FHA Home Loans

What is an FHA Loan?

An FHA loan is a mortgage loan that is insured by the Federal Housing Authority. While the federal government does not make the loan itself, it insures the loan to reduce the risk of loss to the FHA-approved lender if the borrower defaults on their mortgage payments. Since risk equals rate, in the lender’s eyes a loan backed by the full faith of the US government poses a smaller than average risk, so the rates are generally low overall.

What are some advantages of an FHA loan?

FHA loans are one of the easiest types of loans to get approved for since they require only a low down payment and you do not need to have perfect credit. It is a good choice if you cannot afford a large down payment or may not qualify for the private mortgage insurance that is required on conventional loans with less than 20% down.

If you have a recent bankruptcy or foreclosure on your credit report, it may be the only program available due to stricter lending guidelines on other loan programs. However, it is required that you have reestablished good credit and payment history since the bankruptcy or foreclosure. Since the lenders like to see several positive lines of credit when you apply for a home loan, having a couple of credit cards with a low balance to limit ratio is often helpful.

Most FHA loan programs require only 3.5% down to purchase and are intended for borrowers who will be living in the home and will not be using it as an investment property or a vacation home. This 3.5% can be from a recognized down payment assistance program or a gift from a family member.

While many loan programs limit the maximum debt-to-income ratio (total monthly mortgage payment plus all monthly debt such as credit cards, auto loans, student loans, etc.) to around 43% of the gross income, FHA loans have been approved with debt ratios up to 56.99% as long as you can show that you are willing and able to repay the mortgage as well as your existing debts.

An FHA mortgage can also be used to purchase or refinance a manufactured home up to 96.5% of its value or purchase price, whichever is less. Although the rates are a little bit higher than for a loan on a conventional or “stick-built” home due to greater perceived risk to the lender, it is the best program available if you have less-than-perfect credit and a small down payment.

While some lenders will lend to you with a credit score as low as 500, most use 580 as a cut-off point and the qualifying is a little harder than for someone with a 620+ score.

What are some disadvantages of an FHA loan?

The biggest drawback of an FHA loan is that it requires two types of mortgage insurance premiums: the first one being paid upfront at closing or financed into the loan and the second one being added to the mortgage payment every month for the life of the loan. While the amount of mortgage insurance required will depend on the initial loan-to-value and the length of the loan, it can still be costly.

This loan may be an option for you if you do not qualify for a conventional loan currently due to low credit scores or a high debt-to-income ratio but may be able to refinance in the future.

What are the requirements?

While not all-inclusive, the following are some of the basic requirements for an FHA mortgage.

Must be able to show a steady, secure source of income. This includes W2 wages, child support, social security, and pension income.

Minimum of 3.5% down, but some or all can be in the form of a gift from a family member or a recognized down payment assistance program.

Can only be used for your primary residence.

A minimum of 580 credit score is required in most cases. While lower scores may qualify, they require a greater down payment and have lower debt-to-income ratios, so having a 620 or above score is preferred.

Must be two years past the discharge date of bankruptcy. Some exceptions may apply.

Must be three years past the effective date of foreclosure, deed-in-lieu, or a short sale if the mortgage was delinquent at the time of sale. Some exceptions do apply.

The property must meet certain requirements for safety and soundness. Some issues may need to be fixed before closing the loan.

What are some other options?

For borrowers with good credit, a conventional loan may be an option. These programs offer down payments of either 3% or 5% dependent on several factors. If you are a first-time home buyer (meaning you haven’t owned a home in the last three years), you may qualify for a mortgage with just 3% down. To find out more, visit the Conventional Loan page.

For borrowers that are current duty military or have prior military service, a Veterans Administration loan may be an option. They offer 100% financing and no monthly mortgage insurance, which makes them one of the best programs available. A Certificate of Eligibility is required to process a VA loan, however, they are relatively easy to obtain and we can assist in securing it. For more information, visit the VA Loan page.

Finally, USDA Rural Development home loans offer 100% financing and are a preferred loan for those that choose to live outside the large cities. While this program has maximum income levels and requires the home to be located in an eligible area, the USDA mortgages are ideal for those that qualify and have reasonable debt-to-income ratios. To get more information and see if you and your home’s location qualify, visit the USDA RD page.

We are an FHA approved lender licensed in Indiana and Illinois with an office in Crown Point, IN.