FHA (Federal Housing Administration) Loans*
Due to their relatively low down payment and less strict underwriting guidelines compared to Conventional Loans, FHA* mortgages are a very popular loan product. But they are not for everyone. Here is some program information to make your loan decision a little easier.
FHA* Mortgages At a Glance
There are many types of home mortgage loans out there. For first-time buyers as well as those who have had some financial trouble in their past, qualifying for home loans with favorable terms can be challenging. FHA (Federal Housing Administration) loans* were developed for this very reason. The pros and cons of an FHA loan* follow.
To find out if you are eligible for an FHA loan*, or to get more information about FHA loans* in general, contact an FHA loan* specialist today.
|Minimum Down Payment:||3.50%*|
|Terms (Years)||30, 25, 20, 15 Fixed and Adjustable*|
|Gift Funds Allowed||Yes|
|Eligible Homes||Single & Multi-Family, Manufactured, Condo|
|Seller Paid Closing Costs||Up to 6% of the Sales Price*|
|Loan Limits||Varies by County (Shasta County $271,050)*|
|MaxDTI||31/43% (Higher DTI’s May Be Allowed In Some Cases)|
|Minimum Credit Score||FHA None (Most Lenders Require 600+)|
|Availability||All US States, Owner Occupied|
*Other restrictions and guidelines apply. Please contact lender for full program details.
What is an FHA Loan*?
FHA loans* are home mortgage loans insured by the federal government. Because it’s less risky for lenders to provide borrowers with FHA loans* (since they are insured by the government), it’s easier for borrowers to qualify for them compared to traditional home mortgage loans. The terms are generally more favorable as well, even for borrowers with less than stellar credit scores.
Who are FHA Loans* Best For?
Lenders are very careful approving loans to borrowers. They judge a borrower’s ability to pay and financial responsibility by looking at their credit history, credit score, employment, and debt-to-income ratio. Borrowers who have had some financial issues in the past from unpaid debts or bankruptcies often have difficulties securing a mortgage or finding favorable terms even if they are currently financially secure and capable.
Since FHA loans* are federally insured, such borrowers will have a much easier time being approved. Younger borrowers who may have secure employment but lack a substantial credit history can take advantage of FHA loans*. An FHA loan* can also be a good option for borrowers who don’t have the funds for a large down payment.
Unique Details of an FHA Loan*
The following are some of the unique details that make an FHA loan* worth looking into for many borrowers.
Example FHA*: Loan amount $300,000, 3.5% down, APR 5.395%
Monthly payment without taxes & insurance: $1,501.74, FHA monthly MI: $211.00.*
Although FHA loan* mortgage rates are comparatively lower than traditional loan rates, they do depend on a variety of factors, including the borrower’s credit score, the length of the loan period, the amount of the loan, and more.
FHA borrowers can choose loan terms from 15, 20, 25, and 30-years.
Borrowers who take out an FHA loan* aren’t limited to just the FHA loan*. They can make use of other programs, including city, county, and state programs (as well as energy-efficient mortgage options) available to them in conjunction with their FHA loan.*
Conventional loans often require as much as 20 percent of the home’s price upfront as a down payment. And conventional loans often have limitations imposed on how that down payment can be paid for. But FHA loans* can require as little as 3.5 percent of the price as a down payment, the full amount of which can be paid using money gifted by the borrower’s family, employer group, labor union, or other approved sources.
A fixed-rate loan locks in the interest rate, meaning it will remain unchanged throughout the duration of the loan term. An adjustable-rate mortgage may start out very low at the closing of the loan, but may rise or fall from one month to the next depending on market conditions throughout the term of the loan.*
Refinancing allows borrowers to potentially lock into a lower interest rate, change from an adjustable-rate to a fixed rate, or either reduce or increase the length of their loan term. Borrowers with existing FHA* mortgages can refinance their loan through FHA* Streamline Refinances. Refinancing an FHA* mortgage tends to be easier since they will remain insured by the federal government. To refinance, borrowers need an existing FHA loan*, be current on their payments, and have a valid reason for refinancing. However, borrowers cannot take out more than $500 in cash when they refinance through the FHA* Streamline Refinances program.
Because the cost of living varies greatly throughout the state of California, FHA* maximum loan limits vary from one county to the next. For example, the maximum loan amount allowed will be more in places like San Francisco and Los Angeles than it would be in smaller towns in Northern California due to the difference in property values.
Maximum Loan Amounts
The amount of an FHA loan* is limited based on where in California the borrower resides. Homebuyers should look up the county in which they plan to live to identify what the FHA loan* limits are. The size of the home being purchased (such as whether it’s a single-family home, duplex, tri-plex, or four-plex) has some bearing on the maximum loan amounts as well.
FHA* Loans and Mortgage Insurance
Due to the low down payment requirements, mortgage insurance is required. Mortgage insurance of 1.75 percent is required upfront but is added to the loan amount. Following that initial payment, borrowers will have to pay a monthly mortgage insurance rate of 1.25 percent*.
FHA Loan* Requirements in California
Although FHA* loans are much easier to qualify for than traditional home mortgages, there are still a number of requirements that must be met for borrowers to eligible. These requirements include the following:
Lenders often look at a borrower’s income to determine if they can afford monthly mortgage payments. However, because FHA* loans are federally backed, there are no income restrictions to qualify for an FHA loan.
Technically, there are no minimum FICO requirements set in place by the FHA loan program, which means borrowers with bad credit can still be eligible. However, most lenders will impose their own FICO requirements, which typically require a credit score of at least 600 or above.
While there are no established FICO requirements, borrowers who have a credit score under 579 will be required to pay a 10 percent down payment instead of a 3.5 percent down payment.*
To qualify for an FHA loan*, the borrower must move into the house within 60 days of purchase and must live on that property full time for at least one year.
Unlike many other specialized home loan programs, the borrower does not need to be a first-time homebuyer to qualify for an FHA loan. This means that they can still qualify if they were a previous homeowner.
With traditional home mortgages, the bigger the risk a borrower is deemed to be, the more reserves are required. FHA loans* do not require any reserves for 1 to 2-unit properties.
Other FAQ’s About FHA*
Here is some more helpful information concerning FHA loans in California:
The down payment isn’t due until closing; however, the homebuyer will need to have access to it beforehand so that the lender can verify that it came from an approved source.
If no FICO is available, the borrower can use non-traditional credit, such as their telephone and PG&E (Pacific Gas & Electric) payment histories. Their rates and fees will generally be higher as a result.
If a property is located in a declining market, lenders often require additional data and analysis by the assigned appraiser. However, the FHA* does not observe declining markets, which means the appraisal of the home will be evaluated without being affected by the changing status of the area’s housing market.
Although conventional loans are not assumable, FHA loans* are. This means if the buyer uses an FHA* loan to purchase their house and decides to sell it later, potential buyers have the right to assume the seller’s low-rate FHA* loan.
The maximum seller concession refers to the amount of closing costs a seller can pay for. FHA loans have a maximum seller concession of 6 percent, which is well above the typical closing cost amount (generally between 2 and 5 percent).*