Because they are government-backed, Federal Housing Administration (FHA) home loans have attractive interest rates and less stringent qualifications. Loan applicants must meet credit-score and down-payment requirements, and show proof of employment and a steady income. An appraisal of the home by an FHA-approved appraiser is also required. Following are six features of FHA loans first-time homebuyers should consider while weighing their financing options.
1. Flexible guidelines give more purchasing power
- Low Down Payment - as little as 3.5% down
- 100% gift allowable for down payment
- Lower credit requirements. 580 minimum FICO credit score.
- Competitive market rates
- No income restrictions
- Limited tradelines needed
- Higher debt-to-income ratios approval
- Shorter waiting period for major credit events like bankruptcy
2. FHA loans are transferable to potential buyers
This means that a home buyer who finances a purchase with an FHA-insured loan and who sells the house later, when interest rates are higher, will be able to offer a potential buyer the right to assume his or her low-rate FHA loan. In the current raising interest rate environment this is a huge advantage to FHA loans versus conventional loans.
3. Borrow cash for home repairs with FHA 203(k)
- Full and Streamline programs
- Repairs and improvements vary based on program
- Low down payment
- 640 credit score
- Owner occupied only
- All rehab work must be completed by licensed and insure contractors
- FHA/HUD consultant oversees project to protect borrower
4. Qualifying FHA Property Types
- 1-4 unit properties
- FHA approved condominiums (two types): 1. HUD Review Approval Process (HRAP) . 2. Direct Endorsement Approval Process (DELRAP): Some lenders offer the DELRAP method, which is an "in-house" underwriting department that can review and approve FHA condo projects which means faster turn times. Click here to VIEW FHA APPROVED CONDO PROJECTS.
- Planned Unit Development (PUDs): These are a community of homes that could look like single family residences, townhomes or condos, and can include both residential and commercial units, but they’re most similar to condos.
- Modular homes
- New construction
5. FHA Back to Work Program
- Available to borrowers who suffered financial hardship due to reduced income or job loss
- Shortens the waiting period to obtain FHA financing to as little as one year after bankruptcy, foreclosure, deed in lieu of foreclosure or short sale.
- Must meet FHA loan requirements
- Mortgage or credit problems that resulted from a financial hardship must be documented
- Client must have re-established a responsible credit history for a period of 12 months prior to application
- Client must complete HUD-approved housing counseling 30 days prior to loan application
6. Two types of mortgage insurance premiums to pay
- Upfront premium: 0.75% of the loan amount, paid when the borrower gets the loan which can be rolled into the financed loan amount.
- Annual premium: 0.45% to 1.05%, depending on the loan term (15 years vs. 30 years), the loan amount, and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.
FHA and Conventional Loan Feature Comparison
