FHA mortgages were created to help home buyers facing specific challenges.
Yet, FHA is not the first choice of many buyers. ItsÂ popularity rises and falls depending on cost andÂ availability of other options.
Currently, an FHA loan isnâ€™t the most innovative option. Itâ€™s also not the cheapest.
But thereâ€™s a reason FHA has been around more than eighty years.
It is ultra-flexible on credit scores and is available to buyers with lower incomes. Itâ€™s the U.S. governmentâ€™s tool to promote homeownership, especially among those who canâ€™t qualify for other loan types.
Nearly 40 percent of first-time home buyers age 36 and younger use FHA, according to a recent study. This is no sub-par mortgage loan.
Some argue that there are better options available, but aÂ number of factors still make FHA the best option for manyÂ buyers.Click to see today's rates (Mar 26th, 2017)
Federal Housing Administration (FHA) loans are government-backed mortgages that allow home buyers to qualify more easily.
The U.S. government insures loans approved to FHA standards, giving lenders more flexibility to approve loans they otherwise might turn down.
Home buyers donâ€™t need a 20% downpayment or even close to it. And, buyers can have a credit score way below 720 and still qualify for FHA.
Without FHA, millions of todayâ€™s homeowners would still be renters.Click to see today's rates (Mar 26th, 2017)
FHA mortgages donâ€™t have the lowest downpayment requirement, but it is low.
Applicants with a 580 or higher credit score canÂ put down just 3.5 percent.
Thatâ€™s just $3,500 for each one hundred thousand dollars in loan amount.
Fannie Maeâ€™s HomeReadyTM program requires only three percent down, and USDA and VA home loansÂ require zero downpayment.
However, not everyone is eligible for these specializedÂ loan programs.
VA loans, backed by theÂ Department of Veterans Affairs (VA), require applicants to serve in the U.S.Â Armed Forces. Likewise, USDA loans are somewhat restrictive in that the property must be located in a USDA-eligible area.
And HomeReadyTM buyers must fall within designated income limits, or purchase a home withinÂ under-served communities.
FHA has no income eligibility restrictions. Nor are mortgages limited to first-time buyers or certain geographical areas.
That makes FHA available to more buyers in more situations than the more narrow financing options available today.
Fannie Mae and Freddie Mac may say they accept FICOs as low as 620, but in reality, lenders impose higher minimums.
These two agencies create guidelines by which lenders issue mortgages. But, banks and mortgage companies add their own rules on top of Fannie and Freddie requirements.
The extra rules are called lender overlays.
Stricter credit score minimums are part of the reason the average credit score for completed Fannie Mae and Freddie Mac home purchase loans was 754 in May 2016.
According to the same report, by loan software company Ellie Mae, the average FICO for closed FHA purchases was almost 60 points lower at 686.
FHA loan requirementsÂ allow for very low credit scores. About 37 percent of FHA approvals fell into the 650-699 credit score range according to Ellie Mae. Another 24 percent of applicants had a score between 600 and 649.
The majority of Fannie Mae and Freddie Mac approvals went to applicants with FICOs 100 points higher, in the 700-749 group.
High credit scores are great, if you have them. But applicants withÂ credit mistakes in their past can often purchase a home before they have fullyÂ restoredÂ their credit.Click to see today's rates (Mar 26th, 2017)
FHA loans also allow higher debt-to-income ratios.
Your debt-to-income ratio, or DTI, is calculated by comparing two things: your debt payments and your before-tax income.
For instance, if you earn $5,000 a month and your debt payment total is $2,000, your DTI is 40 percent.
Most conventional mortgage programs -- those offered by Fannie Mae and Freddie Mac -- allow debt-to-income ratios between 36 and 43 percent.
With downpayments of less than 25 percent, for example, Fannie Mae lets you go to 43 percent DTI for FICOs of 700 or higher.
Ellie Mae reported in May 2016 that the average DTI for closed conventional purchases was 34 percent.
The average DTI for closed FHA purchases in May 2016 was 41 percent, and FHA will allow ratios as high as 50 percent.
To get an approval at this high ratio, youâ€™ll likely need one or more compensating factors -- for instance, a great credit score, significant savings, or a downpayment exceeding the minimum.
The future buyer of your home can assume your FHA mortgage.
This means a qualified buyer can take over your mortgage when you sell your home, instead of getting their own home loan.
Why wouldnâ€™t someone open a new loan to buy a home? Because current mortgage interest rates are much lower than they areÂ likely to be in the future.
If interest rates are higher when you sell your property, this assumability can help you sell your home faster, get more money, or both.
In a way, FHA allows you to purchase rental property with 3.5 percent down.
You have to choose a multi-unit property â€“ a duplex, tri-plex, or fourplex â€“ and live in one of the units. The rent from the other units can partially or even fully offset your mortgage payment.
Conventional lenders will lend on investment homes with 15 percent down, if you have excellent credit, income and assets.
Use FHA financing to gainÂ landlord experienceÂ with less risk and potentially more reward.Click to see today's rates (Mar 26th, 2017)
Many lenders and online resources say home buyers should avoid FHA's mortgage insurance premiums (MIP).
That's becauseÂ FHA mortgage insuranceÂ "sticks" to the loan for the entire repayment term. Conventional loan mortgage insurance, however, drops off when you reach 20 percent equity. FHA mortgage insurance could last 30 years. But you can refinance to cancel it long before then.
Most home buyers purchase with FHA, then refinance into a conventional loan with no mortgage insurance, when theyâ€™ve built enough equity.
Taking on FHA mortgage insurance can be aÂ solid investment. It gets you into a home sooner. You can start building home equity, which is the number one wealth-building tool for most American households.
Standard mortgageÂ rates are low, and, according to Ellie Mae, FHA rates are even lower.
Get an FHA rate quote for your home purchase, and check your FHA home buying eligibility.Â No social security number is required to start, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Mar 26th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)