If you're looking at getting an FHA loan, or even just purchasing within the upcoming year, you want to watch this video. I'm gonna cover everything you need to know about an FHA loan to see if it's the right option for you, or even better if it's not the right option for you. And there's another loan that would work to save you more money.
So really quickly, let's go through some highlights of this program. FHA is one of the easiest loans to qualify for, and it's not just for first-time home buyers.
You don't have to be a first-time home buyer, but a lot of first-time home buyers do use an FHA loan. And it's primarily because it has a lot of flexibility with the income that you can have.
It allows you to go up to a higher purchase price if you have a debt-to-income ratio, which we'll cover, and it's also very lenient with credit or for people who have some credit issues. So basically there are two different credit brackets.
If you have a 580 credit score and above, then you have a 3.5% minimum down payment. This is not the rate, this is the amount. Down. Okay. Now, if you have anywhere from a 500 to a 579 credit score, then you're going to need to put 10% down.
Now, FHA is best for lower to mid credited scores, so when you get to the 620 range, that's the minimum needed for a conventional loan. When you Now, FHA is best for lower to mid-credited scores, so when you get to the 620 range, that's the minimum needed for a conventional loan. When you start getting up to that point, you wanna also start looking at conventional as a second option.
Now, what people make the mistake here of doing is they hold onto their FHA loan for way too long. FHA to me is a loan that you use to be able to secure a home if you can't qualify for something like a conventional loan or another loan that might be cheaper for you monthly, and long-term.
So what you want to do is use an FHA loan to secure the. And then work on your credit or any other thing that you need to work on to refinance into cheaper debt, a cheaper mortgage, and this is what I call the bridge strategy when you do that.
So some quick pros and cons here. Number one is it's really easy. To qualify for an FHA loan, which is often why people kind of see it as a first-time home buyer loan, even though you don't have to be one, and you can still get something like a conventional loan as a first-time home Buyer also has a really low-interest rate. Often FHA rates are lower than conventional loan rates because of the mortgage insurance they carry, which I will talk about.
Also, you have the option of a low down payment, again, down to 3.5% as the minimum. Um, you also have some rehab options. This is really common, which I'll talk about, where maybe you found a home and it needs some work done, and you can get money from the FHA, what's called a 203k to go towards rehab work.
Then there are also some investing options, what a lot of people will call house hacking, where you might look at purchasing a multi-family home and use FHA to do that. So it's not for investors. You still have to live in the home. But people can use it in a way to help with a kind of investing.
So some cons here, it does have mortgage insurance monthly. That is expensive. There's also upfront mortgage insurance, and I'll cover both of those. The loan limits on these are a little bit low, so if you're looking at buying in, you know, the higher end of the range in your area, FHA, might not be the best for you. It does have strict appraisal requirements compared to something like a conventional loan, and then it's also not always super favored by sellers.
So FHA loans really are best for more buyers' markets where buyers have control compared to seller's markets.
So some big changes that we saw here. In the past year is number one, is the market is changing and FHA, it's becoming more accepted as we're switching from a super hot seller's market to, in a lot of areas, more neutral territory.
There are also some new loan limits and the Covid restrictions that were on FHA loans are relaxed for a lot of lenders.
Now again, we talked about the down payment here, 580 and above. You can do three and a half percent down. So if we're running through an example of a $425,000 home, that would be $14,875 as your down payment.
Now, if you have a 500 to 579 credit score, that's 10% down. It'd be $42,500 down. So you can see with FHA, it is possible to get this loan if you have less than a 580 credit score.
However, it's going to cost you that down payment. It's just because FHA views that as riskier to have a lower credit score. So they wanna see that you have a little more skin in the game. Now you can always put more down than the minimum. These are just the minimum down payments. If you want, you can put 20% down, 30% down your choice
Now FHA does work with a lot of down payment assistance programs. For instance, my company, we're licensed in all 50 states.
We work with what's called an Empowered Down Payment Assistance program. And this is a national grant, so it's forgivable at closing. So there's no second loan or hidden loan in there, like a lot of down payment assistance programs. So it can give you up to a 3.5% grant. There's a 620 minimum credit score, even though FHA went down to 500.
Using the down payment assistance does require that higher credit score. And then you have to have one of these options, either a first-time home buyer, be within an income limit in an underserved census tract, or current retired first responder educator, military personnel, civil servant, or military.
