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Issued by a FHA direct endorsement, an FHA loan allows borrowers with lower credit scores and/or limited assets to obtain a mortgage. These loans are insured by the Federal Housing Administration.
FHA loans tend to come with low minimum down payment options and are available to those with lower credit scores.
Down Payments
Current FHA loan guidelines allow you the option to borrow up to 96.5% of the value/price of the house you want to purchase, which means you need a down payment equal to 3.5% of the lesser of the value or price of the house.
To find your down payment, find out how much of a loan amount you can afford, then multiply that amount by 3.5%. Once you determine your down payment amount then divide by the number of months you want to save for your down payment. For example, if the home value/price is $100,000, your down payment would be $3,500 at a 3.5% down payment ($100,000 x 3.5%). Over a 12-month period, you’d need to save $291.67 each month to purchase your home ($3,500 ÷ 12 months).
Another way to fund your down payment is to get it as a gift from a family member, a charitable organization, a government agency offering down payment assistance, and/or a close friend (with a clearly defined and documented interest). Sometimes, parents want to gift their children with their first home’s down payment, so ask your family if they would like to provide you a gift to assist in your home purchase.
Credit Scores
Although you can get an FHA loan with a low credit score, you’ll need a score of 600 or better to qualify. On occasion, those with a credit score as low as 580 can still qualify for an FHA loan, subject to certain requirements.
If you have filed Chapter 7 Bankruptcy, you may be eligible for an FHA loan once the bankruptcy has been discharged for two years. If you filed a Chapter 13 Bankruptcy, you may be eligible once you have paid 12 on-time payments into the Chapter 13 and with court approval to obtain a new loan.
Your loan officer can work with you to help you determine your mortgage credit score.
Understanding FHA Loans
FHA loans work a little different than traditional loans. When you get an FHA loan, the Federal Housing Administration is not lending you the money. Instead, this entity is simply insuring the loan. FHA charges a financeable upfront premium and a monthly amount in your payment. The loan will actually come from an FHA-approved lender.
Once you are approved and closed, your loan will be guaranteed by the Federal Housing Administration and you pay for this guarantee within your mortgage insurance premium. This situation helps lenders because they have less risk in the event you cannot make your monthly payments – though this should never be a reason to not pay each month.
Mortgage Insurance Premium
With an FHA loan, you pay two different types of mortgage insurance premiums.
Upfront Mortgage Insurance Premium
One type comes in the form of an Upfront Mortgage Insurance Premium. The second one is charged on a monthly basis and is included in your regular monthly payment.
The Upfront Mortgage Insurance Premium is equal to 1.75% of the base loan amount. This fee is generally financed in the loan. However, you or your seller may choose to pay this premium when you close on the house rather than financing it into the loan amount.
For example: If your base loan amount is $96,500, your Upfront Mortgage Insurance Premium would be $1,688. Your total loan amount will be $98,188 used to calculate your monthly principal and interest portion of your payment.
Monthly Mortgage Insurance Premium (MIP)
The MIP payments are paid on a monthly basis from your normal monthly mortgage payment. The MIP ranges from 0.45% to 1.05% of your base loan amount. The amount of MIP required for your loan is based on your loan amount, how long the loan is set up to be paid (term), as well as the original loan-to-value ratio.
If you pay the minimum down payment of 3.5%, you will pay the MIP for the life of the loan. For a $100,000 loan at 96.5% LTV, that is set up to be paid for 30 years, the Annual MIP cost is 0.85% of the loan amount and these payments are paid for the life of the loan.
But if you increase that down payment to 10%, the MIP will end after 11 years. For a $100,000 loan at 90% LTV, that is set up to be paid for 30 years, the MIP cost is 0.80% of the loan amount and these payments will end after 11 years.
Final Thoughts
Important to note is that the maximum amount you can borrow through an FHA loan is determined by the loan limit for the county where the new home is located.
FHA loans are widely used throughout the southeast and they may become your path to homeownership! Want to learn more about getting an FHA loan? Contact Mortgage Investors Group today.
Based on base loan amount of $96,500 and loan amount of $98,188, down payment $3,500, monthly P&I and PMI $515.56, 30 year fixed, Interest Rate 3.625%, APR 4.77%. Monthly payment does not include taxes or insurance.
