance even if your current mortgage is underwater.
- No verification of job or income — You may be eligible for FHA Streamline refinancing even if you recently lost your job or took a pay cut.
- No credit check — A low credit score won’t stop you from using the FHA Streamline’s non-credit qualifying option. This is almost impossible to find with other refinance loans.
FHA Loans vs. Conventional Mortgages
FHA loans are available to individuals with credit scores as low as 500. If your credit score is between 500 and 579, you may be able to secure an FHA loan assuming you can afford a down payment of 10 percent - still half the payment on conventional mortgages. If your credit score is 580 or higher, you can get an FHA loan with a down payment for as little as 3.5 percent down. By comparison, you'll typically need a credit score of at least 620, and a down payment closer to 20 percent to qualify for a conventional mortgage.
Could an FHA loan be right for you?
If you're a first-time homebuyer and your down payment is small, an FHA loan could be for you. If you’re over 62 and looking to draw income from your home, an FHA loan could be for you. If you’re looking to purchase and renovate or rebuild a home, an FHA loan could be for you. See the trend? FHA loans can help so many different types of buyers.
Takeaways
Whatever your situation, if you’re looking into buying or refinancing your home, it might be worth investigating if getting an FHA mortgage would be a good fit for you. Especially since FHA loans are more lenient with approval requirements than most other types of loans.
You can find local HUD offices in all 50 states (including Puerto Rico) which offer free assistance and referrals - or simply contact our team at Texas United Mortgage. We are experienced in working with all types of homebuyers who choose FHA loans to optimize their homebuying ability.
