FHA Loans are mortgages which are guaranteed by the Federal Housing Administration. The FHA doesn’t actually make home loans. In the event, a homeowner defaults on their mortgage, the FHA reimburses the lender for their loss.
FHA LOAN LIMITS
(Los Angeles County & San Francisco Bay Area – look here for other counties)
1-unit $726,525 | 2-units $930,300| 3-units $1,124,475 | 4-units $1,397,400
An FHA loan is insured by the Federal Housing Administration (FHA). Because the loan is insured against default this enables lenders to offer more liberal guidelines to prospective home buyers. These loans are offered as an alternative to Fannie Mae and/or Freddie Mac conventional loans, and have some real advantages for the right person.
Why Choose an FHA Loan?
An FHA loan is frequently chosen when a buyer/borrower doesn’t have at least a 2-year credit history or has other credit challenges. When a buyer doesn’t have sufficient funds for the 3.5% down payment and/or closing costs, 100% of the down payment may be “gifted“.
To qualify for an FHA loan, the property being purchased must be for the buyer’s primary residence but may be up to 4-units.
A likely applicant would have:
- only a 3.5% down payment and little or no cash reserves in savings
- a credit score potentially as low as 580
- a borrower with a debt-to-income ratio between 45-55%
- access to gift funds
- Smaller down payment required (as low as 3.5%)
- Gift funds may be used for the down payment. Often the costs to obtain the loan are covered by the loan itself or may be credited from the seller.
- It’s easier to qualify for an FHA insured loan as debt-to-income ratios up to 55% may be allowable.
- Credit is less an issue than with a Conventional loan.
- Rates are generally lower than on a Conventional loan.
- The time to wait after a bankruptcy is 2 years, which is shorter than for Conventional loans.
- For a shortsale or foreclosure the waiting period is 2-3 years depending on payment history.
- Part of the Mortgage Insurance, called Up-Front Mortgage Insurance, is either paid out of pocket by the buyer or may be added to the loan balance.
- An additional Mortgage Insurance premium is paid monthly which raises the monthly payment.
- With less than 10% down payment, the mortgage insurance is permanent. (However, as property values rise, a buyer can refinance out of the FHA loan)
- Condominiums must be on the FHA approval list.