Are you one of those people who think that owning a house is just a distant dream because you don’t qualify for a conventional loan? Well, you might want to rethink that because there’s an option that you might be eligible for – FHA loans! With only a 3.5% down payment requirement, and more lenient credit requirements than other loan types, you can still make that dream a reality. In fact, did you know that FHA loans make up 15% of all mortgages in the United States? So, if you’re ready to learn more about how an FHA loan can help you buy a house in San Francisco, keep reading!
Overview of FHA Loans
Before you jump in and make the decision to get an FHA loan for buying a house in San Francisco, you need to know that you need to know first. So let’s start with a brief overview of FHA loans.
According to the Department of Housing and Urban Development, in 2020, FHA loans accounted for 11.7% of all home-purchase loans and 15.8% of all refinance loans in the United States. An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are popular among first-time home buyers who have little savings or have credit challenges.
“The FHA insures mortgages issued by lenders, like banks, credit unions, and non-banks. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a home loan.”
Keep in mind, though, that only FHA-approved lenders can issue FHA-insured loans. But an FHA loan “can be used to buy or refinance single-family houses, two- to four-unit multifamily homes, condominiums, and certain manufactured homes. In addition, there are specific FHA loans that can be used for new construction or renovation of an existing home.
FHA Loans vs. Conventional Loans
If you’re weighing your options for buying a house, it’s important to know the differences between FHA loans and conventional loans. While conventional loans are not insured or guaranteed by the federal government, FHA loans have more flexible requirements that can make them attractive to homebuyers.
Did you know that FHA loans allow for lower credit scores and monthly mortgage insurance rates? According to the U.S. Department of Housing and Urban Development (HUD), borrowers with credit scores as low as 500 can still qualify for an FHA loan with a 10% down payment. Additionally, FHA rules are more lenient regarding gifts of down payment money from family, employers, or charitable organizations.
Keep in mind, though, that FHA loans may involve closing costs that aren’t required by conventional loans. To make the best decision for your individual circumstances, it’s important to consult with a trusted lender or financial advisor.
How FHA Loans Work
Before buying a house with an FHA loan, you should also know something about how they work.
According to the Federal Reserve Bank of St. Louis, the typical FHA loan comes in either a 15-year or a 30-year term with a fixed interest rate. But the lenient standards come with a catch. “Borrowers must pay FHA mortgage insurance, which is designed to protect the lender from a loss if the borrower defaults.
In addition, all FHA loans require the borrower to pay two mortgage insurance premiums . . .
An upfront mortgage insurance premium of “1.75 percent of the loan amount, paid when the borrower gets the loan” (though the premium can be rolled into the loan amount) Annual mortgage insurance premiums of 0.45% to 1.05%, “depending on the loan term (15 years versus 30 years), the loan amount, and the initial loan-to-value ratio.
The good news here is that for most borrowers who financed 90% or less of a home’s value, these insurance premiums will be canceled after 11 years. In addition, FHA lenders can charge no more than 3-5% of the loan amount in closing costs.
Qualifying Criteria for FHA Loans
If you are considering buying a house with an FHA loan, you need to meet specific qualifying criteria, such as a down payment of 10% with a credit score of 500-579. However, if your score is 580 or higher, you only need to make a down payment of 3.5%. Additionally, you must have a verifiable employment history of two consecutive years.
The house must be used as your primary residence only, and you must pass an appraisal by an FHA-approved appraiser, as well as meet HUD guidelines. Moreover, you must have a maximum front-end debt ratio of 31%, and a back-end debt ratio of no more than 43% of gross monthly income.
There is also a two-year wait before applying for the loan after bankruptcy or three years after a foreclosure.
FHA Loan Pros and Cons Now let’s look at some of the pros and cons of buying a house with an FHA loan.
Pros
- Lower credit-score requirement
- Relatively low down-payment requirement
- Opportunity to stop renting sooner owing to the ease of an FHA loan
Cons
- Mortgage insurance requirement
- Eligibility requirements for a property
- An APR often higher than with conventional loans
It’s worth noting that FHA loans are available only through FHA-approved lenders.
If you’re a first-time buyer with less-than-perfect credit, an FHA loan can be an attractive option to achieve home ownership. But before making any decisions, it’s important to understand the qualifying criteria and the pros and cons involved. Our team of experienced agents in San Francisco can guide you through the process, help you find qualifying homes, and provide personalized advice. If you’re considering an FHA loan, give me a call at 415-830-1423 to get started on the path to home ownership.
