First time homeowners would be foolish to think the journey ends when they sign their names on the dotted line. The next step, if they haven’t done so already, is get their investment insured against fires, water damage, and all matters that can be declared “acts of God.” The financial burden these place on the owners could sour their victory.
The Federal Housing Administration (FHA) is one organization started in 1934 to help low income individuals obtain a mortgage. FHA offers government-backed housing loans that protect lenders against default. This makes the loans act more as mortgage insurance.
Aside from having financial challenges, there are other factors that go into applying and gaining an FHA loan. The borrower’s employment history, for starters, must show they have worked for the same employer for the past two years. They must also have a valid Social Security, legal citizenship, and above the age of 18. And, that’s just the beginning.
The minimum down payment for an FHA loan is 3.5%. This percentage can be gifted from donor, retroactively making it zero down. This is an advantage when trying to purchase houses in Colorado Springs or another emerging market.
Borrowers can apply for rate and term refinances by getting a Loan-to-Value (LTV). LTVs are distributed according to certified appraisals that can cost the owner from $250 to $750. The property value from the appraisal will be divided against the loan value leaving you with an LTV percentage.
An FHA loan is essentially a form of mortgage insurance. A borrower will have to pay a Mortgage Insurance Premium (MIP). There are two kinds of MIPs: upfront premium and annual premium.
The upfront MIP is 1.75% of the loan and paid upon application. An annual premium varies based on the loan term (15 to 30 years) and can range from .45-1.05%. Those with a 15 year mortgage may have to pay a higher interest rate while less than 15 may have lower rate. That number is also adjusted based on the amount of money borrowed.
Buyers with low credit scores can still get an FHA. If that credit score is within the range of 500-580, then the borrower must pay an upfront charge of 10%.
Low credit borrowers must also have no more than 1 late payment per year. An applicant must also have no bankruptcies, foreclosures, or tax liens within 3 years.
Limits & Loans
All FHA loans, regardless of credit score, have a maximum borrowing ceiling of $729,750. And, that’s only an estimate based on the cost area and the number of units owned.
203k renovation loans are reserved for houses in need of major repairs to their plumbing or climate control. The payout is set according to the cost of repairs in a detailed LTV appraisal. A streamlined version is issued to properties that require cosmetic repairs to the interior (kitchens, bathrooms) and exterior (siding, roofing, decks and patios). The streamlined borrowing ceiling is $35,000.
Cash-out refinances are also available under FHA for any owner who has built up equity in their property.