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Frequently Asked Questions About FHA Loans

When it comes to purchasing a home, many people feel that finding the right financing is often their biggest challenge. 

FHA loans can be the best option for many hopeful buyers, as they offer more flexible credit score requirements, competitive interest rates, and lower down payments. 

These products have become increasingly popular in recent years, especially with first-time homeowners and people who have always dreamed of buying and renovating a home.

However, they also have some unique stipulations that borrowers should be aware of before starting the application process. Let’s address some of the most frequently asked questions about FHA home loans — and how this type of mortgage can benefit you and your family.

How do FHA loans differ from conventional mortgages?

An FHA home loan is a mortgage offered by a private lender but insured by the Federal Housing Administration (FHA). This means that the lender is reimbursed for any losses if the loan goes into default. They’re readily available through banks, credit unions, and mortgage brokers.

FHA mortgages are designed to make homeownership more accessible to people who may not meet the standards for a conventional mortgage.

Conversely, conventional loans are not insured or guaranteed by any federal agency. While they might cost less in the long run, they often have stricter qualification requirements, as you need a comparatively higher credit score and a low debt-to-income ratio (DTI) to qualify. In some cases, you may also need a higher down payment for a conventional mortgage, as compared to an FHA loan, but that isn’t always the case.

However, while the FHA is more lenient, they still require hopeful homeowners to meet certain financial and employment criteria. You need a steady employment history and your debt obligations can make up a bigger percentage of your gross monthly income.  

The minimum credit score requirement for an FHA loan is 500. However, to qualify for the lowest down payment option (3.5%), you’ll need a credit score of 580 or higher. Borrowers with scores between 500 and 579 may still qualify if they can make a down payment of at least 10%. The maximum amount you can borrow for a single-family home varies by county, but in most places (all of Illinois, for example) it is $472,030 and goes up to $1,089,300 in some high-income zip codes. 

How difficult is the process of getting an FHA mortgage?

While applying for an FHA loan can be slightly more involved than a conventional mortgage, an experienced lender can help you navigate the process of purchasing the home you’ve always wanted. 

One of the elements of getting any type of home loan is the appraisal process. For a conventional mortgage, the appraisal is typically focused on the valuation of the property. When applying for federal funds, the appraiser must be FHA-approved and will deliver a report that outlines any necessary repairs or improvements. 

There are some specific FHA appraisal criteria that borrowers should be aware of. Certain safety features must be present in the home, such as working windows, handrails on staircases, working smoke detectors, and other “minimum property standards.” The home must have working HVAC, plumbing, and electrical systems. It must also have a roof that is in good condition and a foundation that is structurally sound.

The FHA also requires that the property be free of any health and safety hazards, such as lead-based paint or asbestos. However, if the property is in distress (aka a fixer-upper), you can apply for an FHA 203k loan, which will cover both the cost of your mortgage as well as improvements, upgrades, and repairs.  

Some sellers prefer dealing with buyers with conventional financing over FHA offers due to the exacting property standards and the misconception that these applicants lack adequate funds for down payments or earnest money. Partnering with a real estate team that has knowledge of the local market will help you avoid disappointment by communicating the process clearly to misinformed sellers and sourcing the right home for your needs. 

What can I purchase with an FHA mortgage?

If you’re exploring the idea of buying a second home or an investment/ rental property, you’ll need to look into other financing options. FHA loans are only available for the borrower’s primary residence. 

However, the regulations do allow you to purchase a multi-family residence with up to four units. This can be a tremendous tool for consumers who want to begin “rent hacking”, or buying a multi-unit home, living in one unit, and renting out the rest while benefiting from FHA’s low down-payment requirements. 

FHA financing can also be used to purchase condos. However, there are some additional requirements that must be met

For example, the condo complex must be on the FHA’s approved list of condos, which means that it meets certain financial and operational requirements. Or, the building must be FHA-approvable through a process known as “spot approval”, or DELRAP. Your lender can help. The condo must also meet certain occupancy requirements, meaning that at least 50% of the units must be owner-occupied.

If you’re interested in a newly constructed abode, you may be able to get an FHA mortgage for that as well. It’s vital to partner with a knowledgeable mortgage lender who can assist you with the ins and outs of finding the perfect home and the right financing for your specific situation.

Many people feel that owning a home is out of their reach, but you actually have a variety of options. There are many city, state, and federal programs available to help make purchasing real estate more accessible for everyone.

If you have questions about FHA loans that aren’t covered here, please reach out to me for more information and assistance — I’m here to help you every step of the way!

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