FHA HOME LOANS
FHA/HUD Home Loans
Millions of first time homebuyers are using HUD/FHA Loans to buy their first house with as little as 3.5% down. Millions of others are financing their existing homes with competitive terms from FHA Lenders.
Understanding the Basics of Loans from the FHA
Originally, the FHA program was instituted after the Great Depression to help lower-income families purchase housing. FHA loans use a small, as little as 3.5% down payment as well as federally-backed insurance payments to help home-buyers afford their purchase and to create less risk for lenders thereby incentivizing them to make loans.
This initiative allowed Americans who could not afford high down payments to acquire housing and, today, FHA loans are still a viable alternative for lower-income Americans who lack the significant savings required to qualify for a traditional mortgage.
What is an FHA Loan?
FHA loans are a form of insurance-backed mortgages. As a matter of fact, HUD (The Department of Housing And Urban Development) was one of the first ever agencies to offer insurance-backed mortgages.
An insurance-backed mortgage, like an FHA loan, provides prospective homeowners with a federally-insured home loan on an eligible property. Because the federal government is providing insurance for the mortgage, private lenders can rest assured that they will be paid – even if the borrower defaults on a home loan.
This is a way that the federal government can reduce the risk that private lenders and banks incur when lending to lower-income individuals, and provide low-income Americans with a way to obtain housing without large down payments.
Down payments are typically only 3.5% – 10% of the value of the home, depending on the credit score of the applicant, down payment amount, and income/expenses. Today, FHA loans have primarily been eclipsed by private mortgage insurance (PMI) but HUD still offers FHA loans to eligible low-income Americans who do not qualify for PMI and who cannot afford the high down payments of traditional mortgages.
Understanding UFMIP and MIP Payments
- UFMIP – UFMIP stands for “Up-Front Mortgage Insurance Premium” and is usually equal to 1.75% of the total value of the loan amount (as of 2017). It’s paid at the time of closing on a home; so, for a HUD Loan (or FHA home loan) of $100,000, the UFMIP payment would be $1,750. This payment can be either paid in full up-front, or financed at closing and rolled into your loan’s monthly payments. UFMIP and MIP payments are rendered into an escrow account by the US Treasury Department, and can be used to pay the mortgage in case the borrower defaults.
- Annual MIP – In addition to the first UFMIP payment, FHA borrowers must pay a monthly Mortgage Insurance Premium.
This MIP will vary depending on the credit score, the loan-to-value ratio of the mortgage, and the value of the home purchased. Generally, the annual MIP cost is around 0.85% of the total loan amount. For an FHA loan (or HUD home loan) of $100,000, the annual MIP would be $850 – paid monthly as $70 per month.
These payments are added directly to your mortgage, and paid on your behalf to HUD by your lender.
What Are FHA Home Loan Requirements?
Though low-income Americans will have an easier time getting HUD home loans than traditional mortgages, there are still a few requirements for an FHA loan. These include:
- Lawful US Residency – Lawful US residency must be proven with a valid Social Security Number, and the applicant must be of legal age (18+) when applying for an FHA loan.
- A “Front-End Ratio” Of Less Than 40% – The “front-end ratio” is the summation of property taxes, Homeowners Association (HOA) fees, mortgage insurance, homeowners insurance, and monthly mortgage payments that apply to your home. Ideally, this “front-end-ratio” will be 31% or less of your total gross income. However, it is possible to be approved with a ratio of up to 40%.
- “Back-End Ratio” Of Less Than 50% – The “back-end ratio” includes both a mortgage and all other consumer debts – credit cards, car payments, etc. It is usually required to remain under 43% of gross income – though approval can be gained with a ratio of up to 50%. This is also commonly known as DTI (debt to income ratio).
- Steady Employment (2+ Years) – FHA Home Loans require employment be verified for the past 2 years, with an explanation for any gaps in employment that exceed 1 month. Those who are self-employed must show proof of employment via tax returns, balance sheets, and up-to-date profit/loss statements.
