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The Ins and Outs of FHA Loans

FHA loans are great for first-time homebuyers or buyers with less than perfect credit. FHA loans have low credit score requirements and only require a small down payment. At Achroma Mortgage, we help you find FHA lenders that offer fair, transparent, and unbiased lending decisions that can help you get the financing you need. Check out our current mortgage rates for FHA loans, or visit our mortgage finder to customize a loan for your needs.

What is an FHA Loan?

You don’t go through the FHA to get an FHA loan – instead, you apply for a loan with an FHA lender. The FHA provides FHA lenders with a payment guarantee if borrowers lose their home in foreclosure. In other words, FHA lenders have less to lose, so they are willing to loan you money even with less than perfect qualifying factors. 

Loan Limits for FHA Loans

The maximum amount you can borrow on an FHA loan depends on where you live. The experts at Achroma Mortgage can help you understand the lending limits in your area. In general, FHA loan limits vary between $314,827 and $726,625, with most areas falling somewhere in between these amounts. 

Minimum Credit Score Requirements for FHA Loans

You need a minimum credit score of 580 to get FHA financing. A higher credit score isn’t a bad thing, of course. Lenders look at all of your qualifying factors when deciding what interest rate and closing costs to charge. If you have a credit score as low as 580, though, you may still qualify. If you have a good idea of what your credit score is you can create an account and use your dashboard to learn about how it may impact your mortgage.

In rare cases, FHA lenders can allow credit scores as low as 500. The difference, though, is in the required down payment, which we discuss below. If your credit score is lower than 580, but higher than 500, you may still get approved if you put 10% down on the home. On a $150,000 home, that means a down payment of $15,000. 

Minimum Down Payment Requirements for FHA Loans

Normally, you need a down payment of at least 3.5% of the purchase price to use FHA financing. The down payment can come from several sources:

  • Your own funds 
  • Gift funds from a relative, or a charitable organization

On a $150,000 loan, a 3.5% down payment equals $5,250. 

If you use gift funds for the down payment, the funds cannot come from the lender, realtor, or seller. Typically, gift funds come from a relative (blood or marriage). 

Donors must be able to provide a paper trail to show where the down payment came from. For example, paystubs, a bill of sale for selling an asset, or proof of the sale of a stock all count as a paper trail. You can receive the entire down payment as a gift, as long as the donor states in writing that the money is a gift and not a loan.  

Paying Mortgage Insurance on FHA Loans

The FHA promises lenders they will pay them back should you default on the loan. In order to provide that promise, you must pay mortgage insurance. The FHA has two types of mortgage insurance:

  • Upfront mortgage insurance – You pay 1.75% of the loan amount at the closing as a part of the closing costs. 
  • Annual mortgage insurance – You pay monthly mortgage insurance as well. Lenders add the amount to your monthly mortgage payment. Annual mortgage insurance lasts for the life of the FHA loan. The average borrower pays 0.85% of the loan amount in annual mortgage insurance. A $150,000 loan would require $1,275 in annual mortgage insurance premiums or $106.25 per month.

Maximum Debt-to-Income Ratios for FHA Loans

You need reasonable debt-to-income (DTI) ratios for an FHA loan. This means your mortgage payment and current monthly debts should not take up too much of your monthly income. 

Typically, FHA lenders like your housing payment to take up 31% or less of your gross monthly income (income before taxes). This includes your principal, interest, real estate taxes, homeowner’s insurance, HOA dues (if applicable) and mortgage insurance.

FHA lenders also like your total debts to take up less than 43% of your gross monthly income. Your total debts include all personal debt, such as minimum credit card payments, installment loan payments, student loan payments, alimony, child support, or any other personal debt. 

FHA lenders do offer some flexibility with these guidelines. The experts at Achroma can help you understand where you stand with your debt-to-income ratio as well as how you can improve if your ratios are close to the maximum ratios allowed. You can create an account and use your dashboard for an interactive way to learn how your DTI impacts your mortgage.

Getting Help With Closing Costs on FHA Loans

The FHA offers many ways to help you get approved for a loan. In addition to gift funds for the down payment from a relative, sellers can help you with your closing costs. Sellers can provide up to 6% of the price of the home in closing costs. On a $150,000 home, a seller could give you a credit of up to $9,000 to help with the closing costs.

If your seller isn’t willing to provide you with a credit at the closing, you may be able to turn to your lender. At Achroma, we work with lenders that offer ‘no closing cost loans.’ The lender credits your closing costs for you. In exchange, they charge you a slightly higher interest rate. This does make your monthly payment higher, but lowers the amount of money you need to close on the loan. 

Lastly, you may be able to wrap the costs into the loan. If you agree to pay less than the home’s value for the home, you may have room for closing costs. For example, if a home is worth $175,000, but you bid $150,000 and the seller accepts it, you may have room to roll your closing costs into the loan. 

Eligible Property Types for FHA Loans

You can use FHA financing on single-family homes, condos, and townhomes. The easiest type of property for FHA financing is the single-family home, though. If you buy a condo or townhome, the FHA must approve the association first. Our dedicated non-commissioned Loan Coaches can help you determine if the association is already approved by the FHA in order to make the process easier for you. 

FHA Loans Offer Flexible Financing Options

FHA loans offer more flexible options for first-time homebuyers and borrowers with less than perfect credit. If you are shopping for a mortgage, include FHA financing in your options as you compare the choices you have. At Achroma, we are happy to help you find FHA loans from lenders that offer unbiased, fair, and transparent financing options for people of all ages, races, and occupations.