FHA Home Loan, perfect for first time home buyers!
Guess how many FHA loans are originated each year?
In 2019 alone, there were 777,419 home purchases, and 338,308 refinances made with an FHA loan.
Needless to say, it’s a very popular home loan.
FHA loans carry the reputation of a first time home-buyers loan, but in reality, they are a great fit for many buyers, whether first-time buyers or not.
FHA loans have flexible guidelines, affordable closing costs, and competitive interest rates.
While first-time homebuyers certainly benefit from the FHA loan, subsequent homeowners without much equity or the ability to make a large down payment often benefit from the program too.
Keep reading to learn more about this great program to see if it’s a good fit for you.
- What is an FHA Home Loan and How Does it Work?
- Who Can Qualify for an FHA Mortgage?
- Are There Income Limits?
- How Long Does it Take to get Pre-Approved?
- How Much Money do You Need to Buy a House with an FHA Loan?
- Do You Have to Pay Closing Costs on an FHA Loan?
- What is the FHA Mortgage Insurance Premium?
- Is it a Good Idea to Get an FHA Loan?
- Is it Hard to Get an FHA Loan?
- Can I Get an FHA loan if I’m Self-Employed?
- Can I refinance an FHA loan?
- Minimum Credit Score
- Can I Buy a Foreclosure with an FHA Loan?
- Can I buy a home that was flipped?
What is an FHA Home Loan and How Does it Work?
FHA loans are government loans that are underwritten and funded by individual lenders.
The FHA guarantees loans for lenders. In other words, the FHA provides a promise that they’ll pay lenders back a portion of the funds they lose should you default on your loan.
FHA itself does not finance the program individual lenders do.
Because FHA provides an incentive to lenders, this is how lenders offer flexible guidelines, low down payment requirements along with competitive interest rates.
Lenders underwrites and fund the loan in their name. In exchange for the flexible guidelines, borrowers pay mortgage insurance for the life of the FHA loan.
In fact, you pay it twice – an upfront premium and an annual premium paid on a monthly basis.
You don’t have to use a specific lender. What you need is an FHA-approved lender with plenty of experience. You want a lender that understands the FHA program and offers the flexible underwriting guidelines that the FHA allows, making it easier for everyone to secure home financing.
Coole Home is approved to originate FHA Home Loans with a minimum credit score requirement of 620. Lower scores are acceptable on a case by case basis.
Who Can Qualify for an FHA Mortgage?
First, let’s talk about the good news. You don’t have to live in a certain demographic, have a certain income, be in the military or be a first-time homebuyer to qualify for the FHA loan. Anyone with the following qualifying factors can secure this great program:
- Minimum 620 credit score
- Minimum 3.5% down payment
- Stable income and employment for the last two years
- Proof that you’ll occupy the home as your primary residence
It’s that simple! There are very few restrictions regarding how one can qualify for an FHA loan. In some cases, we may even be able to get you approved with a credit score between 500 – 619, too. This is on a case by case basis.
If you have a credit score below 580, your down payment requirement increases to 10%, rather than 3.5%, but it still gives you an option for flexible financing that other loan programs may not offer.
Are There Income Limits?
The FHA loan program doesn’t have income limits. You don’t have to fall within a certain bracket or make a certain amount of money to qualify.
Instead, you must prove that you can afford the loan, which is where your income is a factor. You must prove that you have enough money to cover the potential mortgage payment as well as your current debts, while falling within the debt ratio guidelines.
How Long Does it Take to get Pre-Approved?
One of the best things you can do for yourself is get pre-approved before you shop for a home. Knowing how much you can afford before you start looking at homes saves you time and frustration.
The FHA pre-approval process doesn’t take that long when you provide us with everything we need.
The pre-approval process requires the following documents:
- Loan application
- A credit report
- Proof of your income (paystubs for the last 30 days and last two years’ of W-2s) or retirement award letters.
- Last two years’ of tax returns if you are self-employed or earn commission
- Last two months’ of bank statements and/or investment statements
With all of the necessary information, an FHA pre-approval can be done in a matter of a few days. Once done, you’ll have a pre-approval letter that states how much you can borrow, the size of your down payment, and the maximum sales price you can pay for a home.
How Much Money do You Need to Buy a House with an FHA Loan?
The down payment is always a sore subject with potential borrowers. In fact, a lack of funds is what keeps many people from buying a home and continue renting.
Fortunately, the FHA works well with people just like you, giving you many options to buy a house.
FHA loan does require a 3.5% down payment. The money can come from your own income and savings. You just need to prove that the funds are yours. We need to see that the money is seasoned’ or in your account for at least two months.
If you don’t have the money to put down on a home, the FHA does allow you to accept gift funds.
If you have a credit score of at least 600, you can accept 100% of the down payment as a gift. In order for gift funds to count, the donor must provide a gift letter with the following details:
- Your relationship with the donor
- The amount of the gift
- The reason (purchase a home with the address)
- A statement that the money is a gift and not a loan
The donor will also have to provide their bank statements showing that they have the funds. This is to ensure that they in fact have the money and it isn’t a loan somewhere down the line that could affect your ability to repay the FHA loan. If there is a loan, we’d have to include it in your debt ratio.
If you have a credit score between 500 – 579, the down payment requirement is 10%. You will need to contribute 3.5% of the purchase price from your own funds. The remaining 6.5% down payment funds can be a gift, though.
If gift funds isn’t an option, we do offer a FHA no down payment loan as well but the minimum credit score requirement is 620, and the interest rate is typically higher.
Do You Have to Pay Closing Costs on an FHA Loan?
