#how to get a loan
Is an FHA loan right for you?
By: Amy Fontinelle, November 12th 2015
You should consider buying a home with an FHA loan.
The Federal Housing Administration, a division of the Department of Housing and Urban Development, was created 80 years ago to help low- and moderate-income families borrow the money they need to buy a home.
There are serious limits on how much you can borrow with an FHA loan for a single-family home — up to $271,050 for single-family homes in most parts of the country or as much as $625,500 in high-cost cities such as New York and San Francisco.
Advantage 1. You’ll need a smaller down payment.
Most FHA mortgages require a 3.5% down payment — that’s $3,500 for every $100,000 you borrow — and the average down payment on an FHA home loan is about 5%, according to Ellie Mae.
Many conventional mortgages require the down payment to come from a borrower’s savings or other assets, such as proceeds from the sale of another home.
Advantage 2. You can qualify with below-average credit.
The average FICO score for buyers who finance FHA loans is right at 689, according to Ellie Mae.
That’s considerably lower than the average score of 755 for conventional, non-FHA financing.
Successful applicants usually have a two-year history of steady employment and paying their bills on time.
The same big financial problems that derailed FHA applications in the past continue to do so. If you:
- Declared Chapter 7 bankruptcy, you usually must wait two years from the date of discharge before qualifying.
- Lost a home through foreclosure, you must wait three years. However, if you can prove that the foreclosure was caused by involuntary job loss or income reduction, and your payment history has been good since then, the waiting period can be as little as one year.
- Are delinquent on a federal debt, such as a student loan or income taxes, you can’t get an FHA loan.
- Have a credit score lower than 500, you won’t qualify under FHA guidelines. Most lenders have a higher minimum of 600.
Advantage 3. You’re allowed to carry more debt.
According to Ellie Mae, the average borrower with a new FHA loan spends 28% of their gross, pretax income, on housing costs — everything from mortgage payments and taxes to insurance and homeowner association fees.
The average buyer who finances with a conventional loan only spends 23% of their income on housing costs and 34% of their income on all recurring debt payments.
Advantage 4. The interest rate could be lower.
That’s actually less than the average cost of a conventional loan, which is right at 4.3%.
So what’s the big disadvantage to FHA financing?
That means that you pay a $1,750 insurance premium on every $100,000 borrowed.
While that sum can be added to your loan amount so you don’t have to bring more cash to the table, it’s still an extra charge. And if you finance it, you’ll pay interest on it, too.
For a 30-year loan with a down payment of less than 5%, your premiums will be 0.85% (down from 1.35%) of the outstanding balance each year.
That cost is typically divided into 12 monthly payments and added to your mortgage payment. That’s $850 per year, or about $70 per month, per $100,000 of loan balance.
If you put more than 5% down on a 30-year loan, your annual premiums will be 0.80% (down from 1.30%).
It used to be that you only had to carry this insurance for at least five years on all loans longer than 15 years, or until the balance on your mortgage was down to 78% of the original purchase price, whichever took longer.
Since mid-2013, new FHA borrowers who put down less than 10% have been required to pay these premiums for the life of the loan. This rule isn’t changing.
Conventional loans also allow you to count home price appreciation toward obtaining the needed equity. FHA mortgages do not.