- Years Out Of Bankruptcy – Bankruptcy does not necessarily make you ineligible for a HUD home loan, however, most FHA loans require you to be out of bankruptcy for at least 2 years, unless “uncontrollable circumstances” can be proven.
- Home Will Be Used As An Owner-Occupied Residence – HUD and FHA loans cannot be used for rental properties. It must be a principal, owner-occupied residence.
- Minimum FICO Credit Score of 500– Your credit score is taken into account when you apply for a HUD home loan and the FHA requires a minimum FICO score (Credit Score) of 500. Scores that are 620 or higher can make you eligible for a better payment tier.
- Lending Institutions Must Be FHA-Approved – The lending institution you’re seeking a loan from must be FHA-approved. This is because, as mentioned, the FHA is an insurer, not a lender. An FHA-approved lender must be found, and then the loan must be presented for final FHA approval. At HUD.Loans, we will quickly connect you to the right FHA approved lender. You can scroll down to the bottom of the page and fill out the application form.
Generally, each one of these guidelines must be met to get FHA loan approval, though there are some exceptions.
What is the FHA Loan Application Process?
The process for getting an FHA loan is a bit complex. The FHA doesn’t actually issue loans – it insures loans made by private lenders. Here’s how it works:
- Find an FHA-Approved Lender – The first step is to find an FHA-approved lender. Most major banks and credit unions are FHA-approved, so it’s usually quite simple to find a bank willing to work with you. You can apply with HUD.Loans today at the bottom of the screen.
- Collect Required Documentation – Documentation will be required for all FHA loan requirements, as outlined in the above section. The lender will verify your employment history, income, credit score and residency, and will also order an appraisal on the property you intend to purchase.
- Wait for Underwriter Approval – After you’ve collected and sent your documentation, it will be gathered and sent to an underwriter by the lender. This underwriter will determine whether or not to approve your loan application. If FHA requirements and guidelines are not met, your application could be denied but your HUD home loan lender will work with you to do everything possible to make your loan fit.
- Receive FHA Loan Documents – Upon approval of your FHA loan, the relevant documents will be prepared. This includes a promissory note with the total amount of the loan, the interest rate, and your monthly payment for the mortgage, including annual MIP and UFMIP payments.
You will also be furnished with a “HUD-1” document. This breaks down the individual costs associated with acquiring your FHA loan. After agreeing to lending terms – congratulations! – you’re the proud owner of an FHA-backed mortgage!
This process can take up to 4 weeks – home inspections, failure to supply required documents, or a re-appraisal can cause further delays.
FHA Lending Tiers
FHA operates with multiple tiers which determine the overall cost of insurance payments. Currently, these tiers are determined by the length of the mortgage and the LTV (Loan-To-Value) ratio which in the vase of a purchase is determined by the down payment. They are as follows:
● 15-Year Term, Loan-To-Value Ratio Up To 90% – 0.45% Annual MIP
● 15-Year Term, Loan-To-Value Ratio Greater Than 90% –0.70% Annual MIP
● 30-Year Term, Loan-To-Value Ratio Less Than/Equal To 90% – 0.80% Annual MIP
● 30-Year Term, Loan-To-Value Ratio Greater Than 95% – 0.85% Annual MIP
These tiers have been in effect since 2009, when HUD decided to lower MIP rates in response to the 2007-08 financial crisis.
Surcharges are also common when loans exceed the amount of $625,000, or when loan terms are shorter than 15 years.
Is An FHA Loan Right For You?
FHA loans have a wide variety of benefits for Americans who can’t afford high down payments. However, private mortgage insurance (PMI) or traditional mortgages may be a better option for wealthier individuals.
Interested in finding out more about FHA loans – and if you’re qualified? The FHA has been issuing more loans than ever before – so you might be a perfect candidate! And at HUD.Loans, we specialize in a wide variety of loans backed by the FHA and HUD – including HUD home loans!
So, if you’re interested in an FHA loan or you just want to find out more you can apply below and speak with an FHA Home Loan Specialist for a free consultation. From practical advice and financial assessments, to helpful information about HUD Home Loans, we can walk you through every step of the process!