FHA loans explained: What they are and when to use them

This content is sponsored by PenFed Credit Union, federally insured by NCUA.

Looking to buy a new home? There are many different mortgage options available to you – among them are FHA loans.

Federal Housing Administration (FHA) loans are backed by the U.S government so lenders can offer better deals, said the U.S. Department of Housing and Urban Development. With FHA loans, interest rates are low, and you only need a 3.5% down payment, the experts at PenFed Credit Union said.

“FHA loans have less stringent credit guidelines compared to conventional mortgages. First-time homebuyers tend to choose this type of loan because it’s easier to qualify for,” PenFed Credit Union said.

In fact, according to FHA’s 2020 Annual Report, more than 83 percent of all FHA loan originations were for borrowers purchasing their first homes.

With these types of loans, FHA only insures the loan — they don’t lend the money. To get an FHA loan, you have to go to an approved lender, PenFed noted.

With an FHA fixed-rate mortgage, your interest rate will remain the same during the term of the loan, which makes budgeting much easier. The only time your monthly payment will change is if your property taxes or insurance does.

FHA loans are good options for borrowers who have lower credit scores, don’t have a 20% down payment and are looking for a lower- or medium-priced home.

But borrowers must pay FHA mortgage insurance, which is designed to protect the lender from a loss if the borrower defaults. FHA’s mortgage insurance premiums can be reduced to 11 years if at least a 10% down payment is made at the time of purchase,. Also, there is a one-time upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, PenFed Credit Union said.

Generally, FHA loans are easier to get from the borrower qualifications standpoint. Credit score is just one of the big qualifications, PenFed Credit Union pointed out. You typically need a credit score of 620 or higher; some lenders will go as low as 580.

The ratio of the mortgage payment to gross income (before taxes) and the ratio of debt-to-income are also important. The mortgage payment-to-gross income ratio can’t exceed 31%; the debt-to-income ratio can’t exceed 43%, and includes your housing costs and recurring bills like credit cards and car loans.

FHA funding is only for owner occupied properties. You can’t use FHA funding to buy a second home, a vacation home, or investment properties, PenFed said. Also, the amount needed for the down payment depends on your credit score. If your score is at least 580 you’ll need 3.5%. If your score is 500 to 579, you’ll need a 10% down payment based on the sales price of the property.

Income plays an important role in qualifying for an FHA loan. You need to be able to document a consistent income.

To get an FHA loan, you will also need: at least one years of W2s and two years of employment verification, property appraisal from an FHA-approved appraiser that the lender orders and current debt information.

So how long does it take to get an FHA loan? It can really depend on many things including the lender, borrowers, sellers and the property, PenFed Credit Union said. Lenders can get backed up when rates are low, meaning that turn-around loan processing and underwriting can take more time.

If something comes up in the appraisal or inspection, the buyers and sellers may have to renegotiate on how to handle it, adding more time to the process. Property guidelines are stricter for an FHA loan, meaning the appraiser may point out things that need to be fixed before funding. Those things can include dry rot, broken windows, exposed wiring, exterior doors that don’t close right, missing appliances or old roofs. The repairs to these things could potentially add weeks to the timeline.

“The key is to have realistic expectations and do whatever you can to keep the loan moving along,” PenFed Credit Union said. “If the underwriter needs information, an explanation, or documentation — get it to them quickly.”

Read more about FHA loans on PenFed Credit Union’s website. PenFed Credit Union is federally insured by NCUA.

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