FHA-Insured Loans

Financial hardship relief may be available

Loan servicers can offer some flexibility on FHA loan requirements to those who have suffered a serious financial hardship or are struggling to make their payments.

That relief might be in the form of a temporary period of forbearance, a loan modification that would lower the interest rate, extend the payback period, or defer part of the loan balance at no interest.

FHA loan requirements

1. You don’t need stellar credit to qualify

FHA loan requirements on credit scores depend on the down payment.

• For an FHA loan with a down payment as low as 3.5 percent, the borrower’s minimum credit score must be 580.
• Those with credit scores between 500 and 579 must put at least 10 percent down.

Know your credit score before you borrow.

People with credit scores under 500 generally are ineligible for FHA loans. However, there may be some wiggle room there. The FHA does make allowances, under certain circumstances, for applicants with “nontraditional credit history or insufficient credit” if other criteria are met.

Ask your FHA lender or an FHA loan specialist whether you qualify.

You must be out of bankruptcy at least two years and not have had a foreclosure within the past three years to get an FHA loan. In addition, you must be current with payments on federal student loans and income taxes.

2. The minimum down payment is 3.5 percent

For most mortgage borrowers, the FHA requires only 3.5 percent of the home’s purchase price as a down payment. For example, if you bought a $200,000 home, the minimum down payment would be $7,000.

FHA borrowers can use their savings, a financial gift from a family member or a government grant for down-payment assistance.

States, cities, counties, local housing authorities and nonprofits are all potential sources for down-payment help. The National Council of State Housing Agencies is a good resource for assistance programs.

3. Closing costs may be covered

The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as for an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home.

Lenders typically charge more interest on the loan if they agree to pay closing costs. Borrowers can compare loan estimates from competing lenders to decide which option is best for them.

The total for closing costs will vary based on the state you live in, the size of your loan and whether you pay points to lower the interest rate.

Lenders are required to give you a loan estimate within three business days of your loan application. The estimate will give you a good idea early in the process of your closing costs.

HUD holds FHA lenders to no more 3 percent to 5 percent of the loan amount for closing costs.

4. The lender must be FHA-approved

Because the FHA is not a lender, borrowers get their home loans from FHA-approved lenders. FHA-approved lenders can have different rates and costs, even for the same loan.

FHA loans are available through many sources — from the biggest banks and credit unions to community banks and independent mortgage lenders.

Costs, services and underwriting standards vary among lenders or mortgage brokers, so it’s important to shop around.

5. There are two types of mortgage insurance to pay

Mortgage insurance is required when borrowers put down less than 20 percent. It insures the mortgage for the lender in case the borrower defaults.

All FHA loans require the borrower to pay two mortgage insurance premiums:

• Upfront premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
• Annual premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.

So, if you borrow $150,000, your upfront mortgage insurance premium would be $2,625 and your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25 per month).

6. You can borrow cash for home repairs

The FHA has a special loan for borrowers who want extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203(k), is that the loan amount is not based on the current appraised value of the home, but on the projected value after the repairs are completed.

A so-called “streamlined” 203(k) allows the borrower to finance up to $35,000 for nonstructural repairs, such as painting and replacing cabinets or fixtures.

Among the repairs an FHA 203(k) will cover:

• Bathroom and kitchen remodels.
• Flooring.
• Plumbing.
• Decks and patios.
• Heating and air-conditioning systems.

One big benefit of a 203(k) is that it allows you to buy a fixer-upper that you might not have been able to afford otherwise. However, not all properties qualify and applying for the loan can be more difficult because a detailed proposal of the work and cost estimates are required.

7. Loan limits are adjusted annually

Every year the FHA changes the maximum loan amount (“ceiling”) that it will insure, and the minimum loan limit (“floor”) it will insure. This is in response to shifting home prices.

Ceiling and floor limits vary according to the cost of living in a certain area. FHA limits can vary from one county to the next. Areas with a higher cost of living will have higher limits, and vice versa. Special exceptions are made for housing in Alaska, Hawaii, Guam and the Virgin Islands, where home construction is more expensive.

For FHA home loans in high-cost areas in 2018:

• The ceiling is $679,650.
• The floor is $294,515.

The loan limits either stayed the same or increased from 2017. There were no U.S. counties where loan limits were decreased. FHA ceilings are intended to be slightly higher than the median home price in a particular area.