Guide to FHA Mortgages:
FHA Basics, Pros, Cons, & FAQ's
FHA Home Loans - In a Nutshell
Federal Housing Administration (FHA) mortgage loans are helpful for borrowers making small down payments. FHA is often considered one of the easiest mortgage programs in terms of qualification standards. It's especially attractive for borrowers who want to make a small downpayment with a credit score under 720. (Borrowers with higher scores will especially want to compare this program with Conventional 5% Down).
FHA Mortgage Advantages
Low minimum downpayment (3.5%)
Relatively easy qualification standards
In addition to single family homes, also available for owner occupied multi-unit properties (2-4 units)
Rates typically lower than Conventional
Rates generally less credit score sensitive than Conventional (helpful for people with credit scores ranging from 620 - 719).
We go down to 580 credit score with 3.5% down and down to 550 with 10% down
(credit scores under 620 are subject to extra rules)
Mortgage insurance not impacted by credit score (typically better for people with lower credit scores compared to Conventional)
Mortgage insurance rates generally much lower than Conventional 3% down (Fannie 97%) program
Mortgage insurance rates generally lower than Conventional 5% down for borrowers with credit scores under 700.
Sellers can pay closing costs and prepaids (if negotiated in your contract)
Down payment funds can come from a gift
FHA loans are assumable (when you sell, a future buyer could potentially assume your FHA loan). This could help sell your home if rates rise.
Alternative credit verifications can often be used for borrowers who lack credit depth or credit history.
Possible to receive with no credit score. You may be able to verify payment history for rent, phone bill, utilities, or other bills you pay monthly.
Possible to get approved with a high debt-to-income ratio. The automated approval system used by FHA will sometimes approve loans up to 55% debt-to-income ratio (subject to extra guidelines)
Streamlined refinance process available if rates drop with FHA Streamline refinance program. (Subject to qualification standards)
Possible to refinance with no appraisal under FHA Streamline refinance program.
Counts certain types of income more quickly than Conventional. For example, counting income such as child support, family support, alimony, or court-ordered payments (such as resulting from divorce) don't require as long of a track record as Conventional.
Possible to be approved with shorter waiting periods after short sale, bankruptcy, or foreclosure (compared to Conventional).
Renovation projects can be financed through the FHA 203k program
May be used to purchase new construction, assuming the occupancy permit will be granted before closing.
FHA loans are not right for everyone. Here are some drawbacks...
All FHA loans include one-time upfront mortgage insurance premium of 1.75% (as of May 2018) added to loan amount. (This impacts your loan amount, not cash to close).
All FHA loans include ongoing, monthly mortgage insurance
Mortgage insurance rates calculated at .8% or .85% (just under 1%) annual (as of May 2018).
Compared to Conventional 5% down payment...
FHA's mortgage insurance is typically lower for borrowers with credit scores under 700.
Conventional's mortgage insurance is typically lower than FHA for borrowers with credit scores over 720.
Mortgage insurance is permanent (unlike Conventional where it can be removed after you reach certain equity requirement
FHA loans are known for being strict regarding peeling paint in homes. It seems like a minor issue, but to the government, it's a health and safety issue that disparately impacts minorities, due to homes with lead paint. (You may remember this was one of Ben Carson's talking points when appointed to run HUD. The FHA is a HUD agency).
Therefore, the FHA requires that peeling paint be repaired (generally prior to closing). This issue can arise during the course of the appraisal. If the appraiser notices peeling paint in the home, he or she will flag it in the report. This may put slightly more burden on the seller. In rare cases, the seller may be favor other buyers who are less likely to cause this small burden -- which should be corrected anyway.
If you qualify for multiple programs, you should compare FHA with the following programs.
Pre-Approval for FHA Financing
If you'd like a pre-approval, you do not need to choose a program first. We'd be happy to help you explore. When you're interested in pre-approval, complete the information at Get Started Online.
Options to Compare with FHA Mortgages
HomeReady - for borrowers with low- to moderate- income
Conventional 5% down (all home buyers)
USDA (if you're purchasing in a rural area)
WHEDA (low income, first-time homebuyers in WI)
VA Home Loans (for military Veterans)
Remember, you'd don't have to compare options by yourself. We'd be happy to help you explore with more meaningful and personalized details when you get started at Get Started Online.
FHA Loan Size Limits
What's the maximum FHA loan amount? It depends on the location and property type. This is shown on the table below for Wisconsin --
FHA Rates & How to Compare
We're happy to help you compare rates and options. We offer a free Total Cost Analysis of any relevant programs -- so that you can easily compare the overall costs of any programs.
We emphasize looking at the full picture, finding the right options, and providing accurate information. We need to gather some information from you in order to do that.
If you're targeting a purchase within three months, click Get Started Online, and we can customize a Total Cost Analysis for any programs for any programs you wish to compare.
If you're targeting a purchase beyond three months away, fill out the contact form below for an initial informational (but still helpful) discussion.
Why Work With Us
1. We'll give you an advantage for getting your offer accepted. Many Realtors refers clients to us because we're known in the local real estate community as being fast and reliable. When you submit an offer to purchase with financing backed by us, it carries a lot of weight with sellers' agents. On top of that, we offer a special head start program called VIP FasTrak. It's the next best thing to a cash offer. If you participate, you'll offer higher confidence to sellers and be able to close faster than 95% of other buyers who are applying for mortgages.
2. We'll help you explore your options. As you can see from this program guide, we're knowledgeable and straightforward about the pros and cons of each program. We want to learn about your personal situation and find options that fit best. We'll make it easy for you to compare options with a Total Cost Analysis. That's a tool that summarizes all the figures related to different loan options and creates an easy-to-read visual comparison side-by-side.
