FHA Loan facts to know about one out of every eight homes sold each year. For decades, it’s been popular with first-time buyers because it was the first significant source of low down payment loans. First-time buyers can choose from thousands of low down payment loans. Yet FHA remains the most popular gateway to home ownership with 3.5% down.
Myths about FHA single-family loans confuse many new buyers. FHA loans are not restricted to lower-income buyers, nor to first-time buyers. They are available in every state and have no income or age requirements.
Here are some facts about FHA.
FHA’s “life of the loan” policy on mortgage insurance is one of its most unpopular features. Many first-time buyers shy away from FHA when they learn that FHA requires them to keep their FHA mortgage insurance as long as they have an FHA mortgage.
Borrowers with conventional loans and private mortgage insurance (PMI) can drop their mortgage insurance once they have accumulated 20 percent equity in their homes. Equity grows with increases in value and paying down the loan principal.
FHA borrowers can get out of an FHA mortgage by refinancing into a conventional mortgage. To refinance an FHA loan, you must wait at least 210 days after your FHA mortgage clears or have six months of on-time payments before applying.
You can qualify for an FHA mortgage only two years after a bankruptcy and three years after a foreclosure.
FHA is more lenient than many conventional lenders on giving qualified borrowers a second chance after foreclosures and bankruptcies. After a foreclosure, a former owner must wait at least three years. If the foreclosure also involved an FHA loan, the three-year waiting period starts from the date that FHA paid the prior lender on its claim. On the other hand, former owners who defaulted on conventional loans can wait just as long before they can qualify for a mortgage.
To qualify for conventional financing after a Chapter 7 bankruptcy, borrowers will often need to wait four years. Filing for Chapter 13 bankruptcy can take as long as five years but a borrower can get an FHA loan with court approval, and after making 12 months of payments on time under their bankruptcy plan.
You can get an FHA mortgage with a much lower credit score than a conventional mortgage.
Borrowers with credit scores as low as 580 can qualify for FHA financing with 3.5 percent down. Scores between 500 and 580 can be eligible for mortgages with 10 percent down, of course these lower credit scores can require additional guidelines to qualify for the loan.
FHA loans usually have lower interest rates than conventional loans.
There’s no guarantee that FHA-approved lenders will give you a better rate on an FHA loan than a conventional one, but they usually do.
However, credit scores have a more significant impact on the rates that a borrower pays than the difference between FHA and conventional rates. FHA borrowers with credit scores of 660 will often qualify for the same interest rate as would conventional borrowers with a score of 740, according to Carla Blair-Gamblian, a home loan consultant for Veterans United Home Loans.
FHA is not for everyone. Investment properties, second homes and higher-end homes don’t qualify.
FHA will not finance second homes, vacation homes, investment properties. Properties must be primary residences where owners live for the majority of the year. The FHA requires that a buyer moves into the property within 60 days of closing.
The current (2019) limits for FHA debt-to-income ratios meaning what you make in income after you pay your monthly debts are 31 percent for housing-related debt (mortgage, property taxes), and 43 percent for total debt or less.
Last year, FHA tightened the way it treats student loan debt. Before applying for a mortgage, many student loan debtors defer payments on their student loan debt for three years. Now, FHA requires that one percent of that debt be included in your DTI (Debt to Income) calculation.
If you have a good credit score, you will pay more for FHA mortgage insurance than private mortgage insurance.
A study last year by the Urban Institute found that borrowers with better credit scores are better off with a conventional mortgage than FHA.
Borrowers with credit scores below 640 will pay $266 a month more for PMI than FHA insurance while borrowers with PMI and an excellent score over 760 will pay at least $69 a month less.