FHA Purchase Loan
How to Buy a Home with an FHA Mortgage Loan?
FHA loans are available for people with down payments minimums of 3.5% and credit scores as low as 580 (now 600). This makes these loans more beneficial than other mortgages not to mention easier credit conditions, and the flexibility in the kind of property you can buy. Most first-time homebuyers and consumers with credit challenges consider this a good option to get into a home.
How To Qualify For An FHA Loan?
- You need a minimum 3.5% down payment.
- You need a minimum FICO® Score of 580.
- You need a debt-to-income ratio (DTI) of not greater than 50% and consistent employment over the last two years. Your DTI can be estimated by adding up your monthly debt payments (e.g. credit card and auto/truck payments) and dividing the total by your monthly income before taxes are taken out; which means your gross salary.
- You need to pay for the upfront mortgage insurance premium (UFMIP). The amount is usually equal to 1.75% of your loan amount and may be rolled into the new loan balance. You may alse be able to get this as a gift from a relative.
- Closing costs, which range from 2%-6% of the purchase price. Some may be rolled into the new loan but not your down payment.
- The property must be your primary residence and you must move in within 60 days of closing on a purchase loan
- A 10 percent down payment if your credit score is 500-579
- Documented and steady employment and income for two years or more
- You have not had a foreclosure in the last three years
FHA eligible property types include single family homes, condos, townhomes, and multi-unit properties such as a duplex, triplex, or fourplex. Manufactured and tiny homes are not eligible. There is no other loan product that gives you the opportunity to finance a duplex with 3.5-percent down payment.
What are the FHA loan requirements for the property?
Loan Limits: Your loan cannot exceed the loan amount limits in the county where the property is located. The FHA's limit for lower-cost areas is established at $331,760 in 2020. In high-cost areas, the limit is $765,600 in 2020. Check out the loan limits in your area.
For example, in Orange County, California (designated as a high-cost area), an FHA will guarantee up to $765,600 for a detached home, condo or townhome. If you wanted an FHA loan for a duplex, they will insure up to a limit of $980,325. This means on a sales price of $1,015,880, you only need a 3.5 percent down payment. For a 3-unit and 4-unit property, FHA loan limits are much greater up to $1,472,550.
Property Conditions:The home or multi-unit property needs to satisfy FHA's property requirements which are basic expectations you'd want to have anyway:
- Safety - the home must not impair the health and safety of the occupants.
- Security - the property needs to be safe and secure. No malfunctioning exit doors, broken windows, etc.
- Soundness - the home must not have defects or hazards that affect its structural reliability.
Disadvantages; FHA loans are not available to lend on a property used as solely as an investment property or second home. Down payments of 10% or less require you to pay mortgage insurance upfront and each year you continue to keep an FHA loan.
There are many FHA-approved lenders such as savings and loan institutions, banks, credit unions, and mortgage brokers/lenders that are able to fund an FHA loan. As of May, 2020 the banks, credit unions and some lenders have raised their credit score minimums to 640 or 660 which means you may not qualify with them.
The good news is some mortgage brokers still have FHA loans available to borrowers who's FICO scores are below 640. It's very much worth the effort to "shop around" for an FHA loan.