FHA FAQ: What You Need To Know About FHA Loans In Chicagoland
September 15, 2021
For Buyers & Sellers
Federal Housing Administration, or FHA loans have been a part of the home financing landscape since 1934, and have provided over 40 million borrowers with the opportunity to purchase a home.
Although many homebuyers and sellers have heard of FHA loans, there is a great deal of misunderstanding as to how they must be used, and what they mean for buyers and sellers. Here's what buyers and sellers in Chicagoland need to know about FHA loans.
What Are FHA Loans?
The FHA is part of the U.S. Department of Housing and Urban Development, or HUD. An "FHA loan" is not a direct loan from the agency. Instead, the FHA insures mortgages issued by FHA-approved lenders. HUD created the FHA loan program in 1934, at the height of the Great Depression, to ensure more Americans could afford homes, and the program has been a significant factor in the increase in American home ownership. Today, FHA loans represent a noteworthy share of the mortgage market — in 2018, the FHA insured 12.1% of all mortgage originations. The FHA insures mortgages on single family homes, multifamily properties, residential care facilities, and hospitals throughout the United States and its territories. FHA loans are popular with first-time buyers and buyers for whom conventional mortgages are out-of-reach.What Are The Qualification Requirements For FHA Loans?
FHA mortgages are available for 15- and 30-years, and are fixed-rate loans. Residential FHA loans are considerably easier to qualify for than most conventional loans. An FHA-backed buyer may have a slightly higher debt to income ratio than a conventional borrower. In addition, FHA borrowers can qualify for a home loan with a credit score as low as 500 if they can provide a 10% down payment, or 580 or above with a 3.5% down payment. The other significant requirement for an FHA loan is the mortgage insurance requirement. If a buyer puts less than 10% down, they must purchase mortgage insurance for the life of the loan. FHA buyers who put 10% or more down have to pay mortgage insurance for the first 11 years of the mortgage. Mortgage insurance consists of two types of premium payments. The first is the up-front mortgage premium, calculated at 1.75% of the loan amount and paid when the borrower gets the loan. The up-front premium can be rolled into the mortgage itself. The second mortgage insurance premium is the annual premium. This payment ranges from 0.45% to 1.05%, depending on the loan term, the total amount of the mortgage, and the loan-to-value ratio, calculated by dividing the amount of the mortgage by the appraised or market value of the home. This premium amount is divided by 12 and paid monthly. These premiums can significantly increase the cost of an FHA loan for a buyer.Borrower Requirements
To qualify for an FHA mortgage, borrowers must:- Have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state
- Apply with an FHA-approved lender
- Meet applicable employment requirements, usually a verifiable employment history of at least two years
- Provide evidence of income
- Meet the credit score requirements:
- If the buyer is putting 10% down, a credit score of 500 or higher is required
- If the buyer is putting 3.5% down, a credit score of 580 or higher is required
- Use the loan for the borrower's primary residence
- Hire an FHA-approved appraiser
- Meet the applicable debt-to-income ratio requirements
- Wait the agency-required period after bankruptcy or foreclosure
What Do Home Sellers Need To Know About FHA Loans?
For sellers, an FHA-financed home sale isn't much different than any other sale. An FHA pre-approval is essentially the same as a pre-approval for a conventional loan. It is not uncommon for an FHA loan-backed offer to be the best offer in a multiple offer situation. However, sellers should be aware that there are some unique requirements that apply to FHA-backed mortgage loans. First, in a hot market, an FHA loan may not cover the entire sale if the home appraises for less than the agreed-upon price. The FHA loan value is capped at the appraised value of the home, and FHA loan rules expressly forbid the lender from requesting a new appraisal simply to get a different dollar amount for the value of the property. Sellers in particularly hot markets, then, should be aware that there is a somewhat higher chance that a deal may fall through with an FHA-backed mortgage. The inspection and appraisal process is extremely thorough. HUD and the FHA require an inspection of the home's condition before an FHA loan can be issued. In order to pass, the home must be structurally sound, must reasonably protect the safety and health of its occupants, and must adequately support the protection of their property. This inspection is widely considered to be more rigorous than a standard home inspection, and sellers should be prepared accordingly. In addition, FHA loans create some restrictions on the structure of home sale deals. The seller can agree to pay some closing costs that would normally be paid by the buyer, however, the seller cannot pay the buyer's down payment. While this restriction will not affect most home sellers, it merits consideration if the buyer and seller intend to structure the deal in an unconventional way.When Home Means More, You Need A Team With More To Offer
Home is about so much more than just four walls. Buying or selling a home is a big deal, and with everything we experienced in 2020, our homes have never been more important. That's why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it's the beginning of a story or the end of a chapter, we're here to help.Tags:
