Oakland County MI First-time Home Buyers: FHA Loans 101
While most people consider homeownership the American dream, many are not able to qualify for a conventional loan, which is a type of mortgage loan that’s not insured or guaranteed by the government. Unlike conventional loans, FHA loans are backed by the Federal Housing Administration and help to take some of the risk from lenders and place it on the government for higher-risk borrowers. Although the government insures the loans, they are actually offered by FHA-approved mortgage lenders.
The FHA, which is part of the U.S. Department of Housing and Urban Development (HUD), offers a wide range of loans to help different groups of people. FHA loans are helpful for Oakland County MI home buyers with limited savings and/or lower credit scores as they allow for down payments as low as 3.5% and a 580 FICO. These types of loans are not only for first-time home buyers. Repeat buyers can get an FHA loan as long as they use it to buy a primary residence. FHA loans can also be used to refinance your home or for repairs on an older home.
How FHA Loans Work
The Federal Housing Administration’s flexible underwriting standards allow borrowers who may not have stellar credit, high incomes, and/or cash savings the opportunity to become homeowners. With an FHA loan, borrowers must pay mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. The cost of insuring your loan is generally higher than with conventional mortgages, and you can expect to pay higher mortgage insurance premiums (MIPs) each month. Government-guaranteed mortgages are not available on high-priced homes, and you can see the cap in your area using the online tool on HUD’s website.
The differences between an FHA loan and a conventional loan
When buying a home in Oakland County MI, It’s easier to qualify for an FHA loan than for a conventional loan, which is not insured or guaranteed by the federal government. FHA loans require mortgage insurance regardless of the down payment amount, compared to conventional loans where you need mortgage insurance for down payments under 20%. FHA mortgage insurance payments will be the same regardless of your credit score.
- More rigid property standards
- Lower credit scores allowed
- Somewhat higher down payment needed
- Private Mortgage Insurance (PMI) is required for down payments of less than 20%
- Higher credit score needed (at least 620)
- Slightly smaller down payments allowed
- Private Mortgage Insurance (PMI) is required for down payments of less than 20%
- More liberal property standards
One of the biggest advantages of an FHA loan is that only a 3.5% down payment is required for a home loan purchase (with a minimum 580 credit score). This is a lot less than other conventional types, which will ask anywhere from 5 to 20%. It’s worth noting that If you were to combine the FHA loan with a down payment assistance program, it could potentially mean that you would only need to put 0.5% down.
With an FHA loan, the down payment doesn’t have to come directly from the borrower; It can come from a family member, employer, or charitable organization as a gift. Also, if you prepay your mortgage before a certain amount of time, many conventional lenders will charge a prepayment penalty. With an FHA loan, there is no penalty for prepayment.
FHA loan limits for Oakland County MI in 2021
No matter which type of FHA loan you’re seeking, there will be limits on the mortgage amount. These limits vary by county. Limits for FHA Loans in Oakland County, Michigan range from $356,362 for a 1 living-unit home to $685,400 for 4 living-units.
The different types of FHA loans
Loan qualification guidelines are fairly similar across the various types of FHA loans available:
- Fixed-rate loans – Available in fixed-rate terms between 15 and 30 years, FHA mortgages come with a low down payment advantage- one of the lowest on the market.
- Adjustable-rate loans – An FHA adjustable-rate mortgage (ARM) comes with an interest rate that “adjusts” over the loan’s term; generally increasing. Many people are drawn to ARM mortgages because they offer initial rates significantly lower than a fixed-rate product.
- FHA 245(a) loan – An FHA 245(a) loan packs a fixed rate graduated-payment mortgage, also known as a “growing equity mortgage.” Graduated payment mortgages structure your monthly payment to scheduled increases over the life of your loan. As your loan amortizes, you’ll reach a point in time when your equity starts gaining traction. These mortgages are set up in 30-year terms, but it’s not uncommon to pay off the loan early depending on which graduated plan you choose.
- FHA energy efficient mortgage – The FHA Energy Efficient Mortgage (EEM) program is a financing add-on that allows FHA borrowers to roll the cost of approved energy efficiency upgrades into their home loan. Homebuyers commonly use this program to update their home’s windows, HVAC systems, and insulation.
- FHA loans for mobile homes – It is possible to use an FHA loan to finance a manufactured or mobile home, but finding a lender willing to approve financing may take a few tries.
