Everything You Need To Know About FHA Loans

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1. What is an FHA Loan?

An FHA (Federal Housing Administration) loan is a mortgage insured program that allows borrowers the possibility of homeownership when other programs may not. FHA loans are a great way to turn the American Dream into a reality! Mortgage insurance will be paid by the borrower and while it may have a bad rap it’s what allows the FHA loan to be possible by protecting the lender from a loss if the borrower defaults on the loan.

2. How do I qualify for an FHA Loan?

Anyone can qualify for an FHA loan if the meet the FHA requirements.  Borrowers will need a 3.5% down payment and a credit score of 580 or higher OR a 10% down payment and a credit score above 500. The lower the credit score the more the borrower will pay in interest. FHA loan requirements are not as strict as other mortgage programs.

3. What are the FHA Loan requirements for buyers?

For buyers, an FHA loan is going to require a 3.5% - 10% down payment. It will also require you to pay mortgage insurance over the life of the loan which isn’t as bad as it sounds. You will also be required to have a credit score of over 500 (580 to qualify for the 3.5% down payment program).

4. What is the minimum credit score for FHA Loans?

The minimum credit score for FHA loans is 500 with 10% down payment and 580 with a 3.5% down payment. This means that people with bad credit can still afford a home! The lower your credit score the higher your interest rate will be. The FHA loan is a great loan for folks with low credit scores to be able to buy a home (albeit while paying a premium).

5. What is the difference between FHA and Conventional Loans?

There are several differences between FHA and Conventional loans. The main difference is that an FHA loan has a greater likelihood that people can qualify while conventional loans may be a bit more challenging. FHA loans require 3.5% down while Conventional loans require 5% down. FHA loans will have mortgage insurance over the life of the loan. Conventional loans require at least 20% equity in the home. Once you have paid down the mortgage balance to 80% of the home’s appraised value call the lender and ask them to cancel PMI. They are not required to remove PMI until the balance reaches 78%. That’s a big saving for you so make sure to call!

6. What is the maximum amount for FHA Loans?

The max amount of an FHA loan depends on what county you live in. The current limit in Los Angeles is $625,000.

7. Can closing costs be included in FHA loans?

In short, yes, your closing costs can be included in an FHA loan. There are specific sets of rules that apply to including closing costs in an FHA loan. You still need to bring a minimum 3.5% down payment. If the seller is paying part of your closing cost expenses another set of FHA rules kick in: “The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value of the buyer’s closing costs, prepaid expenses, discount points and other financing concessions."

8. Are there income limits for an FHA Loan?

No. There are no income limits or restrictions that prohibit you from qualifying for an FHA loan. As long as you meet the other FHA requirements and guidelines you have the opportunity to use an FHA loan to help when purchasing a home.

9. Can you use an FHA Loan for new construction?

Yes. You can use an FHA loan for new construction no matter if the home is to be built or is an inventory home ready for move-in. The same FHA requirements and guidelines will apply to this loan known as the ‘one-time close.’ The one-time close allows lenders flexibility to offer FHA loans to borrowers who want to build a new house, buy a manufactured or modular home. The FHA one-time close allows lenders to dictate what types of homes will be included in their one-time close guidelines.

10. Can I refinance an FHA Loan?

Yes. You can refinance an FHA loan to a conventional loan or even a different FHA loan. Refinancing an FHA mortgage to conventional loan makes sense when your goal is to remove the mortgage insurance from your FHA loan. In some cases, especially when you intend to own the home for a long time, refinancing an FHA loan can make sense. There is a large cost to refinancing though! 

11. Can I use an FHA Loan after bankruptcy?

Borrowers are typically ineligible for an FHA loan after Chapter 7 bankruptcy until two years have passed. There are times when a medical emergency or a death to a spouse, or any other life-altering event can cut the wait time down to one year. It takes three years for an FHA loan if you had a foreclosure, short sale or deed in lieu of foreclosure.