An FHA loan is a mortgage issued by an FHA approved lender and insured by the Federal Housing Administration (FHA). Intended for low and middle income borrowers, FHA loans require lower minimum down payments and credit scores than many conventional loans.
Starting in 2019, you can borrow up to 96.5% of the value of your home with an FHA loan (meaning you only need to make a down payment of 3.5%). You will need a credit rating of at least 580 to qualify. If your credit rating falls between 500 and 579, you can still get an FHA loan if you pay a 10% down payment. With FHA loans Michigan, your down payment can come from savings, a financial gift from a family member, or a down payment assistance grant.
All of these factors make FHA loans popular with aspiring home buyers.
While the Federal Housing Administration (FHA Loans) loans require lower down payments and credit scores than conventional loans, they carry other stringent requirements.
It’s important to note that the Federal Housing Administration does not actually provide you with the money for your mortgage. Instead, you get a loan from an FHA approved lender, such as a bank, and the FHA guarantees the loan. For this reason, some people call it an FHA insured loan.
You pay for this guarantee through FHA mortgage insurance premiums. Your lender bears less risk because the FHA will pay the lender the claim if you are unable to get the loan.
FHA loans are federally backed mortgages designed for low and middle-income borrowers who may have below-average credit scores.
FHA loans require lower minimum down payments and credit scores than many conventional loans.
FHA loans are issued by approved banks and lending institutions that will assess your qualifications for the loan.
These loans come with specific restrictions and loans not found in conventional loans.
An FHA loan requires you to pay two types of mortgage insurance premiums – Upfront Mortgage Insurance Premium (UFMIP) and Annual MIP (charged monthly). The advance MIP is equal to 1.75% of the loan base (as of 2018). You pay it at closing time, or it can be rolled up on credit. For example, if you issued a US $350,000 mortgage, you would pay UFMIP 1.75% x US $350,000 = US $6,125. Payments are credited to an escrow account set up by the US Treasury Department and the funds are used to make mortgage payments in the event of default on the loan.
Despite the name, you make annual MIP payments every month. The amount of payments varies from 0.45% to 1.05% of the base loan amount, depending on the loan amount, loan term and the initial amount. Typical MIP value is usually 0.85% of the loan amount. For example, if you have a loan of $350,000, you will pay an annual MIP of 0.85% x $350,000 = $2,975 or $247.92 per month. This is paid in addition to the cost of the UFMIP.
You will make annual MIP payments over 11 years or the term of the loan, depending on the loan term and LTV.
You can deduct the amount you pay in premiums; however, you must list your deductions – instead of taking the standard deduction (up to$ 24,000 in 2019 if married together) to do so.
Congress created the Federal Housing Authority in 1934 during the Great Depression. The housing industry was in trouble at the time: default and foreclosure rates skyrocketed, loans were capped at 50% of the market value of real estate, and many home buyers found it difficult to meet mortgage loan terms, including short maturities combined with balance payments. As a result, the US was largely a nation of tenants, with only 40% of families owning a home.
To stimulate the housing market, the government created a federal loan insurance program that reduced the risk of lenders and made it easier for borrowers to qualify for mortgages. According to the Federal Reserve Bank of St. Louis, the share of homeowners in the United States has grown steadily, reaching an all-time high of 69.2% in 2004.
In addition to traditional first mortgages, FHA offers several other lending programs, including:
- Home Equity Conversion Mortgage (HECM) program is a reverse mortgage program that helps seniors age 62 and older convert capital in their homes into cash while retaining ownership of the home. You choose how to withdraw funds, either as a fixed monthly amount or a line of credit (or a combination of both);
- Credit improvement FHA 203k. This one loan allows you to borrow money for both the purchase of a home and home improvement, which can go a long way if you don’t have a lot of cash after your down payment;
- FHA Energy Efficient Mortgage Program. This is a similar concept but aims at upgrades that can lower your utility bills, such as new insulation or new solar or wind power systems. The idea is that energy efficient homes have lower running costs, which lowers bills and makes more income available for mortgage payments;
- Section 245 (a) loan is a program for borrowers who expect to increase their income. Under the Section 245 (a) program, the Phase Mortgage starts with lower initial monthly payments that gradually increase over time, and the Rising Equity Mortgage has scheduled an increase in monthly principal payments, resulting in shorter loan terms.
FHA loans Michigan are available to individuals with credit scores as low as 500. If your credit rating is between 500 and 579, you can get an FHA loan with a down payment of 10%. If your credit rating is 580 or higher, you can get an FHA loan from just 3.5% lower. In comparison, you usually need a credit rating of at least 620 and a down payment of 3% to 20% to qualify for a regular mortgage.