Then expect about a 1% higher interest rate when using down payment assistance programs.
Now, closing costs are going to be the same as every other type of loan with one big exception. And this is FHAs upfront mortgage insurance cost which I'm gonna cover here on a mortgage insurance slide in a second. With closing costs on FHA loans, you're gonna run into the same closing costs that you would on a Conventional loan, a VA loan, a USDA loan, or a Jumbo loan, they're all going to be extremely similar in their closing costs.
You're still gonna have to pay for things like any lender fees if they're charging any, an appraisal fee, title fees, recording. Also, homeowner's insurance and taxes, potentially HOA fees if you have those. If you're in an HOA as well.
Now we talked about down payment assistance, and this is where you can get help to pay your down payment. Again, usually, you do have a higher interest rate with that as well. So most of the time it's mathematically the best choice to pay your own down payment, especially with it only being 3.5% down. But down payment assistance is an option.
Another option that a lot of people don't consider is getting credit from the seller. So FHA allows you to actually negotiate for 6% up to 6% of the purchase price. Towards your closing costs. So what you can then do is basically when you write an offer, you can say, Hey, seller, you would do this with your real estate agent. Hey, could you give me x percent of the purchase price towards my closing costs?
So in this, let's say you had a $425,000 home, a down payment of 14,875, and let's estimate closing costs of around 6500. If you ask for 1% seller credit, so 1% of the purchase price, that would give you $4,250 to help pay down your closing costs. So the total due at closing would be just above $17,000.
Now keep in mind that this does make your offer less attractive because the seller doesn't always want to give up that money. So sometimes the strategy that people will do, Is if this was the asking price from the seller, they might bump this up by what they were asking for in the seller credit or maybe somewhere in between.
And really working with a good real estate agent can help you understand what's gonna work best in your market. For some people, they don't have to do this, and for others they do. If you'd like an agent referral, you can go to this link.
Now for credit score FHA, like most loans, is going to use your median credit score. So you're gonna have three credit scores. You're gonna have one with Equifax. One with Experian and one with TransUnion. So what we're gonna do then is we're going to cut out the high score and then cut out the low score, 647 would be the credit score for this, you know, a fictitious person here.
So there are different levels here with FHA 500 again as the minimum. 580 becomes more accepted by most lenders now not, but I would say most lenders don't allow down to 500.
In my company, we do go down to a 500 credit score on FHA and I'll cover what these overlays are in a big problem that people are running into when they have less than a 580. But 580 is more accepted by a lot of lenders.
640 is when you're gonna start getting a little bit better rates when you get to 640 and above on FHA.
Now, when you get up to the 680 credit score range. This is when conventional likely is going to start being a, probably a better option for you, or at least you wanna compare the two side by side.
There is no maximum on FHA credit scores, so you can have an 800 credit score and still get FHA. FHA really is the most lenient type or a major type of loan as far as credit.
Then if you are within 620 to 680 is when you also need to look at a conventional loan and get a quote for that. See if you can get approved for it. See if you can get a quote for it. That way you can compare it side by side with FHA.
Because I make these videos about FHA and talk about going down to a 500 credit score. The problem is not all lenders have the ability to do the bare minimum FHA guidelines.
What they'll do is they'll create their own rules. They'll stack a rule on top of a rule, and then that is called an Overlay. So even though in this video I mentioned the minimum is 500, some lenders will say, we won't do an FHA loan unless you have a 640 credit score. That's called an Overlay.
My company, we work nationally, and we go all the way down to a 500 credit score, and of course, it does still carry the 10% down until you get to 580 and it's three and a half percent.
Now, just because you're eligible in that credit score range doesn't mean you'll get approved. You still do have to go through the approval and process. The minimum credit score is just the general eligibility of the loan.
FHA does not care about medical collections. If you have a deed in lieu, foreclosure, or short sale, you have to wait three years from that transfer. If you have a Chapter 7 bankruptcy, you have to wait two years from the d. If you have a Chapter 13 bankruptcy, you have to have 12 on-time payments and court approval, or wait two-years from the discharge of that.
And if you have any IRS liens, you need three on-time payments. Those payments do have to be included in your debt-to-income ratio.
