If you’re looking to buy a home or refinance your current one, an FHA loan can be a good deal for a number of reasons. The low down payment option and more flexible credit guidelines can be very attractive if you’re in the right situation.
Let’s go over the benefits and guidelines for getting an FHA loan so you decide whether it’s the right loan product for you.
Credit Score for FHA Loan
The credit score necessary to get an FHA loan depends on what you’re using the loan for. If you’re looking to ge a home or do a rate/term refinance on your existing loan, you can qualify with a median FICO Score of 580 or higher. It’s important to note that if you try to qualify with a credit score on the lower end of this range, you also have to have a low debt-to-income ratio (DTI). DTI is a ratio of your monthly expenses compared to your monthly income. This can be measured two ways: one the front end – before the mortgage payment is taken into account – and on the back end, after the potential mortgage payment is added.
In order to be approved with a 580 FICO score, you need a median FICO score of 620 0r higher. With a higher credit score, you’re able to have higher DTI levels. This could enable you to purchase more house because your higher credit score shows FHA that you’re a well-qualified buyer.
These are the 2019 FHA loan credit requirements, but these guidelines can change, and other lenders may have their own standards.
Buying a Home with FHA
If you’re getting an FHA loan to purchase a home, you can have a low down payment in addition to the credit advantages mentioned above. You need a down payment of only 3.5% in order to qualify.
If you’re getting the down payment as a gift from someone, you don’t have to contribute any of your own funds. Additionally, if you’re buying the primary residence of a relative, fiancé or domestic partner, the down payment can be in the form of a 3.5% gift of equity. A gift of equity is a discount on the sales price given to immediate family.
Rate/Term Refinance and FHA Streamline
You can also use an FHA loan to lower your rate or change your mortgage term in a refinance. This could enable you to lower your mortgage payment or pay off your home faster.
If you have an existing FHA loan that you’re refinancing, you may be able to take advantage of an FHA streamline. This could enable you to refinance while also requiring less documentation, which could help avoid some of the hassle of finding paperwork.
An additional benefit of the FHA streamline is that while most loans require a certain amount of equity in order to lower your rate or change your term, you may be able to refinance even if you owe more than your home is worth.
Finally, the streamline options allows you to take advantage of lower up-front and annual mortgage insurance premiums (MIP).
FHA Cash-Out Refi
When getting an FHA loan, you can convert more of your existing equity into cash than you would be able to with a cash-out refi under many other options.
With an FHA loan, you can take cash out while leaving as little as 15% equity remaining in your home. That translates to more money to pay off high-interest credit card debt, boost a college or retirement fund, or make home improvements.
You’ll Pay Mortgage Insurance
The first thing to be aware of with an FHA loan is that you’ll have both up-front and annual MIP. The mortgage insurance helps compensate for the lower credit score requirements and helps compensate the FHA if you default on your loan.
MIP rates are set by the federal government. If you were to take out a loan today, the up-front premium would be 1.75% of the loan amount. This up-front premium can be rolled into the loan amount if necessary.
YOu’ll also have an annual premium split into 12 equal monthly payments. The percentage for this depends on the size of your down payment, but if you make the minimum 3.5% up-front investment, the annual rate is 0.85% of the loan amount if you have a mortgage term greater than 15 years and a loan amount of $625,500 or less.
If you make a down payment of less than 10%, mortgage insurance remains for the life of the loan. If you make a down payment of more than 10%, you pay it for 11 years. One thing to note is that if you have s FICO score of 620 or higher by the time you get to 20% equity in you loan, you can refinance into a conventional option and never pay for mortgage insurance again on that home.
There’s also an advantage with FHA streamlines here. When you refinance one FHA loan into another under the streamline, the up-front premium is 0.1% of the loan amount and the annual premium is 0.55%.
FHA Appraisals
FHA has its own special appraisal requirements that are slightly different from those for other mortgage loans. An appraiser’s job is to place a value on the home but also make sure the house is safe and move-in ready.
Most of the requirements are pretty standard and apply to any appraisal. For example, the electricity has to be on, and the water has to be running. There can’t be structural defects like exposed floorboards or holes in the roof.
What sets an FHA loan apart is if you have a house built before January 1, 1979. If the house has lead paint, anything that’s chipping will need to be dealt with due to the risk of leading poisoning.
