As exciting as it sounds, FHA mortgage loans remain shrouded by myths and misconceptions. Moreover, many eligible borrowers do not even know they qualify for an FHA loan.
This post breaks down everything you need to know about FHA loans and whether it is right for you.
What Is An FHA Loan?
A Federal Housing Administration loan or FHA loan is a residential mortgage available to aspiring home buyers with lower credit scores or no credit history. It targets low-to-moderate income families who cannot afford a conventional loan, allowing them to buy homes even if their credit is less than favorable.
Unlike conventional mortgages, FHA loans have low down payment requirements, with borrowers expected to pay as low as 3.5% instead of the usual 20% down. The loan is federally-backed, ensuring the down payment remains low while protecting lenders from defaulting borrowers.
While the FHA sets the borrowing terms and eligibility requirements, the organization does not directly issue loans to borrowers. Instead, aspiring borrowers must contact an approved lender such as a bank, credit union, or mortgage company to apply for an FHA loan.
How Does An FHA Loan Work?
An FHA loan works like any traditional mortgage but with more favorable terms. Even though the loans are less stringent, you must meet the minimum eligibility requirements to qualify.
Here’s a breakdown of important FHA loan guidelines for borrowers:
Credit Score
Your credit score indicates your creditworthiness or ability to repay a loan and clear debts. Like most home financing options, your score might determine your eligibility for an FHA loan. The good news is that FHA loans have lower minimum credit score requirements than traditional mortgages.
While a conventional loan requires a minimum credit score of 620, an FHA loan only requires a score of 580 to qualify. However, you can still be eligible if your FICO score is between 500 and 579, but a lower score attracts a higher down payment requirement.
Down Payments
A down payment is a percentage of the property’s selling price that you must pay before securing a home loan. For traditional mortgages, the minimum down payment is usually 20% of the selling price.
For FHA loans, your credit score will determine how much you pay as a down payment. Borrowers with a credit score of 580 or higher qualify for a minimum 3.5% down payment. Applicants with a credit score below the 580-mark must settle for a 10% down payment.
Mortgage Insurance Premium (MIP)
Since FHA loans are government-backed, you must pay an upfront insurance premium of about 1.75% of the base loan amount. You must also pay an annual mortgage insurance premium of 0.45% to 1.05% of the loan amount for the duration of the loan. Despite the name, payments for annual mortgage insurance premiums are monthly.
The FHA collects these fees to reimburse your lender if you default on payments. It keeps the money in an escrow account, only releasing it to the lender if you default or end up in foreclosure.
Debt-to-Income Ratio
Your Debt-to-Income (DTI) ratio is the percentage of the amount that pays your debts from your monthly gross income. Lenders usually calculate the DTI to determine your ability to repay your loan without stretching your earnings too much.
A higher DTI of more than 40% indicates you are probably a risky borrower, but FHA loan requirements are lenient and often allow a debt-to-income ratio of up to 43%. You can qualify for an FHA loan even with a much higher DTI as long as you have a high credit score.
Income Requirements
Even though FHA loans target low-to-moderate earners, you must have proof of steady employment and a verifiable income source to qualify for the loan.
The lender may require additional documents such as the most recent bank statements, profit-and-loss statements, balance sheets, W-2 forms, and federal tax returns. This information shows you can repay your loan and other obligations without struggling.
Approved Properties
FHA loans are not for any home or investment property. You can only use your loan to purchase a house you intend to use as your primary residence. The home must meet security, safety, and soundness standards with no physical deficiencies impacting its structural integrity. Moreover, you must occupy the property within 60 days of closing the loan.
FHA-approved properties include:
- Single-family detached homes
- Condominiums
- Multiplexes
- Certified manufactured homes
Closing Costs
The closing costs on FHA loans are similar to those of conventional mortgages, varying between 3% and 6% of the property cost. The exact figure depends on the home value, property location, and mortgage type. You must pay this amount to process and secure your loan.
How To Apply for An FHA Loan?
If you're looking to purchase a home in Brevard County, Florida, here are the simple steps to help you get started:
Find a Lender
Applying for an FHA loan is a straightforward procedure. Most banks, credit unions, and mortgage companies offer FHA loans, but you can also find an accredited lender online. However, you first need to find an approved lender since the government does not issue loans directly to borrowers.
