FHA Loans Guide
Everything You Need to Know About FHA Loans
Characteristics of FHA Loans
FHA-approved lenders offer FHA-guaranteed mortgages to qualified homebuyers. These loans must conform to FHA rules, and the most popular program has the following characteristics:
Interest rate: fixed
Term: 15 or 30 years
Credit level: minimum credit score of 500
Down payment requirement: for applicants with credit scores of at least 580, the minimum down payment is 3.5%. For applicants with credit scores between 500 and 579, the minimum down payment is 10%
Borrower’s closing costs: from 3% to 5%. Homesellers, lenders and builders can pay up to 6% to cover the closing costs on behalf of the borrower
Mortgage insurance: required on down payments below 20%. The initial mortgage insurance premium is 1.75% of loan amount, paid up-front. The initial premium can be rolled into the mortgage balance. The annual mortgage insurance premium ranges from 0.45% for 15-year term loans to 1.05% for 30-year term mortgages. The annual premium is paid in monthly installments
FHA Loan Limits
The FHA imposes certain limits on how much you can borrow under its guarantee program. The 2019 limits include the floor (i.e., minimum) amount in a low cost area and the ceiling (i.e., maximum) in a high cost neighborhood. A one-unit property has a floor of $314,827 and a ceiling of $726,525. The limits are higher for multi-unit properties, and special exception areas have ceilings exceeding $1 million.
FHA Loan Types
The FHA has a variety of loan-guarantee programs:
Fixed-rate mortgages are the most popular FHA loan. The interest rate and monthly payments remains the same over the life of the mortgage.
Known as an ARM, the initial interest rate might be lower than a fixed-rate mortgage. Rates can be adjusted once or twice each year and can cause your payments to rise above the fixed rate. An ARM may make it easier to buy an expensive house and is an attractive alternative for folks who move often.
Section 245(a) Graduated Payment Mortgage
The section 245 (a) Graduated Payment Mortgage is tailored to applicants with upwardly mobile income. The initial payments are low but increase over time. GPMs are available to single-family, primary residences. The low early payments are negatively amortizing, in that they increase your loan balance by the amount they fall below the standard fixed-rate for FHA mortgages. Naturally, as the loan approaches term, the monthly payments will be higher than under a fixed-rate mortgage. Four types of amortization schedules are available:
Code A: annual increase of 2.5% for 5 years
Code B: annual increase of 5.0% for 5 years
Code C: annual increase of 7.5% for 5 years
Code D: annual increase of 2.0% for 10 years
Section 245(a) Growing Equity Mortgage
On the other hand, the Section 245(a) Growing Equity Mortgage is similar to the GPM program. However, the GEM plan’s scheduled increases shorten the loan term and saves borrowers some money. GEMs are available for single-family homes and condos. The first year’s payments are based on a 30-year amortization schedule. Then, monthly payments increase as follows:
Code L: annual increase of 1% for life of loan
Code M: annual increase of 2% for life of loan
Code N: annual increase of 3% for life of loan
Code O: annual increase of 4% for life of loan
Code P: annual increase of 5% for life of loan
Section 203(k) Plan
The Section 203(k) Plan enables homebuyers and homeowners to finance the purchase/refinancing of a residential property that is at least one year old, as well as the cost to rehabilitate the home, all in a single mortgage. This allows a homebuyer to fix up a home before moving in. This mortgage can have a fixed or adjustable rate. The rehabilitation must cost at least $5,000. The lender keeps the rehab money in escrow until the work is complete. There’s a long list of approved home improvements under this program. The total property value must fall with FHA mortgage limits for the location.
Limited 203(k) Rehabilitation Mortgage Insurance
The Limited 203(k) Rehabilitation Mortgage Insurance plan is for less extensive renovations, costing up to $35,000.
Home Equity Conversion Mortgage (HECM)
The Home Equity Conversion Mortgage, also known as HECM, is a reverse mortgage insured by the FHA. Borrowers age 62 and up can use the program to withdraw the equity in their home. The withdrawal amount varies with the ages of the homeowners, the mortgage limit, the appraised value and current interest rates. Applicants must continue to live in their homes and keep it in good repair. That also means paying the property tax and insurance premiums. You can access your withdrawals as monthly payments for an agreed period or for the rest of your life. Alternatively, you can arrange a line of credit with some limits on the withdrawal amounts. The maximum claim amount for FHA-insured HECMs in 2019 is $726,525.
Energy-efficient Mortgage (EEM) Program
The Energy-Efficient Mortgage Program designers reasoned that money saved on energy efficiency can go toward a bigger mortgage. This program encourages energy efficiency in two ways. Firstly, it insures mortgages for homebuyers purchasing homes that are demonstrably energy efficient. For example, a home that is EnergyStar certified would qualify. Alternatively, you can use this program to purchase and refurbish homes to increase their efficiency. You can roll the cost of the green improvements into the mortgage without inflating your required down payment. The improvements must produce benefits in excess of their costs, as confirmed by a home-energy survey. The amount that can be financed under this program is the lessor of (1) 115% of the median local price for a single family home, (2) the homes adjusted value, and (3) 150% of the national limit on conforming mortgages.
Mobile Home Mortgages
Mobile Home Mortgages guarantee modest loans for the purchase/refinance of a manufactured/mobile home and/or the land it’ll go on. You can lease the lot instead of purchasing the land, but the lease term must be at least three years. The maximum loan amounts are:
Home only: $59,678, 20-year term
Lot only: $23,226, 15-year term
Home and lot: $92,904, 20-year term
Section 203(b) Loans
These are loan guarantees for condominiums. The homes can be detached or semi-detached, row houses, walk-ups, mid- and high-rises, and manufactured housing. Loan terms on single units extend up to 30 years.
For more information about FHA loans, visit this website for the Department of Housing and Urban Development.