What You Need To Know About FHA Loans

If you need a mortgage loan and you have a low credit score, then an FHA loan is right for you. And, if you are a first-time home buyer, an FHA loan is a mortgage that caters to first-time home buyers.

FHA loans are backed by the government and the US Department of Housing and Urban Development, HUD determines the loan limits and requirements to qualify for an FHA loan.

In this article, we’ll go through all you need to know about FHA loans, including the FHA loan limits for 2022 set by HUD.

What are FHA Loans?

FHA Loans belong to the categories of loans insured by the government under the Federal Housing Administration. And unlike other conventional loans, FHA loan lenders are willing to approve mortgages for you even if you have a low credit score. 

Furthermore, if you have less than 10% of your loan principal for a down payment, you may also get approved for an FHA loan. But you’ll need to have a credit score of at least 580 and above. 

FHA loans also have a similarity with other conventional loans because they are issued by banks and other private lenders. This explains why there are varying eligibility criteria for the FHA loan

FHA Loan and Conventional Loans: Differences

Types of FHA Loans

Like conventional mortgage loans, there are various types of FHA loans that cover different financial states and home-buying requirements. Your mortgage advisor can help you decide which FHA loan type is the best for your needs.

Below are the available types of FHA loans:

FHA Basic Home Mortgage 203(b)

This is a broad FHA loan category. Here you can have access to both fixed and adjustable rate mortgages. 

If you opt for a fixed-rate mortgage, this means you’ll continue to make loan repayments during the whole loan term at the same constant rate as when you sign the loan agreement. Loan terms can range from 15-30 years. 

On the other hand, an adjustable-rate mortgage gives you a low rate at the initial period of your loan term. But unlike the fixed rate, the interest rate is subject to change over the period of the loan term. However, there is a threshold that regulates how high or low your interest rate can be.

Home Equity Conversion Mortgage (HECM)

This works as a reverse mortgage program. It helps homeowners who are 62 years old or older to convert their home equity into cash. 

The home title is retained and the homeowner can have access to withdrawable funds. The owner can decide to withdraw the cash using a line of credit or a fixed amount monthly.

FHA 203(K) Improvement Loan

This allows you to finance the purchase of your desired home and the necessary repairs or renovation in a single loan. It is a great option if you are willing to buy a fixer-upper home and add some sweat equity after purchase.

Energy Efficient Mortgage

This FHA loan type has some similarities with the 203(k) improvement loan program. However, this loan is approved for upgrade costs that can reduce your utility bill. An example of these costs is the installation of new solar or wind energy systems.

Section 245(a) Loan

If you are expecting an increase in your income, then this FHA loan is for you. You can either opt for the graduated-payment mortgage (GPM) which you can start with a lower monthly payment, then gradually increase your monthly payment over time. 

However, another loan option under section 245(a) loan is the Growing Equity Mortgage (GEM). Here you’ll need to make a scheduled increase in your monthly principal payment.

FHA Construction to Permanent, CP

If you are planning to build a new home or you are already in the construction phase of your new home, you can get the FHA CP mortgage. This loan is created to provide you with the necessary funds that you’ll need to finance your construction costs, all within your loan limits.

FHA Loan: Limits

According to the US. Dept. Of House and Urban Development, HUD, the FHA loan limits in 2022 range from $420,680 to $970,800. The limits vary based on where your residential area is.

FHA Loan: Pros and Cons

Pros

• Borrowers with short credit histories or low credit scores can access a mortgage loan

• If you have less cash or can’t afford a 10-20% down payment, you can also have access to a mortgage through the FHA loans

• If you have a credit score of 580 and above, you’ll only need 3.5% of your loan principal as a down payment.

• You have access to a mortgage loan with a lower interest rate which saves you a lot of money in the long run compared to other mortgage loan types.

Cons

• A mortgage insurance premium is required irrespective of your home equity or downpayment.

FHA Loan: Qualification Requirements

The loan qualification requirements vary from one loan lender to the other. However, below are some basic requirements set by the Department of House and Urban Development.

Your Credit Score

If you have a low credit score, you can qualify for an FHA loan. However, if your credit score is lower than 580, that is between 500-579, you’ll be required to make 10% of your loan principal as a minimum down payment.

Down Payment

As stated above, your credit score determines your minimum down payment percentage. If you have a credit score of 580 or above, you may be required to pay only 3.5% of your loan principal as a down payment.

However, FHA loans are not excessively concerned about the source of your down payment. So you can receive aid from friends or relatives to make your down payment.

Debt-To-Income, DTI Ratio

This is a percentage illustration of the amount of your monthly income that goes to make your minimum monthly debt payments. In order to qualify for an FHA loan, you need to have a DTI ratio of 43% or lower.

Conclusion

With the FHA loan, you can qualify for a mortgage loan even if you have a low credit score. You can have access to a mortgage loan amount within the range of $420,680 to $970,800.