What You Need to Know About the FHA Loan

You may have heard about the Federal Housing Administration (FHA) loan being a great possibility, especially for first-time homebuyers. And it is! With only a 3.5% down payment required and more flexible qualifications for credit and income, FHA loans open doors for many buyers. Let’s take a look at why… 

What Is the FHA Loan?

Administered by the U.S. Department of Housing and Urban Development (HUD), the FHA was established in the 1930s to insure mortgages and help stimulate the housing industry during the Great Depression. Not just any lender can offer FHA loans – they must be approved first. Because the FHA insures the loan, you can enjoy: 

• Lower down payments 

• Lower closing costs 

• Easier credit qualifying 

You can qualify for an FHA loan with as little as 3.5% down and a credit score as low as 580 (Atlantic Bay’s requirement is 600). This is not to say that all first-time homebuyers have little saved for their down payment or have a rocky credit history. But the FHA loan’s flexibility is a plus for those who do need some leeway with those two qualifications. 

There are multiple FHA programs available. Homebuyers can purchase 1-4 unit properties, with no first-time buyer requirement. If you want to buy a fixer-upper, the FHA offers renovation loans and – for added energy improvements – the FHA Energy-Efficient Mortgage program. And the FHA loan is available on manufactured homes and factory-built housing, too. 

FHA Mortgage Insurance 

Now here’s the kicker. Because the FHA doesn’t require a large down payment, there’s some risk for a lender in the event a homeowner stops making payments. So, the FHA loan comes with mortgage insurance premiums (MIP). If you put down at least 10%, you’ll only need to pay MIP for the first 11 years of the loan term; less than 10% down means you’ll pay MIP for the life of your loan. 

There are two FHA loan MIPs: an upfront premium and an additional annual payment. The amount you’ll pay for both depends on your loan amount. 

The upfront MIP payment is 1.75% of your loan's value. For example, if you borrow $200,000 for your mortgage, you’ll need to make an upfront payment of $3,500 at closing. But you can roll it into your loan so you don't have to pay it out of pocket. 

The annual MIP depends on your loan-to-value ratio (aka, LTV - a comparison between your loan amount and the value of the home you’re purchasing), your down payment amount, your loan's term, and the loan amount. Every borrower is different, but typically, the annual MIP is .50-.55% of the total loan amount, divided by 12 months, and added to your monthly payment. 

Down Payment and Closing Cost Assistance 

The FHA allows down payment and closing cost assistance from second mortgages and grant programs, as well as gift funds from family and friends. 

Atlantic Bay offers two down payment assistance programs, Chenoa and Buyer Boost, which both help with the 3.5% down payment and the allowed FHA closing costs (up to 6% of the purchase price or appraisal value, whichever is lower). In some cases, these programs can create a 100% combined loan-to-value FHA loan – meaning you bring little, if any, cash to close. 

Additional benefits include: 

• No first-time homebuyer requirement as some other DPA programs have.  

• A generous income limit that’s higher than state bond programs.   

• No minimum contribution for borrowers. 

FHA Loan Eligibility Requirements 

We’ve mentioned a few requirements, like a 580 credit score and the 3.5% down payment, but here are a few more qualifications you’ll need to meet for an FHA loan: 

• Steady employment history and income for at least the past two years 

• The property must be your primary residence 

• A debt-to-income (DTI) ratio of 43% or less. This means your mortgage expense plus all other monthly debt (car loan, student loan, credit cards, personal loans, etc.) can’t be more than 43% of your gross income 

• You must meet the loan limit according to your region (you can look up your location and limit on the FHA’s website

Think an FHA loan is right for you? Reach out to Atlantic Bay today!