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FHA Loan

Chances are you're buying your first home and stumbled upon FHA loan or you heard someone speaking about FHA right ? What is it?

FHA loan is a Federal Housing Administration insured mortgage allowing you to place as little as 3.5% downpayment to buy a property. FHA is a mortgage design to offer home affordability by putting very little down payment in order to own a property. 

Certain requirements must be met, lets dig in.

Why would I need an FHA loan?

  Picture this; you just graduated college, started working 3 months  ago, have little to no savings in your bank account, student loan companies knocking on your door, you just had a kid AND you want to buy a house. Seems impossible right? Not really. Here comes the FHA loan. Lenders (Fancy names for Banks) are willing to give you the FHA loan and in more favorable terms since it is backed by the Federal government. 

Owning real estate is almost always a good idea for tax purposes and appreciation, FHA allows you to put your foot in the door of homeownership. 

FHA will allow people that do not have enough cash reserves (20% downpayment for a conventional loan) to be able to own a home. 

Requirements-

  FICO is the famously known "credit score", you can check your credit score here, up to April 2021 you will be able to check it for free from the three major credit reporting agencies (experian, transunion and equifax). 

 FICO score 580 or higher - 3.5% downpayment. 

  - FICO 500-579 - 10% downpayment

  - PMI (premium Mortgage insurance) is required. This is a type of insurance to cover the mortgage payments in case the homeowner defaults (does not pay the mortgage).

  - Debt to Income ratio - more than 43% (Calculate by adding up all your monthly Debt payments and divide it by the gross monthly income (gross monthly income is your income BEFORE taxes are taken out). 

  - Must be the primary residence. 

  - Proof of steady job/employment. 

  - Property will need to be an FHA approved property - this is to make sure the property is safe and in an acceptable condition to live in. This will most likely require a separate appraisal from the home inspection. 

Price Limits-

  There are limits to the price of the property you can buy with an FHA loan. 

FHA Loans limits for 2020 range from $331,760 - $765,600. The limits will depend wether you are on a low cost county or a high cost county, this is determined by the HUD FHA limit calculator (click here)

What next ?

  If you think you qualify, start shopping around the different Banks interest rates. Once you identify a few options get all your papers together and get pre approved with the bank you have chosen.

Pre approving a Mortgage will take a few days but will give you an advantage over other bidders when you see a property you like and want to make an offer. 

Thoughts about the FHA loan-

  The FHA loan is a great loan to buy a property when you do not have savings to put a 20% down as conventional loans require (my exact situation a few years ago).  That being said, the PMI (which is a requirement for FHA loans) will carry on the life of the loan, this means between $200-$400 a month just on this (so plan ahead).  What I did a few years ago was I refinanced to a conventional loan once the property had some equity in it and took out the PMI. This because there was equity in the property, meaning the house had risen in value, the conditions were perfect for a conventional loan. This not only took out the PMI but also lowered my interest rate from the lender therefore lowering my monthly payments.

 

Any questions or comments feel free to contact me or leave a message.

 

Till next time,

 

JL 

Disclaimer - This blog is meant purely for educational discussion of finance. It contains only general information about financial matters. It is not financial advice, should not be treated as such.

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