While FHA loan requirements are often described as being less stringent compared to Conventional mortgage requirements, borrowers need to know that the FHA requires that all homes financed through their program meet minimum property standards (MPS).
Perhaps the biggest downside of taking out an FHA loan is that you're stuck paying mortgage insurance premiums (MIPs) for the life of your loan. MIP consists of two parts: the up-front mortgage premium, which is 1.75% of your base loan amount, and the annual MIP, which depends on various factors.
An FHA loan is like any other loan, but it's insured by the FHA. It can be easier to qualify for than a regular loan (eg, lower down payment requirements). If you can qualify for a conventional loan there's normally no reason to go the FHA route.
FHA is generally better for people who don't have as much cash in savings. Allows for smaller down payment with some caveats (insurance for the entire life of the loan). Conventional is better if you have more savings and therefore can put more money down.
A major benefit of a conventional loan is that the buyer often has higher credit ratings and more capital available for a down payment than with an FHA loan. On the other hand, FHA loans may be attractive to some sellers since they only require a small downpayment and have traditionally lower closing costs.
No, FHA loan PMI removal is technically impossible because PMI is for conventional mortgages only. FHA loans have MIP, which usually lasts 11 years or the life of the loan. To remove MIP, you must refinance into a conventional loan once you have enough equity.
You may be denied for an FHA loan if you have declared bankruptcy but you have not had the bankruptcy discharged. You may be denied if you are delinquent on federal taxes or otherwise owe money to the federal government but without an approved payment plan.
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Since your home must meet FHA property minimums, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA approved appraiser and may have additional inspections which could result in a higher appraisal cost.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
The seller is responsible for making repairs after an FHA appraisal. However, buyers with FHA loans can exercise a few options. One solution is to switch from a standard FHA loan to an FHA 203(k) loan. This common strategy folds repair costs into the loan.
But the main goal is to evaluate whether the home is in good condition and if it's safe and livable for the borrower. Although the FHA minimum property requirements are strict, they're not prohibitive. In fact, most homes will pass an FHA appraisal, so don't let these requirements scare you off FHA loans.
FHA Rule 75 states that 75% of the rental income must exceed the monthly mortgage for the property to be self-sufficient. This percentage must be at least enough to cover the mortgage payment, known as PITI (Principal, Interest, Taxes, and Insurance.)
Can I rent out my FHA home after the first year? Yes, after fulfilling the initial one-year occupancy requirement, you can rent out your FHA home. However, if you plan to purchase another property with an FHA loan, you will need to meet specific conditions and justifications for maintaining the original FHA loan.
Credit score requirements
Most first-time home buyer programs require a minimum credit score, often around 620, to qualify for conventional loans. However, some programs, like FHA loans, are more lenient, allowing scores as low as 580 or even lower with higher down payments.
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
The answer to this question is "no." There are no minimum income requirements for FHA loans.
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Many lenders (like Fannie Mae) also require a two-year “seasoning requirement,” meaning you can't have PMI removed until you've made two years' worth of on-time payments—even if your equity has grown above 20%. If it's been less than five years, you might even be required to have 25% worth of equity.
FHA loans require you to pay for mortgage insurance when you buy or refinance a home, regardless of the amount of your down payment or home equity.