FHA loans are mortgages insured by the Federal Housing Administration. They are a great option for buyers with less-than-perfect credit or who don’t have a lot of money saved for a down payment. But due to their requirement of mortgage insurance (MI), their long-term costs will be higher than Conventional loans, which only require MI if you put down less than 20%. Let’s take a look at what you need to know about FHA loans in 2022.

A Little History

FHA loans came about in 1934 as the government’s way to help renters during the Great Depression. Today, FHA loans are very popular, especially for first-time buyers. In 2020, more than 83% of all FHA loans were for borrowers purchasing their first homes, according to the FHA’s 2020 Annual Report.

How They Work

FHA loans are not offered by the government, but rather through FHA-approved mortgage lenders like Atlantic Bay. They have fixed rates and come in 15- and 30-year terms. Best of all, the FHA only requires a 3.5% down payment for borrowers with credit scores of 580 or higher and 10% for those with a score between 500 and 579. Remember, lenders can set their own standards for credit scores as long as they meet minimum FHA guidelines. Atlantic Bay’s minimum score is 600.

Continue learning about down payments and resources for paying them in our Knowledge Center.

Mortgage Insurance

Homebuyers are required to pay FHA mortgage insurance (MI), and it comes in two premiums:

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  Upfront MI premium (MIP): You’ll pay 1.75% of the loan amount at the time you get your loan. But this amount can be financed into the total amount you borrow, so it does not have to come directly out of pocket at closing.

  
  


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  Annual MI premium: This payment ranges between 0.45% and 1.05% of the loan amount, depending on the loan amount, whether it’s a 15- or 30-year term, and the loan-to-value ratio (LTV). This premium is divided by 12 and paid monthly.

  
  

For example, if you borrow $200,000, the upfront MIP would be $3,500, and the annual premium would cost between $75-$175 a month depending on the term. But chances are, your annual premium will be 0.85%, which is the rate that applies to buyers who put down less than 5% on a 30-year FHA loan for $625,000 or less.

The good news is you can get rid of FHA MIP after 11 years if you made a down payment of at least 10%. Or you can refinance into a Conventional loan once you’ve established 20% equity in your home through payments or rising market value.

How Much Can I Borrow?

Each year, the FHA updates its loan limits based on median house prices across the country. For 2022, the “floor” limit (the lowest the FHA loan limit can be for any area of the country) for single-family FHA loans is $420,680, and for high-cost areas, the “ceiling” is $970,800. Limits vary by county, and you can find out more by visiting the FHA’s loan limits webpage.

More Good News About FHA Loans

Here are some more pros to FHA loans:

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  They have no prepayment penalty.

  
  


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  You can use gift funds and down payment assistance programs to help pay for the down payment and closing costs.

  
  


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  Sellers can pay toward your closing costs.

  
  


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  There are no household income restrictions.

  
  


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  Co-signers and non-occupying homebuyers can apply with you.

  
  


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  You can purchase manufactured homes.

  
  


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  For borrowers with student loans, the FHA recently lowered the balance percentage that counts toward your overall debt profile from 1% to 0.5%.

  
  

What Do I Need to Apply?

To begin applying for an FHA loan, call your lender and begin gathering documentation proving the following:

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  Two years of verifiable employment history through your W2s or 1099s.

  
  


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  Verifiable income demonstrated through pay stubs, federal tax returns, and bank statements.

  
  

There are some other requirements specific to FHA loans:

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  The loan must be for a primary residence only, not a second home or investment property.

  
  


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  You’ll need an appraisal from an FHA-approved appraiser showing the property meets U.S. Department of Housing and Urban Development (HUD) guidelines. Don’t worry, your lender will help you set this up!

  
  


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  You must show a “front-end” debt-to-income (DTI) ratio of no more than 31%.

  
  


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  Your “back-end” DTI, which is the income used by your mortgage plus all other monthly debt payments like credit cards and student loans, must be no more than 43%—although in some cases, lenders may allow up to 50%.

  
  

Despite some downsides to consider, FHA loans are a great route to homeownership for many buyers, especially first-timers. Think an FHA loan may be right for you? The Reiner Realty Team can help! Give us a call today at 540-494-9284 or click HERE for more info.