Now with FHA rates, again, as I mentioned before, they're often lower than conventional loans, because of the mortgage insurance carried on them. The rates are gonna be similar to USDA rates and VA rates do tend to be lower than all of those.
Also, it's either easier than conventional to get lender credits, and this is where you can ask the lender. Hey, could you actually increase my interest rate? That way I could get a credit towards closing costs. You can also do the opposite. Hey, could you lower my interest rate? And then you would pay money upfront for that lower interest rate.
You can get a Fixed-Loan and an ARM loan. Most people with FHA go with a fixed option. Again, this isn't something that I would expect you're gonna carry for 30 years, but 30 years is pretty common. 30-year fixed FHA loan. Also, you can do temporary and permanent buy downs to the interest rate as well.
And if you wanna see average interest rates throughout the US, you can go to Win the House You Love.
Now, here's the big scary thing about FHA loans is the mortgage insurance that they have. So FHA is really lenient with credit. it's really lenient with its debt-to-income ratio. The main issue here is you're paying for those benefits. You're paying for how lax it is in the mortgage insurance.
OOne of the offsetting things that people forget is even though that mortgage insurance is higher, the interest rate is lower, so that does offset it just a little bit. So there is actually two mortgage insurance that you have to have on FHA.
One is upfront. It is called an Upfront Mortgage Insurance Premium, and the second is a Mortgage Insurance Premium. And this is paid annually, divided into monthly installments. So the upfront mortgage insurance premium is 1.75 of the loan amount. And then it's added to the loan amount. So you're not gonna pay it out of pocket, it's gonna be included in your loan balance.
So for instance, if we look at the example, of a $300,000 loan, 1.75 is 5,250. So your new loan balance would be $305,250. So that's included. Now, this also will slightly increase your monthly payment just cuz your loan balance is a little bit bigger. You also then have the mortgage insurance premium, which is 0.85% of the loan balance then divided into monthly installments.
So, this would then be on a $300,000 loan, $212.50 per month. This will lower each year as the average loan balance decreases.
So some property requirements. Sometimes people can get a little scared of FHA because the property requirements tend to be a little on the stricter side.
So FHA is only for a primary residence, meaning you have to live in the home. It's not for investors. You can do a one to four-unit home. So two to four units are where you would live in one unit, you can rent out the rest.
You want somebody who can help you find an FHA-eligible property, who's familiar with the process, and who can help you negotiate with FHA because sometimes sellers can have a negative perception of FHA so you can get a realtor referral in all of the US.
Now house hacking, like I mentioned at the beginning of this video, is kind of where people will use an FHA loan as a way to use it, almost like an investment loan. Even though investment, strictly investment loans are not allowed.
So again, this is where you might look at a two to four-unit home, you. One unit and rent out the rest, you can use 75% of your rental income to help you qualify for this multi-family home.
There is something called a Self-sufficiency test. 70% of the future rental income must exceed the PITIA payment (usually at least 3 months reserves needed.
Then there is a move-up strategy. This is where you might buy a one-unit home and then you live in it for a year and then you move out and rent it out without having to refinance. You can also do that with a two to four-unit home as well.
So property condition is where people can get tripped up with an FHA loan because it's a government-backed loan. So they want the condition of the home to be kind of move and ready is really the goal with FHA.
So FHA is primarily concerned with the health and safety of the home. So they want structural soundness. Again, think move-in ready. And it's stricter than conventional because it's government insured. If the home does need work, there are rehab options that I'll cover here.
As I mentioned in the beginning. These changed for this upcoming year, so $472,030, the magical $30. In high-cost areas, this can go up to a maximum of just over a million dollars. This is on one unit. So then two units, three units, and four units do increase the loan limit there.
Now, as far as your income and affordability, you do need a two-year history of stable employment. It does not have to be at one specific job. It's ideal for it to be in a similar field if you are changing jobs. So retirement and school do count here. Really what they just wanna see is like, what's your history over the past two years and does it look like you can earn a stable income?
Again, if you're retired, that's fine. If you're on pension or social security, that works perfectly fine. If you're in school, maybe a trade school, a college, or even just getting out of high school, that does count here. As long as you have stability with your new job.
If you have a six-month gap in your work, you need to be six months on the job to be able to qualify.
