The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and conditions and to provide an adequate home financing system through insurance of mortgages. Families that would otherwise be excluded from the housing market were finally able to buy the homes of their dreams under this program.
An FHA loan allows you to buy a house with as little as 3.5% down, instead of the higher percentages required to secure many conventional loans. Taking advantage of the FHA loan program is a great way for first-time buyers (or anyone hoping for a low down payment) to buy a home.
Note that the FHA does not make home loans—similar to how VA loans are guaranteed by the Department of Veteran Affairs—the FHA simply insures them. If a home buyer defaults, the lender is paid by the FHA. This means that lenders have the security they need to offer this mortgage option to homebuyers who may struggle to make higher down payments, or who have lower credit scores.
What is the FHA?
The Federal Housing Administration (FHA) is a branch of the Department of Housing and Urban Development (HUD)—the part of the US government that oversees fair housing for Americans. The FHA insures loan products offered through private lenders to allow more home buyers to have access to high-quality loans at affordable rates. This is why FHA loans have lower interest rates.
FHA Loans vs. Conventional Home Loans
The main advantage of FHA home loans is that the credit qualifying criteria for borrowers are not as strict as conventional financing. Lenders backed by the FHA allows a borrower who has had a few credit problems, or those without an extensive credit history, to buy a home.
Note: At least two years must have passed since any bankruptcy event, unless some other extenuating circumstances can be proven.
Conventional financing, on the other hand, relies heavily upon a borrower’s credit score. Credit scores are a rating given by a credit bureau (such as Experian, TransUnion, or Equifax) that rates your reliability when paying back loans. Those with rockier pasts when it comes to loan repayment often have lower credit scores, making it difficult to secure financing.
FHA-backed mortgages give lenders peace of mind, even in cases where borrowers have lower scores, making the loans easier for those borrowers to secure.
Types of FHA Loans
There are a few different types of FHA loans that borrowers may want to consider as they review their options.
FHA’s section 203(k) program can be used for both the purchase of a new home or the refurbishment of an existing home. Griffin Funding offers both limited and standard renovation lending.
Home Equity Conversion Mortgage (HECM)
HECM loans, usually called reverse mortgages, allow borrowers to receive cash based on their home equity. The amount borrowers can receive is based on the appraised value of their home. With an HECM, payments are paused until the home is sold, then full payment must be made with the interest that has accrued over time.
Section 245(a) Mortgage
The 245(a) program is built for optimistic borrowers who expect a gradual increase in their earnings. Loan payments start out low, then slowly increase over time. This can help make loans affordable earlier on, and can shorten the term of the loan.
Fixed vs. Adjustable Rate FHA Loan
As with other conventional mortgages, FHA loans allow both fixed and adjustable interest rates. Fixed-rate loans will remain the same throughout the term of the loan (unless refinanced into an adjustable loan). Adjustable-rate loans have a fixed interest rate for a set period, but then may fluctuate at the lender’s discretion, often in response to broader market factors.
Who Can Qualify for an FHA Loan?
Qualifications by lender, as these loans are offered through private lenders and not the FHA itself. However, the FHA does offer FHA mortgage qualification guidelines for lenders to follow, including:
- FICO score of at least 500 for 10% down payment, or 580 and above for 3.5% down payment
- At least two years’ employment history, including pay stubs and tax returns
- The home must be the borrower’s primary residence
- It must be approved in an FHA-approved inspection
- The monthly mortgage payments shouldn’t exceed 31% of the borrower’s monthly income
- Two years should have passed since the borrower’s last bankruptcy
At Griffin Funding, we strive to make FHA loans available to a wide variety of borrowers by offering flexible underwriting terms with lenders that we trust. Speak with a representative today to find out more about your eligibility.
I’ve Had a Bankruptcy in Recent Years, Can I Get an FHA Loan?
Generally, a bankruptcy will not preclude a borrower from obtaining an FHA loan entirely. However, a borrower should have reestablished a minimum of two credit accounts (such as a credit card, car loan, etc.) and waited 2 years since the discharge of a Chapter 7 bankruptcy—or have a minimum of 1 year of repayment with a Chapter 13 (the borrower must also seek permission from the courts to allow this). Furthermore, the borrower should not have any late payments, collections, or credit charge-offs since the discharge of the bankruptcy.
Although rare, if a borrower has suffered through extenuating circumstances—such as surviving cancer but having to declare bankruptcy because of the medical bills—special exceptions may be made. However, this is done on a case-by-case basis.
What Documents Are Needed for an FHA Loan?
It is important to understand that loan approval is dependent on the documentation you provide. To ensure a smooth transaction, it is crucial that you have all your documentation in order before you submit your initial application for the loan.
- Most recent two years’ complete tax returns with all schedules
- Most recent two years W-2’s, 1099’s, etc.
- Most recent pay stubs covering one month period
- If applicable: Self-employed individuals will need three years of tax returns and YTD profit & loss statement
- Most recent three months complete bank statements for any and all accounts with all pages
- Most recent statements from retirement, 401k, mutual funds, money market, stocks, etc.
- Most recent statements from your bills, indicating minimum payments and account numbers
- Name, address, and phone number of your landlord or 12 months canceled rent checks
- If applicable: Should you have no credit, copies or your most recent utility bills will be needed
- If applicable: Copy of complete bankruptcy and discharge papers
- If applicable: If you cosigned for a mortgage, car, credit card, etc, the lender will need 12 months’ canceled checks front and rear, indicating you are no longer making payments
- Copy of Driver’s License
- Copy of Social Security card
- If applicable: Copy of complete divorce, palimony, and alimony papers
- If applicable: Copy of green card or work permit
If You’re Refinancing or You Own Rental Property
- Copy of note & deed from current loan
- Copy of property tax bill
- Copy of hazard (homeowners) insurance policy
- Copy of payment coupon for current mortgage
- If applicable: If property is multi-unit, lender may need rental agreements
How Big of an FHA Loan Can I Afford?
For an FHA loan, Griffin Funding requires that your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together and referred to as PITI.
- Monthly income X .29 = Maximum PITI
- For a monthly income of $3,000, that means $3,000 x .29 = $870 Maximum PITI
Your total monthly costs, adding PITI and long-term debt, should be no more than 41% of your gross monthly income. Long-term debt includes such things as car loans and credit card balances.
- Monthly income x .41 = Maximum Total Monthly Costs
- For a monthly income of $3,000, that means $3,000 x .41 = $1230
- $1,230 total – $870 PITI = $360 allowed for monthly long term debt
The ratios for an FHA loan are more lenient than for a typical conventional loan. For conventional home loans, PITI expense cannot usually exceed 26-28% of your gross monthly income, and total expense should be no more than 33-36%.
The new 2024 FHA national low-cost area loan limit for one-unit properties is $498,257. You can check additional FHA mortgage limits here
What is the Downside of an FHA Loan?
FHA loans offer many benefits, however, like any financial product, there are some drawbacks to consider. One downside is that FHA loans typically have higher mortgage insurance premium costs.
FHA loans also have strict requirements surrounding housing standards. Homes must meet FHA health and safety qualifications, and only primary residences are eligible. Additionally, FHA loans have limits on the value of the home—read about non-QM loans here for more flexible financing options that might better suit your needs.
Apply for an FHA Loan Today
FHA loans are an excellent option for many first-time homebuyers and those with lower credit scores. If you think an FHA loan might be a suitable option for your home financing journey, reach out to a Griffin Funding representative, who will be happy to talk you through your options. Griffin Funding is not HUD-approved and is not a direct lender for FHA loans.