Check Your Eligibility
Your lender will help you check if you qualify for an FHA loan. This step entails checking your credit score, debt-to-income ratio, and overall creditworthiness. Since FHA loan eligibility requirements are flexible and lenient, determining if you qualify shouldn’t take long.
Submit Your Application
Once you confirm your eligibility, you can apply for an FHA loan by filling out an online form or via email. A loan officer can help you fill out the documents quickly and get pre-approved.
Provide Required Documents
The lender may require additional documents to verify your income and prove your employment status. You may have to provide the most recent:
- Bank statements
- Federal tax returns
- Profit-and-loss statements
- W-2 forms
- Social Security Number
- Property Address
- Appraisal Reports
Get Approved
After performing the necessary underwriting and verifying your application, you must pay the closing costs to get the final approval and secure your loan.
Saving Money for FHA Loan Down Payment
Even though FHA loans have a lower down payment requirement of just 3.5%, you may face challenges raising the amount, mainly if the home selling price is high. A house selling at $400,000 requires a down payment of $14,000, which might be too much to raise from your regular income.
The ideal way to raise these funds is to save until you accumulate the required amount. Unfortunately, some borrowers opt to keep their money under the mattress or in their home safe, not knowing that doing so could impact their chances of qualifying for a mortgage.
When applying for an FHA loan, the lender must verify the source of the funds used for the down payment. You might not qualify for an FHA loan if the source is unverifiable.
The ideal way to save money for your loan down payment is to:
- Open a bank account under your name
- Deposit your money
- Keep the account active for 60 days or more
- Find a home on sale
- Apply for an FHA loan
FHA Loan Down Payment Assistance Programs
As much as FHA loans have low down payment requirements, some eligible borrowers may not have the funds to raise the required amount. Fortunately, the Florida Housing Finance Corporation administers various down payment assistance programs for FHA loans.
You can get up to $10,000 in down payment assistance to buy your dream home, but only on your second mortgage loan. You must still meet the minimum requirements to qualify for down payment assistance. Here are the guidelines for down payment assistance:
- Qualify for an FHA loan
- Attend and complete an approved homebuyer education course
FHA Loan Limits in Brevard County, Florida
FHA loan limits dictate the maximum amount you can borrow on an FHA-backed home loan. Here's the breakdown:
- Single - $420,680
- Duplex - $538,650
- Tri-plex - $651,050
- Four-plex - $809,150
Pros of FHA Loans
Flexible Eligibility Requirements
You may have issues securing home financing if you have a low credit score or no credit history. Fortunately, qualifying for an FHA loan is incredibly easy because of its flexible eligibility requirements.
Even though your credit history matters when applying for a mortgage, FHA lenders are more lenient on your rating and instead focus on other eligibility factors. While most traditional mortgages require a credit score of 620, you can get an FHA loan with a credit score as low as 500, but you must commit a higher down payment to qualify.
Lower Down Payment
Many mortgage lenders require aspiring home buyers to make a 20% down payment to get approved for financing. If you don’t have the cash up front, you must save for a while, which can be daunting and time-consuming.
FHA loans are popular with borrowers because of the low down payment requirements. Instead of forking out 20% or more in down payments, you only get to pay 3.5%-10% of the amount, depending on your credit score. You can also use gift funds to finance your down payment.
Better Interest Rates
Conventional home loans usually attract higher interest rates, sometimes forcing you to dig into your savings once you start remitting your monthly payments. Without a proper plan, you may become financially destitute or end up in foreclosure.
FHA rates are comparatively better, especially if you have a good credit score. You can also apply for adjustable-rate loans to cushion yourself from prevailing market rates. In any case, the primary objective of this loan is to make homeownership affordable for all.
Lenient Debt-to-Income Ratio Requirements
Lenders usually calculate your Debt-to-Income ratio (DTI) to determine your ability to repay your loan. Your DTI is the ratio of your monthly debts against your monthly gross income. A high DTI of more than 40% indicates you are a risky borrower, and the lender is likely to decline your loan.
Unlike conventional mortgages with stringent DTI requirements, FHA loans are more lenient. You can qualify for an FHA loan even if your DTI ratio is higher than 40%, but you may have to pay a larger down payment in such circumstances.
