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An FHA Loan is a mortgage that’s insured by the Federal Housing Administration. They allow borrowers to finance homes with down payments as low as 3.5% and are especially popular with first-time homebuyers.
FHA loans are a good option for first-time homebuyers who may not have saved enough for a large down payment. Even borrowers who have suffered from bankruptcy or foreclosures may qualify for an FHA-backed mortgage.
FHA home loans differ from their conventional counterparts in many ways including a lower down payment requirement, generally more forgiving credit requirements, and occupancy rules.
For maximum financing, FHA loan rules say FICO scores of 580 or better are required. However, lender standards may be higher-check with your chosen financial institution to see what FICO score minimums apply there.
For best results, you should plan to begin the FHA loan application process with no less than 12 consecutive calendar months of on-time payments for all financial obligations including rent/mortgage payments. Those 12 months should be up to and including the month you apply for the loan.
Most FHA mortgage loans today (with certain exceptions listed in the FHA loan handbook for transactions on tribal lands or Hawaiian homelands) require an Up Front Mortgage Insurance Premium (UFMIP) and an annual mortgage insurance premium which is paid in installments over 12 months. The monthly payment is considered part of your monthly mortgage obligation.
FHA “forward mortgages” or purchase loans can be made only for the amount of the mortgage plus approved add-ons to the loan amount; UFMIP, certain closing costs, etc.
Forward loans will not result in cash back at closing time unless you are due a refund for something paid up front but later financed into the loan. FHA forward mortgages cannot be used as a personal loan-some want to apply for more than the transaction requires and take the excess in cash. This will not happen with FHA mortgages.
The FHA loan minimum down payment requirement for forward mortgages is 3.5% of the adjusted value of the home. Some make higher down payments due to credit issues as a “compensating factor”. Some want to know if there is a no-money-down option with FHA mortgages, but the only kind of zero down payment FHA new purchase loan available is intended to assist victims of a natural disaster in a federally declared disaster area.
FHA home loans-new purchase mortgages, One-time Close construction loans, 203(k) rehab loans, and others-require the borrower to be an owner/occupier of the property secured by the FHA mortgage. When it comes to U.S. residency issues, the borrower(s) do not have to be United States citizens. FHA loan rules state that the applicant must be in the U.S. legally and have documentation to prove it. That means resident aliens and nonresident alien loan applicants are permitted. Documentation of legal status is required.
There are many things you can do with an FHA mortgage, and just as many ways to use FHA refinance loans; buying a home with more than one living unit, refinancing an existing loan to do rehab work, and including energy-efficient upgrades into your new mortgage.
FHA home loans are not specifically created for a single type of buyer or a “demographic” of buyers based on whether or not they owned property before. That said, first time home buyers will appreciate FHA loan down payment requirements (lower than many conventional loans) and more lenient FHA credit requirements compared to conventional mortgages or other types of non-FHA loans.
The FHA home loan program isn’t strictly for first homes, but that the participating lender may offer you some kind of first-time buyer incentive. This is dependent on the lender, and there may also be state/local assistance program for first time buyers to take advantage of. The FHA itself offers no first-time home buyer incentive.
It is definitely possible for an FHA loan applicant to own property and apply for a new FHA home loan to purchase a home. However, borrowers should keep in mind that FHA loan rules state any home purchased with an FHA mortgage must be a primary residence and not a vacation home, timeshare, bed-and-breakfast, or other “occasional occupancy” type property.
At least one borrower obligated on the mortgage loan is required to use the home to be purchased with the FHA loan as the primary residence as a condition of loan approval. FHA loan rules permit the purchase of residences with as many as four living units, giving the borrower the option to rent out the unoccupied units. The FHA loan occupancy requirement applies in such transactions the same as for single-unit property.
There are many who want to refinance an existing mortgage-using an FHA loan gives you several options including the FHA 203(k) rehab loan, which can refinance the mortgage and help pay for upgrades and repairs.
FHA 203(k) rehab loans can be approved with an FHA Energy Efficient Mortgage option to add more funds to the loan for approved energy-efficient upgrades or improvements.
If your current home loan is an FHA mortgage, there is an option to refinance in order to to get lower monthly payments and/or interest rates. This is done using an FHA Streamline Refinance. Streamline loans have no FHA-required credit check or FHA requirement for a new appraisal. It will be up to your lender to determine whether these are needed for your transaction.
FHA Streamline refinance loans usually must, according to the rules of the loan, offer a tangible benefit to the borrower. This can be in the form of a lower interest rate, lower payments, or refinancing out of an Adjustable Rate Mortgage into a fixed rate loan.
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