How Does it Work?

An FHA Loan is backed by the Federal Housing Administration and nearly 1 in 5 homebuyers have an FHA Loan for their home. This loan was originally created to assist first time home-buyers however, it can be used by anyone eligible. It’s a great low down-payment alternative to different mortgage loans. Basically, the FHA will back you in applying for your loan which raises your credibility and makes you seem like less of a risk considering your low down-payment. In exchange, an FHA loan requires payments for two types of mortgage insurance: Upfront Mortgage Insurance Premium (UFMIP) and Annual Mortgage Insurance Premium. The UFMIP is 1.75% of your overall loan amount and can be paid up front in a singular payment, or financed within the loan. Your Annual MIP can vary between .45%-1.05% of your total mortgage amount based on loan length and amount and is paid monthly.

How Much Do I Have to Put Down?

An FHA Loan is a great option for a lower down-payment. While 20% is a general presumption by most people for a down payment, depending on your credit score you can go much lower than that. FHA allows for a minimum down payment of 3.5% with a credit score of 580+, which is most people. However, if your credit score is lower than 620, you may be subject to added requirements.

You may also use financial gifts towards the closing costs and down payment. This means if your closing costs equate to $10,000, you may accept a gift of $10,000 from someone and use that towards your costs. Most loans don’t allow this because it is not an indication of monthly income.

There is also more leniency regarding your debt to income ratio (DTI.) There are two types of DTI; Front-End and Back-End. Your Front-End ratio is limited solely to housing costs, while your Back-End ratio considers all of your current debt, such as credit cards, car payments, and student loans, compared to your monthly income. In some circumstances, an FHA loan will allow you to hold a debt to income ratio of 56% debt per month.

What are the Restrictions?

An FHA Loan is not available for all houses. First, it is only available for one to four unit homes. If the property you are looking to buy is more units than four, you must apply for a different type of loan. Second, this must be your primary residence. You cannot use an FHA loan for a second home or investment property.

Loan limits are also a factor in FHA loans. These limits vary by state and even by county. This means that you cannot take a loan out that is higher than the loan limit. The most recent loan limits for most counties in the Upstate/Central New York area are:

  • One Unit Home: $356,362
  • Two-Unit Home: $456,275
  • Three-Unit Home: $551,500
  • Four-Unit Home: $685,400

An FHA Loan is also much stricter on health and safety standards. Before you can move into your home, there must be absolutely no concerns regarding home inspection such as missing railings from stairwells, chipped paint, anything torn down or rotted, etc. These all must be fixed and inspected before moving in. 

How Do I Qualify?

The only way to absolutely know if you qualify for an FHA Loan is to talk to a licensed mortgage loan officer. They will consider the following factors:

  • Your employment history. Is it stable? How long were you with your past and current employer?
  • Your credit score and ability to pay your correlated down payment accordingly
  • The property eligibility for an FHA loan
  • Your debt to income ratio

Call the experts at Premium Mortgage Corporation to find out if you qualify!