Loan Relief
Another benefit of taking out an FHA loan is that you may be eligible for forbearance through the Home Affordable Modification Program (HAMP). This program allows borrowers with legitimate financial challenges to remit lower monthly payments. Depending on your situation, the adjustment can be temporary or permanent, but you must sign up to qualify for loan relief.
Federally-Backed
Since an FHA loan is a federally-backed mortgage, it is readily available, and you don’t have to struggle to find an accredited lender. Besides, the terms are favorable with lower risks to both the lender and the borrower, making it easy to secure financing for your dream home.
Cons of FHA Loans
Mortgage Insurance Premiums
Mortgage insurance protects the lender from losses if you default. As much as FHA loans have low down payment requirements and better rates, you still have to pay mortgage insurance premiums for the duration of the loan. As such, lenders are keen that borrowers comply with this requirement to qualify for loans.
Limited Approved Properties
Regrettably, not all properties qualify for FHA loans. You cannot buy investment properties such as a rental or vacation home with an FHA loan. The house must be one you intend to live in as your primary residence. Moreover, it must meet various safety and security standards to qualify.
Less Attractive Home Offers
The real estate market is highly competitive, with sellers receiving multiple lucrative offers from aspiring home buyers. In most cases, FHA loan borrowers cannot compete with these buyers, particularly when bidding for prime properties. Moreover, some sellers are reluctant to accept FHA transactions because of the strict appraisal guidelines.
Restrictive Loan Limits
FHA loans have restrictive limits on how much you can borrow. These limits depend on the location and type of property. As of 2022, the FHA loan limit for a single-family home in Brevard County, Florida, is $420,680.
Top 5 Things to Do in Brevard County, Florida
Whether you’re into outdoor sports, eating out, or sightseeing tours, Brevard County in Florida has something special for you and your family. The county has different attractions and places of interest to guarantee a day full of fun and infotainment.
Here is a list of fun things to do in Brevard County, Florida.
Explore the NASA Kennedy Space Center
Located at Cape Canaveral, the Kennedy Space Center is undeniably the biggest attraction in Brevard County. Here, you will see the space shuttle Atlantis up close, watch rocket launch simulations, and touch a moon rock and other space memorabilia. If you are lucky, you’ll get to meet and chat with a veteran NASA astronaut. The complex opens at 9 am, so you ensure you arrive early for a memorable full-day experience.
Feed Giraffes at the Brevard Zoo
The Brevard Zoo in Melbourne, Florida, is another exciting place for fun and educational family activities. This zoo has over 900 animals from all over the world, and it features activities such as animal feeding, bird-watching, behind-the-scene tours, kayak tours, train rides, and themed exhibits. After a long day feeding the giraffes, you can grab a bite at one of the restaurants at the zoo.
Dine at El Sombrero Mexican Cuisine
Brevard is one of Florida’s most diverse counties, with a significant Hispanic community. As such, fine-dining enthusiasts have a chance to sample the best of Latin American and Hispanic cuisines. If you’re in Melbourne, make a point to visit El Sombrero for mouthwatering delicacies. This Mexican restaurant offers traditional meals, cocktails, and live music for a remarkable dining experience.
Visit the Valiant Air Command Warbird Museum
The Valiant Air Command Warbird Museum in Titusville is a great educational stop for kids and adults alike. You’ll learn about the country’s war history, dating back to the Korean and Vietnam eras. You’ll also see restored war airplanes and even climb into the cockpit of some for a surreal and informative tour. Keep in mind that the museum only opens Wednesdays to Sundays from 9 am.
Surf, Swim, and Chill Out at Cocoa Beach
The clean and glamorous sandy shores of Cocoa Beach offer you the perfect spot to have fun and enjoy the holidays with your family. It offers beautiful views and has a lively atmosphere, thanks to the diverse mix of friendly locals and tourists. Cocoa Beach is renowned for hosting surfing festivals and is an excellent location for swimming, sun-bathing, and watersports.
Bottom Line
If you’re in the market for a home in Brevard County, Florida, but lack adequate credit, consider taking out an FHA loan. This mortgage loan has lower eligibility requirements with a reduced down payment, making your homeownership journey as smooth as possible.
For more information on how to get an FHA loan, consult a HUD-certified counselor to discuss your options.