3. You'll be our priority. Unlike bank, we only do mortgages. Our reputation lives or dies based on the experience of each customer such as yourself. We'll closely walk you through the process from start to finish.
Frequently Asked Questions about FHA Mortgages
Q. What is the FHA?
A. FHA is the Federal Housing Administration, part of HUD (Housing & Urban Development) of the U.S. Federal Government. It backs roughly a quarter of all mortgages made in the United States. It generates funds through mortgage securities traded on Wall Street and works by providing a partial guarantee to lenders who issue these loans. It primarily generates its revenue through the mortgage insurance premiums charged on FHA loans.
Q. Are FHA Loans for first-time homebuyers only?
A. No! FHA loans are available both to first-time and repeat buyers.
Q. What credit score do I need for FHA?
A. With 580 or higher, it's possible to use the 3.5% down option.
With 550 or higher, it's possible with a down payment of at least 10%
However, credit scores below 620 involve extra scrutiny and safeguards to ensure responsible lending.
If you have no credit score, we may be able to establish an alternative credit history.
Q. What is an alternative credit history?
If you lack a credit score, credit depth, or a sufficient credit history, we may be able to demonstrate your responsibility through an alternative credit history. How does an alternative credit history work? We would need to document your payment history on monthly bills such as rent, cell phone, utilities, gas and electric, gym membership, or other bills you pay each month.
Q. How do I get pre-approved for an FHA loan?
A. In most cases, we can provide a pre-approval within one business day with the following steps:
1. Complete the information at Get Started Online
2. We will get in touch with you and provide an encrypted portal to gather any additional information we need.
Q. What are some of the main qualification requirements?
A. The main requirements relate to credit, income, assets, and property. It is relatively flexible on credit. We need to be able to show your ability and willingness to repay debt. Alternative verifications can often be used if you haven't established much credit history.
Regarding income, you must have a stable job or source of income. We can help you evaluate how much of an FHA loan you may qualify for based on your income and obligations.
Regarding assets, you need enough money for the down payment, plus some cushion left over. The down payment can come from a gift or money borrowed from a 401k, but it cannot come from an unsecured loan (such as a personal loan or credit card).
Regarding the property, most Single Family (1 unit) and Multi-family (2-4 units) qualify. The FHA requires peeling paint to be repaired. We must obtain a satisfactory appraisal. It also works with many condos whose associations have been approved by the FHA. Not all condo associations have sought FHA approval.
Q. How long does it take to close with an FHA mortgage?
A. Most lenders take 45-60 days, but we are much faster than average.
With our VIP FasTrak Program, you can get a head start that can give you a distinct advantage over other buyers. With a solid head start we can typically close in 16-25 days.
Q. What are common mistakes to avoid?
A. By preparing early, we can help you avoid several mistakes. Here are a few:
Avoid credit inquiries during your loan process.
Avoid depositing cash into your bank account within two months before your application or before closing.
Any personal gifts will require documentation from the donor (which can become difficult with a multitude of wedding gifts, for example). If possible, deposit these to an unrelated account.
Avoid late payments or collections close to your credit application.
Don't wait. Talk to us early, so we can help you plan and prepare.
Q. What if I loose my job after obtaining my loan?
A. In general, it's important to budget for this possibility. Beyond that, we offer an extraordinary level of extra assurance. Our Payment Assurance program is available for most (but not all) loans at no cost to you. There are some qualification standards for this program, and you must opt in during the loan application process. So speak to us about whether your loan qualifies for it. If enrolled, the program can help in case of involuntary job loss within the first two years of your loan. The above link provides more details.
Q. What are the FHA loan limits?
A. The FHA loan limits are listed here (on this page).
Q. What about refinancing my FHA loan?
A. You are welcome to do that. Assuming you qualify for some other type of loan in the future, you can refinance whenever you wish. In fact, FHA offers a special refinance program called FHA Streamline Refinance which can sometimes eliminate the requirement for appraisal and some other requirements.
Q. Can I refinance my FHA loan to eliminate mortgage insurance?
A. Yes, you would have to refinance out of FHA onto another program. Typically, eliminating PMI requires a significantly higher level of equity (due to the home value rising and/or mortgage decreasing). However, if your value significantly rises or your mortgage balance significantly decreases in the future, it's worth exploring this possibility.
Q. How do FHA mortgage payments compare to Conventional?
A. For similar loan amounts, the payments basically involve the same components. Typically, FHA loan amounts are slightly higher (due to the upfront FHA fee and lower down payment) than Conventional, so that has a slight impact on the payment. However, the details of those components depend on a variety of factors such as your credit score, down payment, and loan term. We can help you explore this to answer specifically for your situation. Complete the information at Get Started Online.
Q. How do FHA closing costs compare to Conventional?
The biggest difference is the FHA Upfront Mortgage Insurance which is added to the loan amount (not typically paid out of pocket). Other than that, the standard costs are roughly the same.
Q. Are there any special programs for first-time buyers?
A. The FHA program itself is available to first-time and repeat home buyers. However, there are some special channels such as our WHEDA program that can provide some special subsidized programs in conjunction with FHA loans. These involve separate qualification standards, involve max income caps, and are not available to all first-time buyers. We'd be happy to help you explore.
Q. Is it possible to get money from an FHA loan to repair a home?
A. Yes, that is part of the FHA 203k program.
Q. Does the FHA loan money directly to borrowers?
A. No, the FHA provides guarantees to approved participating lenders. Approved participation does not imply endorsement by the FHA.
Q. How do I apply for an FHA loan?
A. If you're targeting a purchase or refinance within the next three months, proceed to the Get Started Online section.