Non-taxable income can be grossed up to 115%. So for instance, let's say you're on Social Security and it's $2,500. We would multiply that times 1.15 and we use $2,875 per month as your monthly gross income to help you qualify for the loan you want.
Sometimes people are like, Hey, I make $20,000 a month. Can I use an FHA loan? Yes, you can. Also, people say, I make $2,000 per month. Can I look at an FHA loan? Yes, you can. You just still have to be able to afford the monthly payment, but there are no minimum or maximum income limits. If you're self-employed, we'll need to take two years' average of your tax return income.
So lenders are gonna look at your gross, your pre-tax income like all loans do. And then the way that affordability is calculated is through what's called a front-end and a backend debt-to-income ratio. If you know these numbers here's what they are, but a lot of people don't really care about what these numbers look like.
I have a calculator that does all this for you, where you put in your income and your debts and it shows all the ratios. And helps you understand what you could afford with a max purchase price. I call it the Max Purchase Price Calculator. If you'd like to purchase that.
So not all people can be approved to the maximum of FHA. It's all gonna be based on your credit score and down payment and other risk factors of the
So not all people can be approved to the maximum of FHA. It's all gonna be based on your credit score and down payment and other risk factors of the loan. You can also do things with an FHA loan called a Manual Underwrite. And this is where you would be able to basically if the underwriting software doesn't initially approve you. A human can kind of go through and give you a review. However, it does decrease the maximum that you can afford.
So one thing to keep in mind is that if you are in a community property state if you do have a spouse, your spouse's debts have to be included in the debt-to-income ratio. That can decrease your affordability. If you are looking at purchasing in those states, even if they're not on the loan because of community property states, they view your spouse's debts as you know your debts as well. So it's something to keep in mind.
So FHA versus other loans is one of the four main types of loans that we have conventional. FHA, USDA, and VA are kind of the four main ones that most people use.
So, if you do have a 620 credit score, or 680, also look at getting a conventional quote too. Cuz 620 is the minimum conventional credit score.
Also, consider things like VA and USDA, VA is for veterans. And USDA is for rural areas based on population size. But those also go down to a 500 credit score and they allow actually zero down payment. Compared to FHAs, 3.5%. USDA and VA are government loans, so they're flexible as well and have very similar requirements to FHA.
Now, if you have student loans, FHA checks what's called the CAIVRS list. So if your student loans are in default, you need to be taken out of default. Before you can qualify for an FHA loan here. Now income-driven repayment is allowed, which is fantastic.
So let's say normally your student loan payment would be $300 per month, but you're on an Income-Driven Repayment of a hundred dollars per month, then we can use a hundred dollars per month in your debt-to-income ratio. That can help you qualify for more houses. However, if your payment is $0 per month or it's deferred, then FHA does require 0.5% of the balance to be included in the debt-to-income ratio. So for example, a $50,000 balance would be $250 per month in the debt-to-income ratio.
Now some rehab options, this is where FHA is really interesting because maybe you're looking at a home and it needs some work done.
You know, just purchasing it straight with FHA won't work because of its appraisal requirements. You can get either a 203K standard or a 203K limited. And the option here is really just gonna depend on how much you need. So what's the maximum or minimum that you need? The standard can cover structural repairs and the limited cannot include structural repairs. Okay. So then success rate and seller perception.
It's important to know this is less attractive than a conventional offer. So if you're competing against other home buyers and there are multiple offers on a home, if all those other offers are conventional and you had come in with an FHA loan, that can be less attractive to a seller. It's important to keep that in mind.
Because you can work with your real estate agent on how can you make your offers stand out in that instance. So as the market does cool, as it gets more to neutral territory and more buyer's market territory, FHA becomes more accepted. And then in the US, on average offers about 10% on FHA loans. Okay, so here's how you get one.
One schedule a free home loan consult with my team, we're licensed in all 50 states. Have a team of incredibly helpful loan officers. You can go to WintheHouseYouLove.com to get that started, what we'll do is we'll show you your FHA quote and your loan options.
From there, you can start to shop for a home. After you're looking at a home, you find one that you love. You can go ahead and write an offer, and then we'll help you close on that loan. Now there's so much more to learn about FHA loans. There are all these little tricks and nuances. I have an even more detailed video about in-depth FHA loan requirements right here.
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