FHA (Federal Housing Administration) loans are among the most popular loan products in the United States. While market share varies by year, FHA loans usually account for anywhere from 17 percent to 27 percent of all mortgages by dollar volume. If you’re thinking about buying a home in Irvine, CA, with an FHA loan, here’s what you need to know first.
You Only Need a Down Payment of 3.5 Percent
One of the biggest draws of the FHA mortgage is that it allows people to buy homes with a low down payment. The FHA only requires a down payment of 3.5 percent, which is a big attraction for first-time buyers. While other loan products are available with lower down payments, such as a Fannie Mae or Freddie Mac loan with a down payment as little as 3 percent or a VA loan with no down payment necessary, these loans have limited availability or more restrictive qualifications. In addition to the low down payment, FHA borrowers can even use gifted money or a grant from a down payment assistance program.
You Can Qualify with Less-than-Stellar Credit
To qualify for an FHA loan, you will need a minimum credit score of 580 if you want a down payment as low as 3.5 percent. However, it’s possible to qualify with a credit score of 500 to 579 if you make a down payment of at least 10 percent. While this standard makes it possible for people with credit issues to buy a home, lenders also have their own standards. Many lenders require credit scores that exceed the FHA standard to issue an FHA mortgage. Still, the FHA loan is one of the best loan options for borrowers with past credit mistakes.
You Probably Need to Pay a Mortgage Insurance Premium
With a conventional mortgage, you need to pay private mortgage insurance (PMI) if you make a down payment of less than 20 percent, but the PMI drops off once you reach 20 percent equity in the home. With an FHA loan, you will need to pay an upfront and annual mortgage insurance premium (MIP), no matter how much you put down on the home. The MIP never drops off, regardless of equity.
The upfront MIP is currently 1.75 percent of the loan amount, or $1,750 for every $100,000 you borrow. This premium must be paid to get your loan, but you can finance it into the mortgage. The annual MIP is paid monthly and added to the mortgage amount. The annual MIP depends on the loan amount, loan term, and initial loan-to-value ratio or down payment. If you take out a loan for less than $625,500, your MIP could be anywhere from 0.45 percent with a 15-year loan and 10 percent or higher down payment to 0.85 percent with a 30-year loan and a down payment of less than 5 percent.
A 203(k) Loan Through the FHA Allows You to Borrow for Repairs
If you’re planning to buy a home that needs a little work, the FHA offers a special loan for homebuyers who need money to make repairs. A 203(k) loan has a loan amount based on the projected value of the home once repairs are complete, not the current appraised value. With a “streamlined” 203(k), you can borrow up to $35,000 over the home’s current value for nonstructural repairs.
FHA Loans Have a Few Unique Features
An FHA loan can be assumed, which means a buyer can simply take over your loan if you decide to sell. This means the buyer will pick up where you left off with the mortgage with the same remaining term and lower interest rates, as you will have already paid the loan during the first few years when most mortgage payments go toward interest. This can be a big selling point. FHA loans are also easier to get after foreclosure or bankruptcy. You can qualify for an FHA loan within just two years rather than waiting many years for a conventional loan.
Whether you’re planning on getting an FHA loan or not, it’s important to find a real estate agent in Irvine who knows the area and can find the property you’re looking for. Call 714-454-6304 today to start your search.