- FHA loans for condos – Many are surprised to find that they can purchase a condo using the FHA loan. Since some condo associations enforce rules regarding property sales and improvements, however, there are some restrictions when it comes to using your FHA loan for a condo.
- FHA 203(k) – Compared to other types of FHA products, 203(k) loans offer the opportunity for buyers to purchase fixer-uppers while financing additional funds for home repairs and renovations into the mortgage.
- FHA reverse mortgage (HECM) – FHA Reverse mortgages are used as a home equity conversion mortgage (HECM). This allows a qualified homeowner to receive monthly cash disbursements by liquidating the equity they’ve built up in their home.
How to qualify for an FHA loan
Getting prequalified for an HOA loan is a simple and quick process, and can even be done over the phone. Your loan officer will require information about your basic finances, such as debt, income, and assets. After running these numbers and evaluating them, he/she can tell you an amount you may qualify to borrow. To be eligible for an FHA loan, borrowers must meet the following lending criteria:
- A FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
- Verifiable employment history for the last two years.
- Income is verifiable through pay stubs, federal tax returns, and bank statements.
- The loan is used for a primary residence.
- The property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
- Your front-end debt ratio (monthly mortgage payments) should not exceed 31% of your gross monthly income.
- Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43% of your gross monthly income. (Lenders may allow a ratio of up to 50% in some cases).
- If you’ve had a bankruptcy, you will need to wait 12 months to two years to apply, or three years after a foreclosure. (Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances).
Your credit score
The minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can still qualify for an FHA loan, but you’ll need to make a larger down payment. Again, these are FHA guidelines — individual lenders can opt to require a higher minimum credit score.
Your debt-to-income ratio (DTI)
The FHA requires a DTI of less than 50, meaning that your total monthly debt payments can’t be more than 50% of your pretax income. This includes debts that you aren’t actively paying off.
FHA closing costs
FHA closing costs include the mortgage insurance (MIP), lender and third-party fees, and prepaid items that are due when signing your mortgage paperwork. Here’s the breakdown:
- FHA mortgage insurance premium (MIP) totals 1.75% of your loan amount, due at closing. You can also finance this charge as a part of your loan. You’ll also find that an additional ongoing FHA MIP of 0.45% to 1.05% is built into your monthly payment. While the rate remains the same for the life of the loan, the premium is adjusted annually based on the remaining principal loan balance.
- Lender fees typically include an origination fee, underwriting fee, document preparation fee, supplemental loan origination fee (for FHA 203(k) renovation loans only), and interest rate lock fee.
- You may also decide to buy discount points (a prepaid interest that lowers your loan’s interest rate), which will be listed as a lender fee.
- Third-party fees include fees for services offered by other providers and could include Title insurance policy premium (for the lender and an option for the buyer to purchase as well), notary fee, credit report fee, Recording fees, appraisal fee, courier fee, attorney fees, and flood certification fee.
- Prepaid items are fees that are paid in advance, with some shared between buyer and sellers such as tax and insurance escrow deposit, flood and hazard insurance premiums, real estate taxes, and per diem interest.
Whether an FHA loan vs a conventional loan is the better choice, when buying a home in Oakland County MI, really depends on the situation as each borrower, financial situation, and home are different. Likewise, each loan has its benefits. An FHA loan is more flexible to obtain, but no matter how large your down payment, you will have to pay mortgage insurance. Whereas, a conventional loan requires a higher credit score and more money down, but doesn’t have as many provisions. You’ll want to speak with your mortgage professional to discuss which loan makes more sense for your individual financial situation and needs.
Partner with award-winning Oakland County MI REALTOR® – Tom Gilliam
Tom Gilliam is proud to be a trusted REALTOR® in Oakland MI for the past 20 years – offering his guidance and expertise to both home buyers and sellers. Tom understands that buying or selling a home is a significant financial and life decision and that you are looking for someone you can trust. As your agent, he will protect your interests, advocate for you, negotiate on your behalf, and guide you towards a smooth and successful transaction.
Whether you are ready to buy a home in Oakland County MI or its time to list your your current property, feel free to reach out to Tom directly at (248) 790-5594 or you can get in touch with him by email.
Tom Gilliam, REALTOR®
29630 Orchard Lake Rd.
Farmington Hills 48334
Email: Tom @ Homes2MoveYou.com