FHA Loan FAQ – Common Homebuyer Questions
Searching for a home is an exciting process and there are many questions that are asked about mortgages and home buying. Whether you have been looking for a while or are just beginning your search, some questions may be better answered by a mortgage specialist than your realtor.
Here are some of the more frequently asked questions that your mortgage broker can further expand on:
To qualify for a FHA loan, do I have to be a first time homebuyer?
You do not have to be a first time homebuyer to qualify. FHA loans are among several mortgage choices that are available to any buyer who meets the minimum requirements.
Can I use FHA mortgages to buy investment or rental properties?
No. You will only qualify for FHA loans if you are looking to buy a primary residence.
If I have a FHA loan on my current home am I able to use another FHA mortgage to buy my future home?
You generally cannot have more than one FHA loan at a time. If you still have a home loan balance that is 75% or less of the original loan and you meet all other requirements then you may be able to qualify for another FHA loan. On the other hand, if you still owe more than 75% of that original amount, then you may have to sell your current home before actually closing on the new one.
Can I use FHA mortgages to buy a 2 to 4 unit home?
Like many buyers, you must be looking at a multi-family property. Thank answer to this is yes so long as you intend to live in one of the units. Again, to qualify this has to be your primary home.
How long do I have to live in a home with an FHA loan?
There is not really a time limit or specific duration that you must live in a new property that you purchase using a FHA loan. When it actually comes time to close on your mortgage, you will have to sign a statement that certifies your intent to actually live in the home. When the underwriter evaluates your application, they’ll be assessing how practical the home choice is.
As things go with this question, perhaps the real question is: “How long do I have to wait before turning this into a rental property?” Life happens and depending on how much you owe on the property, your situation may be best answered by your realtor and mortgage professional. As a buyer, you need to be as honest and forthcoming as possible to ensure that you are not unknowingly committing “Occupancy Fraud.”
What are the FHA minimum credit score requirements?
The FHA minimum credit standards show that with a FICO score of 580 you can get a loan with 3.5% money down. If you have a FICO score ranging between 500-579, you can qualify for a FHA loan with 10% down.
You should know that these are only FHA minimum standards and your actual lender may set their own additional requirements known as “overlays.”
Some lenders have overlay rules and some do not.
How long before I can Streamline Refi my FHA loan?
The FHA minimum says that after you have made at least 6 mortgage payments and there is enough benefit to do this, you are able to begin the Streamline Refi process. Of course, this 6 payment minimum may depend on any lender overlays that you agreed to.
During this process, you lender is required to assess whether there is enough legitimate benefit before they can do another loan for you to prevent “loan churning.” In their evaluation, the lender will most often look to see if a Streamline Refi will reduce your current mortgage payments by at least 5%. If the benefit isn’t coming via a lower monthly payment, they may also be able to validate benefit if you are converting from a more “risky” loan such as one with an adjustable rate to a more certain fixed rate option.
Does the FHA offer any Zero-Down mortgage options?
Yes and No. To qualify, at a minimum the FHA requires a 3.5% down payment on most loans depending on your credit score. But there is a lot of tolerance in how you might choose to come up with that 3.5% requirement. Some people bring cash to the table that may have been given as gifts or depending on the neighborhood there may be a special program that allows for only $100 down. These are typically known as “Good Neighbor Next Door” programs.
May I qualify for a $100 down payment and “Good Neighbor Next Door” program?
“Good Neighbor Next Door” programs come and go depending on location and they are really designed to attract and reward the public service that police, teachers, firefighters, and paramedics offer to the community. These special programs make home purchasing more attainable for these professionals who are often not well compensated for the high value they provide. A “Good Neighbor Next Door” program will help encourage these folks to live in the neighborhoods they work in. There are a lot of rules and guidelines that go into these sort of programs however if you meet the criteria and the timing is right, your mortgage broker may be able to walk you through this.
So what if you’re not a public servant? Can you still find your way toward a super low, basically zero down payment situation? It is rare that this happens but every now and then a $100 special will be offered to any home buyers that meets certain criteria. Most often, this situation opens up to HUD repo homes.
If I filed for bankruptcy, how long do I have to wait to buy a home with FHA?
It depends. If you are able to show certain “extenuating circumstances” after one year of filing Chapter 7, you may be able to qualify for a FHA loan however this is not hugely realistic. With a Chapter 13 filing, you have to get permission from the court’s trustee after you have made a full year’s worth of payments. In terms of timing, it is more likely that lender overlays will require a 2 year waiting period.
How long do I have to wait for a FHA loan after a Short Sale?
As with bankruptcies, FHA will allow you to buy again if you are able to show “extenuating circumstances.” With overlays, you might be able to find a lender that will do a loan 2 years after a short sale if you are able to show that the short sale happened for reasons that were beyond your control. You should expect that your down payment requirement will be higher than most FHA or lender minimums and generally you can expect at least 3 years until you’re able to close on another property.
How long do I have to wait after a Foreclosure?
If you have foreclosed on a home, FHA currently shows a 3 year minimum from the date you first vacate the foreclosed home. Every lender may have different, unique requirements.
When does the FHA monthly Mortgage Insurance Premium fall off my payment?
FHA’s mortgage insurance premium is what you pay each month for private mortgage insurance (PMI). This goes away when your principle balance reaches 78% of the “lower of the original purchase price or original appraised value”.
If you’re doing a typical 3.5% down payment on a 30 year fixed rate loan, it will take somewhere between 10 to 11 years for PMI to go away if you’re just making the minimum payment. If you put down a larger down payment or pay extra each month towards the principle balance, the mortgage insurance premium will go away sooner than not.
*Note: Be sure you read the terms of your mortgage. If you opt into a 30 year loan term, your monthly MIP will most likely remain for a minimum of 60 months even if your loan balance falls below 78% before that. If you select a 15 year loan term, there is typically not a 60 month PMI minimum imposed on you.
If I do a Streamline Refi, does that reset the monthly MIP back to the beginning?
Unfortunately no. Your monthly MIP will still fall off when your balance reaches 78% of the “lower of the original purchase price or original appraised value.” Once you hit that 78% target, you should contact your lender to be sure that they have your MIP removed. This doesn’t always happen automatically even though it should go away…
Do I have to pay off all my collections before getting an FHA loan approved?
The latest rule is that no more than $1,000 can be in collections when the loan closes. This may be different for you if you have entered into a repayment agreement with your creditors and have made as least 3 scheduled, on-time payments. The rules here are often governed by your State government and inactive debts may present different obligations depending on how long the debt has been active or inactive.
Do I have to pay off legal judgments before getting FHA approved?
The answer is almost always “yes” or “sort of.” You need to have either paid of any judgments or be in a repayment plan and have made at least 3 monthly payments towards that plan before closing.
What about Liens, like tax liens or child support liens?
Liens are actually recorded on title in front of the mortgage lien, and that is not allowed with an FHA loan.
In order to close your FHA loan, the other liens must agree to step out of the way and allow the FHA loan to be recorded ahead of them. If you’re in a repayment plan in good standing, chances are good that these places will allow that, so don’t assume you can’t buy something just because you have one of these liens on your title.
Can I have a Co-Signer on my loan?
Yes. Co-Borrowers are allowed, whether they live with you or not. Just remember that co-borrowers cannot help overcome credit issues – every borrower on the loan must credit qualify. Co-borrowers often help with additional income, and that can help you qualify.