FHA backed loans are easier to qualify for than conventional loans.
Even buyers with less than stellar credit histories can often be approved for a FHA loan. This is why FHA loans can be a great option for first time buyers who might otherwise have trouble getting a conventional loan.
Borrowers do have to meet certain debt to income ratios though. FHA loans are are insured by the Federal Housing Administration. (The FHA insures more residential properties than any other entity in the world.)
Conventional loans, on the other hand, have higher fees and stricter lending guidelines as well as higher down payment amounts. They do, however, offer more repayment options than an FHA loan.
Conventional loans are not capped at a certain loan amount and not subject to mortgage insurance premiums in the same way an FHA mortgage is.
FHA loans can be approved for borrowers with credit scores below 500, although a score of 580 or better is required for most FHA loans.
FHA loans also require a much lower down-payment, (3.5% of the purchase price of the home) and they usually feature lower interest rates too. Additionally, borrowers can either use their own savings to pay the down payment or they can be gifted that amount by family member or some form of assistance grant issued by a state or local government.
While FHA loans have some obvious benefits, they can still be a bit tricky because they come with strings attached, namely, FHA loan required repairs.
In previous years, the guidelines were much more strict and required things like missing handrails, cracked glass windows and poor workmanship to be corrected.
Current guidelines focus more on items that could endanger the health, security and well-being of the occupants (as well as the marketability of the property), but these still have to be addressed.
This often includes items such as:
- Repairs to damaged roofs
- Foundation problems
- Lead based paints on the exterior or interior of the home
- Other structural problems
- Appliances and electrical systems must be up to code
- Adequate sewage (no standing water)
- Adequate hot water and water pressure
- Other mechanical systems such as heating and cooling
- The water heater must meet certain requirements such as venting and overflow piping
- Of course, other lenders, such as the VA often require certain repairs before they will issue a mortgage as well. Click here for more about VA loan requirements. For more information on other conventional lender required repairs, click here.
FHA required insurance
FHA loan requirements also include provisions that require two separate mortgage insurance premiums. The first is either paid upfront or rolled into the mortgage.
Currently, the Up-Front Mortgage Insurance Premium, or UPMIP, is right around 1.75% of the loan amount.
The second requires a monthly payment. The monthly insurance premium will be based on several factors, including the loan-to-value amount (LTV), the length of the loan as well as the amount of the loan.
Once a loan has been paid down to 78% of the loan amount, the monthly insurance premiums can often be dropped. This applies if the mortgage is either a 15 year mortgage or if the borrower has at least five years of repayment history and has paid the loan down to 78%.
FHA Closing Costs
Each local FHA office also dictates which specific closing costs are allowed to be charged to the buyer and which costs must be paid by the seller.
In order to qualify for the loan, the property must be inspected by an FHA-approved appraiser. FHA lending limits are based on the state where the property is located.