A Guide to FHA Loans for Homebuyers

Buying a home is one of life’s biggest purchases. It’s very exciting but requires a huge financial decision. You’ll want to think past home price and about the right mortgage to finance your home. Here, we’re highlighting FHA Loans. We’ll break down what FHA loans are, their benefits, eligibility requirements, and how to apply. 

What is an FHA Loan? 

FHA Loans are government-backed mortgages that carry different requirements than non-government loans, which are referred to as Conventional. These loans are specifically designed to make housing more accessible and affordable for a large population of people, which means the requirements are more lenient than most types of Conventional loans. But this doesn’t mean they’re best for everyone. Let’s consider the pros and cons of FHA Loans. 

Benefits of FHA Loans

• Lower Down Payments: FHA Loans allow for down payments as low as 3.5%, compared to the 5-20% typically required for conventional loans.
• Flexible Credit Requirements: Borrowers with credit scores below 700 typically start to see the advantages of going with an FHA Loan over Conventional Loans, which become more expensive with lower scores. In addition, credit blemishes like bankruptcy or foreclosures are less of an obstacle to obtaining an FHA Loan than a Conventional one. 
• Lower Interest Rates: Government-backed loans pose less risk to lenders. In turn, lenders pass down the savings on mitigating risk to borrowers in the form of a lower interest rate. 
• Higher DTI Ratio Allowance: Your DTI ratio is a percentage that expresses your income in relation to your monthly debts. FHA loans allow for a higher DTI ratio, meaning borrowers with more existing debt may qualify.
• Assumable Loans: If you sell your home, an FHA loan can be transferred to the buyer, potentially making your home more attractive to future buyers.

Disadvantages of FHA Loans

• Loan Limitations: The FHA evaluates limits every year on how much a buyer can borrow on a single purchase. This varies by region, allowing higher priced areas higher limits, and increases with the number of units the property has. 
• Not the Lowest Down Payment: There are two Conventional options that allow a 3% down payment. However, these programs come with an income limitation, making FHA Loans the lowest down payment option for borrowers above 80% of the area median income. 

• Condo and Townhome Restrictions: Not all homeowners associations accept FHA financing for their units, limiting your options if you are searching for a condo or townhouse. 
• Mortgage Insurance Premiums: Any loan on which you put less than 20% down will require a form of mortgage insurance. For FHA Loans, though, MIPs are slightly higher and come with the downside of not being able to be cancelled for a set amount of time. 

Eligibility Requirements

Lenders evaluate a variety of factors when underwriting any loan. There are some requirements, however, that are specific to FHA Loans. 

• Primary Residence Requirement: FHA loans are only available for primary residences, not investment properties or vacation homes.
• Duration of Residency: FHA Loans cannot be used to purchase and flip houses. They are designed for borrowers to live in the home for at least one year, and not for the express purpose of turning a profit.  
• Property Standards: The home must meet specific FHA appraisal guidelines to ensure it is safe, secure, and structurally sound.

How to Apply

If you’re interested in an FHA loan, follow these steps:

• Check Your Finances: Before applying, review your finances and determine how much you can afford for a down payment.
• Complete the FHA Loan Application: Your Mortgage Banker will guide you through the application process, including providing necessary documents like pay stubs, tax returns, and bank statements.
• Get Pre-Approved: A pre-approval letter from a UHL Mortgage Banker will give you a better idea of how much you can borrow and make you a more attractive buyer.
• Find a Home & Make an Offer: Once pre-approved, work with a real estate agent to find a home that meets FHA guidelines.
• Home Appraisal & Underwriting: The lender will order an FHA appraisal to ensure the home meets standards, and underwriters will review your financials.

Once approved, you’ll finalize the loan, sign paperwork, and get the keys to your new home!

Is an FHA Loan Right for You?

If you are trying to find a low-down payment option or want to see if you qualify for a mortgage with less than perfect credit, investigating FHA Loans is a great idea. This fairly comprehensive guide is a good start but it’s best to get personalized advice. Reach out an talk to one of our local mortgage bankers in the Nashville and Chicago markets.