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FHA Loans: Making Homeownership Accessible and Affordable

For many aspiring homeowners, particularly first-time buyers or those with less-than-perfect credit, the traditional mortgage path can seem out of reach. This is where the FHA Loan, insured by the Federal Housing Administration (FHA), steps in as a vital, government-backed solution designed to make homeownership a reality.

FHA loans are non-conforming mortgages that stand apart from conventional products due to their flexible credit and down payment requirements. At The Herd Lending, we champion FHA financing as a critical tool for increasing accessibility, offering favorable terms that many other loan programs cannot match.

What is an FHA Loan?

An FHA loan is a mortgage issued by an FHA-approved lender (like The Herd Lending) but is insured by the Federal Housing Administration. This insurance protects the lender against loss if the borrower defaults, which is what allows lenders to offer more lenient qualification standards and lower minimum down payments.

The FHA loan program has a long-standing history of helping low- and moderate-income buyers achieve their homeownership goals.

How to Qualify for an FHA Loan: Flexibility is Key

FHA loans are famous for their flexible qualification guidelines, focusing less on pristine credit history and more on a stable income and manageable debt.

Credit Score Requirements

The FHA sets the most flexible minimum credit standards of any major loan program, though requirements vary depending on the down payment amount:

  • 3.5% Down Payment: A FICO score of 580 or higher is generally required to qualify for the minimum 3.5% down payment.
  • 10% Down Payment: If your credit score is between 500 and 579, you are still eligible for an FHA loan, but you will need a 10% down payment.
  • Lender Overlays: While the FHA sets a minimum of 500, many individual lenders implement their own requirements (called overlays), with a common minimum set at 620.

Debt-to-Income (DTI) Ratio

The FHA is also more flexible regarding a borrower’s Debt-to-Income (DTI) ratio compared to conventional standards.

  • Maximum DTI: While the standard total DTI is often set at 43%, the FHA allows this ratio to extend up to 56.99% if the borrower has strong compensating factors.
  • Compensating Factors: These factors can include a larger down payment, substantial cash reserves, or a history of successfully making similar housing payments without issues.

Income and Employment

Lenders look for stable, verifiable income, typically requiring a two-year history of employment. The FHA accepts various income sources, including documented steady income from self-employment.

Down Payment & Mortgage Insurance: The Costs

How Much Down Payment for an FHA Loan?

The minimum down payment for an FHA loan is one of its primary advantages:

  • Minimum Down Payment: As noted above, with a credit score of 580 or higher, the minimum down payment is 3.5% of the home’s purchase price.
  • Payment Source: The down payment can be sourced from savings, but FHA loans also permit gift funds from family members, employers, or approved non-profit organizations, as well as Down Payment Assistance (DPA) programs.

Do FHA Loans Require PMI (MIP)?

The answer is yes, FHA loans require Mortgage Insurance Premium (MIP), which consists of two parts:

  1. Upfront Mortgage Insurance Premium (UFMIP): A one-time fee typically equal to 1.75% of the loan amount. This fee is collected at closing but is usually financed (rolled) into the loan amount, so it is not an out-of-pocket expense.
  2. Annual Mortgage Insurance Premium (MIP): This is an ongoing recurring charge, calculated annually as a percentage of the loan amount, but collected in monthly installments. The annual MIP rate typically ranges from 0.15% to 0.75%, varying based on the loan term, loan amount, and Loan-to-Value (LTV) ratio.

Duration of MIP: This is a crucial difference from Conventional PMI:

  • If the borrower makes a down payment of less than 10%, the monthly MIP generally lasts for the entire life of the loan.
  • If the borrower makes a down payment of 10% or more, the monthly MIP is typically paid for 11 years.

The most common way to remove MIP is by refinancing the loan into a Conventional mortgage once the home has 20% equity.

Property Rules and Assumability

Can FHA Loans Be Used for Investment Properties?

No, not directly. FHA loans are strictly intended for owner-occupied properties. The borrower must certify their intent to use the home as their primary residence and generally must move in within 60 days of closing and live in the property for at least one year.

However, there is a major exception that allows for income generation:

  • Multi-Unit Properties: FHA loans can be used to purchase a 2- to 4-unit property, provided the buyer lives in one of the units as their primary residence. This “house hacking” strategy allows the owner to rent out the other units, often using the projected rental income to help qualify for the loan.
  • Future Conversion: After meeting the one-year occupancy requirement, the borrower is generally free to move out and convert the entire property into a rental property.

Are FHA Loans Assumable?

Yes, FHA loans are assumable.

  • FHA mortgages are exempt from the “due-on-sale” clause common in conventional mortgages, which requires the loan to be paid in full upon sale.
  • Assumability allows a future buyer to take over the seller’s existing mortgage, along with its original interest rate and remaining terms. This can be a huge competitive advantage for sellers when interest rates are rising, but the buyer must still be credit-qualified by the lender to assume the debt.

Contact The Herd Lending Today!

Ready to take the first step towards homeownership with an FHA loan? Contact us today and let our team of experts guide you through the FHA loan process. Call us at (904) 406-7753 or fill out our online contact form to get started. Trust our team for your FHA loan needs – we're here to help you achieve your homeownership goals.
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