FHA loans are a popular choice for first-time homebuyers, especially those with limited resources or who may have difficulty qualifying for a conventional mortgage. But FHA loans have important differences that you should be aware of before you apply.
Here’s a quick overview of FHA loans and what you need to know as a borrower.
What Is an FHA Loan?
FHA loans are mortgage loans that are insured by the Federal Housing Administration. The FHA does not lend money directly to borrowers; instead, it insures loans made by private lenders.
If a borrower defaults on an FHA-insured loan, the FHA pays the lender a specified claim amount. In return for this protection, lenders are willing to make loans to borrowers that might not otherwise qualify for a conventional mortgage.
FHA loans are available to all types of borrowers, including first-time homebuyers and those who have previously filed for bankruptcy. However, there are some restrictions. For example, FHA loans are not available for investment properties.
Can You Get an FHA Loan More than Once?
If you want to get an FHA loan more than once, you’ll need to meet the program’s eligibility requirements each time.
The most important requirement is that you must have a good reason for taking out another FHA loan. The FHA does not allow borrowers to take out multiple loans for the purpose of speculation or flipping properties.
Some legitimate reasons for taking out another FHA loan include:
- You want to buy a larger home
- You want to refinance your existing FHA loan into a lower interest rate
- You want to buy a home in a different location
- You want to convert your FHA loan into a conventional loan
What Are the Requirements to Get an FHA Loan?
1. Good Debt-To-Income Ratio
One of the most important requirements for an FHA loan is having a good debt-to-income (DTI) ratio. This is a measure of your monthly debt payments compared to your monthly income. For example, if your monthly income is $3,000 and you have $300 in monthly debt payments, your DTI ratio would be 10%.
DTI ratios above 43% are generally not eligible for FHA loans unless there are extenuating circumstances. If your DTI ratio is below 43%, you may still be eligible for an FHA loan, but you’ll likely need a higher credit score and down payment to qualify.
2. Credit Score
Your credit score is another important factor in determining whether you’ll qualify for an FHA loan. In general, you’ll need a credit score of 580 or higher to qualify for an FHA loan. However, if your credit score is between 500 and 579, you may still be eligible for an FHA loan, but you’ll need a larger down payment.
3. Down Payment
For most FHA loans, you’ll need a down payment of 3.5% of the home’s purchase price. However, if your credit score is 580 or higher, you may be eligible for a reduced down payment of just 3.0%.
4. Mortgage Insurance
All FHA loans require the borrower to pay mortgage insurance. This is to protect the lender in case you default on the loan. Mortgage insurance is paid in two ways: upfront at closing and as an annual premium.
The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount and is typically added to your loan balance. The annual premium is paid in monthly installments and is based on your loan amount, loan-to-value ratio, and length of the loan.
FHA loans can be a great option for first-time homebuyers, but there are some important things to know about before applying. Make sure you understand the requirements and work with a lender who can help you get the best loan possible.
If you are looking for a home loan, Total Lending Concepts can help you. We offer home loans for all types of buyers — FHA loans, VA loans, and other options. Book an appointment with us to find the best option for you.