FHA loans are a great option for first time home buyers — if this is your first home purchase, a California FHA home loan is probably your best option with its low down payment and easier credit standards. Your down payment can be as low as 3.5% of the purchase price and closing costs and fees can be covered by the seller. We’ve put together a list of frequently asked questions about FHA loans to help you decide if this is the right option for you:
What is an FHA loan and what does it mean?
A Federal Housing Administration (FHA) insured loan, provided by an FHA approved lender, is a mortgage insurance backed loan. This program was intended to provide lenders with sufficient insurance to reduce their risk of loss. The FHA program was created during the Great Depression of the 1930s, in response to the marked spike in foreclosures and defaults. A type of federal assistance, FHA loans in California typically allow lower-income Californians to borrow money. An FHA loan helps people purchase of a home that they would not otherwise be able to afford.
Why an FHA loan?
With the lower down payment and acceptance of less than stellar credit, FHA loans provide a simpler path to home ownership. It’s also easier to use money gifted to you for the down payment on an FHA loan. Some states even offer grant programs that will help you with the down payment.
Below is an overview of the rules:
- You must have solid, documented work history or have at least worked for the same employer for the past two years.
- You must be a US citizen, have a valid Social Security number, and be legal age to take on a mortgage in your state.
- This loan is for you only if you intend to buy a home to be your primary residence.
- Appraisal from an FHA approved appraiser is mandatory and must meet certain minimum standards at appraisal. You will have to pay for the repairs yourself at closing (this money will be held in escrow until repairs are completed) if the home does not meet the FHA standards at appraisal and the seller is unwilling to make them.
- The total of your mortgage payment, property taxes, mortgage, homeowner’s insurance and any HOA fees will need to be less than 31% of your gross income. In some instances, a lender will go as high as 40% — but they will need documentation of your unusual circumstances.
- Your mortgage plus all your other monthly expenses needs to be less than 43% of your gross income. Some lenders will go as high as 50% but you will need an explanation and documentation of your unusual circumstances.
- You must be two years out of bankruptcy and have re-established good credit.
- You must be three years out of foreclosure and have re-established good credit.
FHA loan requirements: how much down payment is required?
Up front, an FHA loan requires a down payment amount of 3.5%, and you’ll need to have a 580 minimum credit score to qualify. If your credit score is lower, it’s still possible to qualify if you can provide a minimum down payment of 10%. Lenders will go on a case-by-case basis for borrowers with poor credit.
Who backs FHA loans?
The Federal Housing Administration provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. Lenders bear less risk because FHA will pay a claim to the lender if you default.
Consider the mortgage insurance
There are some negatives to an FHA loan, however. Mortgage insurance payments and fees can outweigh the small down payment at the beginning.
The initial mortgage rate might look competitive, but it’s the underlying insurance fees that add major costs to the loan. That insurance fee currently costs borrowers 1.75% upfront with an ongoing monthly fee of 0.85% for a mortgage of 15 years or more, with a loan-to-value ratio of more than 95.01%. And this is money you have to pay on top of your mortgage payment itself.
In 2013, the FHA required borrowers to possess mortgage insurance for the entire term. With a more traditional mortgage you could remove the mortgage insurance as early as five years. With FHA loans, the insurance is with you for the life of the loan.
Who offers FHA loans?
At Golden State Mortgage, we are a California FHA lender who will help you through every step of financing your new home. Fill out the quick contact form or call Golden State Mortgage today at 1-888-502-2136 to speak with one of our California mortgage specialists and get a free good faith estimate.