FHA Loan is insured by the federal housing administration and is designed for low to middle class first time buyers. With a credit score of 580 you can get a loan with only 3.5% down payment. You can also qualify with a 500 credit score but will need to put a 10% down payment. FHA Loans require an upfront mortgage insurance premium (UFMIP) and an additional monthly private mortgage insurance (PMI). The upfront mortgage insurance premium is equal to 1.75% of your loan value. For example, on a $300,000 loan * 1.75% = $5,250. This will be paid upfront or sometimes can be rolled into your overall loan. The PMI which is paid monthly is usually equal to 0.45%-1.05%. For example a $300,000 loan * 1.0% = annual $3,000 or $250 additional per month. This payment will continue for 11 years of the life of the loan depending on the terms. One way to avoid this long cycle of additional payments, is if your home has gone up in value. If your home does go up in value, you can refinance your home as you have gained equity and therefore your loan to value will be will be less than the new higher appraised value. This can then qualify you for a conventional loan through a multitude of lenders.
FHA Loans also have additional requirements. The loan to income ratio is your monthly loan payment including principle, interest, insurance, HOA fees and property taxes, divided by your monthly income. This ratio shows lenders how affordable this loan is for you to still have some leftover money to handle your other expenses. Ideally your loan value should be 31% or lower however you could be approved up to 40%. The back end loan to income ratio includes all of your other consumer debts such as car loans or credit card debt. Your back end loan to income ratio should be below 43% however some individuals can qualify if they are below 50%.
FHA Loans also have loan limits. This is established per county and is 115% of the median home value. To verify your county you can visit the HUD website. The chart below gives you a quick idea on what could qualify for your area.
Saving up for a down payment can be difficult, luckily there is a variety of ways to help. FHA's allow for a gift from friends/family to help get you started. You can also withdraw up to $10,000 from your IRA without paying a penalty if you are a first time homeowner. It is important however to remember that you will stay pay taxes on this money and it is a lifetime limit. It may also be worth consulting a financial advisor as you will lose out on the years of compound interest. FHA Loans can also qualify for a variety of state housing incentives that can help you with the down payment.
FHA Loans also allow for more leniency when you do run into an issue. One example, the FHA Home Affordable Modification Program (HAMP) allows for lowered payments to help you avoid foreclosure. This program does have a three month trial period with the lower payments that you must complete.
FHA Loans allow for a great option for those who cannot save up for the hefty down payment usually required for conventional loans. This loan program can help you on your way to home ownership!