Like all other loan programs, there are buyers closing costs associated with the FHA loan. Fortunately, the costs are competitive and sometimes even lower than other loan programs.
If you don’t have the funds to cover the closing costs, there are a few options:
- Ask the seller to help with the closing costs. FHA allows sellers to contribute up to 6% of the sale price in closing costs. That’s typically more than enough to cover your closing costs.
- Accept gift funds from an acceptable source. If you have a family member, employer, or charitable organization willing to help with your closing costs, you may be able to accept it. As long as the donor ensures that the funds are a gift and not a loan and can verify that they have funds’, you may be able to decrease your out-of-pocket expenses for closing costs.
Update 2022: Please note that in today’s market, you may have a hard time getting your offer accepted if you request for the seller to pay your costs. You can read more about this by going to this article: How to Get your Offer Accepted in a Seller’s Market
What is the FHA Mortgage Insurance Premium?
The FHA program is self-funded. FHA relies on the mortgage insurance premiums to continue to guarantee loans. FHA borrowers pay two types of mortgage insurance:
- Upfront mortgage insurance
- Annual mortgage insurance
As the name suggests, you pay upfront mortgage insurance which is typically rolled into your loan. It costs 1.75% of the loan amount.
If you borrow $200,000, you’d owe $3,500. If you can’t afford the cost at the closing, you can wrap it into your loan.
This does slightly increase your loan payments, but decreases the financial burden on you at the closing.
The upfront mortgage insurance is the only cost that can be rolled into the loan for a purchase.
You pay annual mortgage insurance on a monthly basis. It ranges from .80% or 0.85% of the loan amount. The range is based on the loan amount. You do pay annual mortgage insurance for the life of the loan or until you refinance out of the FHA loan.
Is it a Good Idea to Get an FHA Loan?
Every loan program has its pros and cons, but FHA loans have a lot of pros,’ especially for people with credit blemishes.
FHA has the most flexible credit underwriting guidelines out of any loan program out there today.
In addition, they don’t penalize’ you for the credit issues by charging higher interest rates or excessive closing costs.
A potential downside of the FHA loan is the mortgage insurance that lasts for the loan’s term. This does increase your loan payment and adds to the total cost of the loan. But, given the fact that you can get a competitive interest rate with a lower than average credit score, for many it’s worth it.
The good news is that you can pay off your FHA loan at any time. If your credit situation improves or your debt ratio decreases, you can refinance your FHA loan into a conventional loan.
The best time to do this is when you owe less than 80% of the home’s value. When you owe less than 80% of the home’s value, you don’t have to pay Private Mortgage Insurance on a conventional loan.
Is it Hard to Get an FHA Loan?
Compared to conventional (Fannie Mae) loans, FHA loans are not hard to get. As we said above, they have the most flexible guidelines. You’d be hard-pressed to find another loan program that allows a credit score as low as 600 with only a 3.5% down payment.
Because the FHA loans offer the government guarantee, it’s not hard to get approved for an FHA loan. While having a great credit score, low debt ratio, and high down payment always helps your case, this isn’t necessary with FHA loans. It’s a loan program for the average buyer.
As long as you buy a home knowing the full implication of the mortgage loan, the FHA loan is a great way to become a homeowner. Its flexible guidelines, low interest rates, and low closing costs make it an attractive loan.
With little money down, you may even be able to become a homeowner sooner than you thought and even have attractive interest rates and terms.
Can I Get an FHA loan if I’m Self-Employed?
Being self-employed comes with a lot of benefits but lenders typically view a self-employed borrower as a risk, which means the income guidelines to qualify are challenging.
You can still get an FHA loan if you are self-employed. The documentation needed for a pre-approval is a bit different than someone who is a regular W2 employee.
A Non-Qm Loan is usually a better and easier option for self-employed borrowers.
Can I refinance an FHA loan?
Yes, there are two types of FHA refinances. The first type is the streamline and the second is the cash-out.
The streamline allows you to refinance to lower your interest rate, or to lower your term from a 30 yr to 15 yr.
Cash-out refinance is when you are taking cash out of the property. This cash can be used to pay for home improvements, large repairs, investments, college tuition, etc.
Minimum Credit Score
The minimum credit score varies for each lender. Some will go as low as 500, while others won’t go below a 640.
We require a minimum of 620.
On a case by case basis we can go down to 580.
If you aren’t looking to purchase until 6 months to a year from now, start working on improving your credit score. It’s not a requirement, but it would help with getting a better interest rate. It also takes some time to improve a score, so why not get started as early as possible.
Can I Buy a Foreclosure with an FHA Loan?
The general answer is yes,’ you can buy a foreclosure but it depends on the situation. You may find it hard to get FHA financing on a foreclosure that has major repairs.
If the home is in good condition than there shouldn’t be an issue. The home needs to be safe, sound, and sanitary to be eligible..
If the home has major repairs, it may not pass the FHA inspection which is done during the appraisal process.
There is another option for foreclosures that have major repairs, it’s called an FHA 203k loan. An FHA 203k will allow you to borrow extra money to make the necessary repairs needed.
Can I buy a home that was flipped?
Yes, FHA does allow you to buy a home that is a flip but there are some rules. A certain amount of time has to pass before you can purchase the home. It’s called the “90 day flip rule”.
A property flip is a home that has been owned by the current owner for a short period and then sold for a sizable profit. If you watch HGTV “flip this house” or “fixer-upper”, than you know what we are talking about.
These types of homes usually can’t be sold to a buyer using an FHA loan, unless it meets the flipping rule.
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