For an FHA loan or any mortgage, there must be at least two years of bankruptcy unless you can prove that the bankruptcy was caused by uncontrollable circumstances. You must be in foreclosure for at least three years and demonstrate that you are working to restore good credit. If you are not eligible for federal student loans or income tax, you cannot qualify.
FHA loans vs regular loans
|FHA loan||Regular loan|
|Minimum credit score||500||620|
|Advance payment||3.5% with a credit score of 580+ and 10% with a credit score of 500 to 579||3% to 20%|
|Lending terms||15 or 30 years old||10, 15, 20 or 30 years|
|Mortgage insurance||Advance MIP + Annual MIP for 11 years or for the loan term, depending on LTV and loan term||None with a down payment of at least 20% or after loan repayment up to 78% LTV|
|Mortgage insurance premiums||Advance: 1.75% of the loan + Annual: from 0.45% to 1.05%||PMI: from 0.5% to 1% of the loan amount per year|
|Down payment gifts||100% down payment can be a gift||Only a part can be a gift if the down payment is less than 20%|
|Advance payment support programs||Yes||No|
Your lender will assess your FHA qualifications like any mortgage applicant. However, instead of using your credit report, the lender can view your work history for the past two years, as well as other payment history records such as utility bills and rent payments. You can qualify for an FHA loan if you have experienced bankruptcy or foreclosure if you have repaired good credit. Typically, the lower your credit score and down payment, the higher the interest rate you will be charged on your mortgage.
Remember, when you buy a home, you may be responsible for certain personal expenses such as loan fees, attorney fees, and appraisal costs. One of the benefits of an FHA mortgage is that the seller, developer, or lender can pay some of these closing costs on your behalf. If the seller is having a hard time finding a buyer, they may simply offer you help in closing the deal as a sweetener for the deal.
Along with the credit rating and down payment criteria, there are certain FHA home loan requirements Michigan set out by the FHA for these loans. Your lender must be an FHA approved lender and you must have a consistent employment history or have worked for the same employer within the past two years.
If you are self-employed, you need two years of successful self-employment history backed up by tax returns and a current year balance sheet and income statement. If you have been self-employed for less than two years but for more than one year, you may still be eligible if you have a solid work record and income in the two years prior to self-employment and self-employment has not changed or a related occupation. You must have a valid Social Security number, reside legally in the United States, and be an adult in your state to sign a mortgage.
Typically the property being funded should be your primary residence and should be occupied by the owner. This loan program cannot be used for investment or rental real estate. Private and semi-detached houses, townhouses, terraced houses and apartments within the framework of FHA-approved apartment projects are eligible for FHA funding.
Your front-end ratio (mortgage payment, HOA fees, property taxes, mortgage insurance, and homeowner’s insurance) must be less than 31% of your gross income. In some cases, you may be approved with a 40% ratio.
Your aspect ratio (your mortgage payment and all other monthly consumer debt) should be less than 43% of your gross income. However, it can be approved with a ratio of up to 50%. In addition, you need a property appraisal from an FHA approved appraiser and the home must meet certain minimum standards. If the home does not meet these standards and the seller does not agree to the necessary repairs, you must pay for the repair at closure (funds are held in escrow until the repairs are completed).
One limitation of FHA loans is that they have external restrictions on how much you can borrow. They are established by the region you live in, with low-cost areas that have a lower limit (“floor”) than a regular FHA loan and high-cost areas with a higher rate (“ceiling”). In addition, there are “special exceptions” areas, including Alaska, Hawaii, Guam and the US Virgin Islands, where very high construction costs push the limits even higher. Elsewhere, the cap is set at 115% of the county’s median home price as determined by the US Department of Housing and Urban Development.
FHA loans have some benefits. If you have such a loan, you may be eligible for a loan if you have experienced legal financial difficulties – for example, loss of income or increased living expenses – or if you are having a difficult monthly mortgage payment. The FHA-HAMP program can help you avoid foreclosure by continually reducing your monthly mortgage payment to an acceptable level. To become a full member of the program, you must successfully complete a trial payment plan, in which you make three scheduled payments – on time – of a lesser modified amount.
While an FHA loan may sound great, it is not suitable for everyone. This will not help those with a credit rating of less than 500. On the other hand, beginner homeowners who can afford a large down payment may find it better to go with a regular mortgage as they can save more money in the long run through a lower interest rate.
The FHA says the FHA loan “is not for those who shop in the higher price range. The FHA loan program was created to support “low and middle income” home buyers, especially those whose cash is limited for a down payment. “