FHA stands for Federal Housing Administration. The FHA loan is backed by the federal government, which provides mortgage insurance on all loans made by any FHA approved lender. FHA loans are generally easier to qualify for than conventional loans. This program was put in place to help first-time home buyers have a safe and secure loan option that they could qualify for.
FHA loan requirements:
- At least two years of steady employment
- A minimum credit score of 580 or higher. A no credit score program is also available.
- Borrowers must pay a minimum down payment of 3.5 %. The money can be gifted by a family member.
- The borrower’s credit score can be between 500 – 579 if a 10% down payment is made.
- Any previous bankruptcy must be at least two years old.
- Any prior foreclosures must be at least three years old.
- FHA loans are only available for primary residence occupancy.
- Borrowers must have a property appraisal from a FHA-approved appraiser.
FHA provides such low qualification standards that open the door for many home buyers that it makes you wonder if it is too good to be true; that there has to be a catch. With an FHA home loan – there are two kinds of mortgage insurance premiums. One is paid in full upfront (or financed into the mortgage) and the other is paid as a monthly payment. FHA loans also require the home to meet certain conditions and the appraisal must be conducted by an FHA-approved appraiser.
- Upfront Mortgage Insurance Premium (UFMIP) — This is the one-time, upfront payment required when using an FHA loan. This is at a rate of 1.75% of the home loan. So, if your FHA loan is for $250,000, then your UFMIP is is 1.75% of $250,000 ($250,000 x 1.75%) or $4,375. This premium can be paid upfront along with your other closing costs or it can be rolled into the mortgage payment.
- Annual Mortgage Insurance Premium (AMIP) — Although it is called an annual premium, this is actually a monthly charge that will be added into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s loan-to-value (LTV) ratio, the loan size, and the length of loan (see chart below).
|LOAN TERM||LOAN AMOUNT||LTV RATIO||AMIP|
|Over 15 Years||$625,000 or Less||95% or Less||0.80%|
|Over 15 Years||$625,000 or Less||Over 95%||0.85%|
|Over 15 Years||Over $625,000||95% or Less||1.0%|
|Over 15 Years||Over $625,000||Over 95%||1.05%|
|15 Years or Less||$625,000 or Less||90% or Less||0.45%|
|15 Years or Less||$625,000 or Less||Over 90%||0.70%|
|15 Years or Less||Over $625,000||90% or Less||0.70%|
|15 Years or Less||Over $625,000||Over 90%||0.95%|
Example: Consider a $300,000 FHA loan with a loan term of 30 years and a Loan-to-Value (LTV) of less than 95%. The Annual Mortgage Insurance Premium (AMIP) would be at a rate of 80% because the loan information meets the criteria of the first row in the above chart. To figure what that would be monthly, take $300,000 x 0.80% = $2,400. Then, divide $2,400 by 12 months = $200. So, the AMIP would be set as payments of $200 per month.
FHA Loan FAQs
- What is the maximum amount that can be financed through an FHA loan? The Federal Housing Authority (FHA) sets maximum mortgage limits for FHA loans that vary by state and county.
- Can any lender offer a FHA loan? The lender must be approved by the Federal Housing Authority in order to help you get an FHA loan.
- How are my closing costs covered? You can cover your own closing costs out of pocket. The FHA allows home sellers, builders, and lenders to pay some of the borrower’s closing costs. For example, a lender may be offer to pay closing costs as an incentive for the borrower to use their services. However, to make up for that loss, they may charge a higher rate for loans they pay closing costs on.
- Does the FHA loan provide any leniency during hardships? Loan servicers may offer relief to borrowers if they have suffered a serious financial hardship and are struggling to make their payments. It might be in the form of a temporary forbearance, a loan modification to lower the interest rate or extend the payback period, or a deferral of part of the loan balance with 0% interest.