Overview
FHA Loans are common home loans backed by the Federal Housing Administration. Just like VA Loans, the government backs these loans in case the borrowers default on the loan, but instead of only a 25% guarantee, FHA Loans are fully insured by the government. Even though the guarantee is a major benefit of the FHA Loan, it doesn’t have the same benefits of the VA Loan like a $0 down payment requirement, and no PMI.
Some of the great benefits that you’ll find with FHA Loans are due to the fact that the government insures the loans which means lenders are protected against loss if the borrower defaults on their loan. With this protection, lenders are able to offer more flexibility. These benefits include credit score requirements typically being lower than those of other loans, borrowers who have financial issues on their history like a past bankruptcy can still qualify, and closing costs can often be rolled into the loan.
Guidelines/Requirements
Borrowers who use FHA Loans are required to pay a minimum down payment of 3.5% if their credit score is 580 or higher. If their credit score lands between 500 and 579, the minimum down payment required raises to 10%. In addition to the down payment, FHA Loans are subject to 1.75% private mortgage insurance up front with additional annual fees. These loans are great options for borrowers who have lower credit scores or high DTI ratios.
FHA Loans vs. VA Loans
|
VA Loan |
FHA Loan |
|---|---|
|
$0 down payment |
3.5% minimum down payment |
|
No minimum credit score required by the VA and relaxed requirements by lenders |
580 minimum credit score with a 3.5% down payment and 500 minimum credit score with a 10% down payment |
|
VA funding fee (typically between 1.25% and 3.6%) |
1.75% PMI up front and annual fees |
|
Reserved exclusively for veterans, service members, and military families |
Good option for borrowers with lower credit scores or high DTI ratios |
Getting Started
The process of getting started with an FHA Loan is pretty similar to that of other traditional loans. You will need to prepare all necessary documents like pay stubs, tax returns, and proof of employment for a lender in order to get a pre-approval. That pre-approval will help you determine your buying power and then you can get started on the fun part, finding your home!
If you have served in the US military or are currently serving and are interested in having a government insured loan that has a $0 down payment and no PMI, you’ll want to look into the VA Loan.
What happens next?
Once you’ve spoken with your lender about your options within the FHA loan, it’s time to jump into the home buying process.
- Go home shopping: this is the fun part! Check out homes that work within your budget and have the amenities you’re looking for.
- Submit an offer: once you find the house you’re ready to commit to, it’s time to make an offer and prepare for negotiations!
- Submit updated documents to your lender: this will happen right before you submit an offer that has been accepted. Your lender will supply you with a list of documents to submit and that will get your loan into processing!
- Lock in your interest: once your lender has received your updated documents and the contract, you’ll be given an opportunity to lock in your interest rate. Typically you can lock it in for 15, 30, 45, or 60 days. Be sure to lock your rate for as long as the negotiated escrow period, or longer! Inspections can take a while so don’t be afraid to go with something outside of 30 days.
- Get a home appraisal and home inspection: now that your offer has been accepted, you’ll move forward with the loan process and will begin the inspection and appraisal process.
- Receive approval: after all your documents have been reviewed you’ll receive underwriting approval and can go to closing.
- Close on your home: after you’ve had an offer accepted, gone through the full approval process and all inspections and are ready to go, your lender will clear you for closing!
- Sign your final loan documents and get the keys to your home: Congratulations, you are a homeowner!
Documents that will be reviewed
As mentioned above, your lender will need to obtain very specific documents and verifications to submit to the underwriters in order to complete the loan process and get approval. These documents include:
- Credit report to ensure the borrower has a good credit score and no red flags on past credit like bankruptcy or other financial issues.
- Employment verification to show how much income borrowers have now, and any anticipated additional income as laid out in employment agreements. Documents to help with this include:
- W-2’s from the last two years.
- Pay stubs from the last 30-60 days prior to applying.
- Tax Returns from the last two years
- Asset information including statements from all bank accounts such as checking, savings, and retirement accounts.
- Any additional income asset or liability information like dividends, overtime, pension, child support, etc.
- Renovation plans and permits (as applicable) your lender will review these documents with the underwriting team to ensure that the repairs to the home match the increase value to the home
If all of these documents are checked and approved, underwriters can issue a “clear to close'' which means borrowers are ready to go to the final stage of the process, closing.
FAQs
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What is the FHA Loan program best used for?
FHA Loans are best suited for people who are not eligible for a VA Loan or for those who have used their VA Loan already and are looking to buy another home to live in that is at least 100 miles away.
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Is there a down payment required for FHA Loans?
Yes. FHA Loans require a down payment of at least 3.5% for borrowers with credit scores over 580 and 10% for borrowers with credit scores between 500-579.
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How do interest rates compare to a VA Loan?
The FHA Loan program has very similar interest rates to the VA Loan, but FHA Loans also include MIP (mortgage insurance premium) which can add on a few hundred dollars per month in costs. MIP can not be avoided with an FHA Loan but VA Loans are not subject to MIP. FHA Loans are still great options for moving families or PCSing veterans who have already used their VA Loan entitlement.
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What does the FHA Loan cost?
The costs associated with FHA Loans are comparable to VA Loans with closing costs ranging from 2% to 4%. When you add in the down payment requirement, a home buyer can expect to have a minimum of 5.5% to 7.5% in overall costs.
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Why would I use an FHA Loan?
An investment in real estate always beats renting. Even if you aren’t a veteran or have already used your VA Loan, you should always try to own the house you are living in and the FHA Loan could be a great option.