Ever heard of FHA loans and how they are gaining traction due to their 3.5 percent down payment requirement? An FHA loan boasts partial backing from the US Federal Housing Administration, making it easier for borrowers to qualify with a low down payment, low income, and low credit score. So, what's stopping you from getting one for your next home purchase?
To start with FHA loans, it's essential to have a picture of how they work and what is required in the loan process. Below, learn more about how you can qualify for the 3.5 percent down payment home loan in Sarasota County, Florida.
Are you a Hometown Hero? Find out your eligibility for the Hometown Heroes Loan Program in Sarasota County, Florida.
Understanding FHA Loans
As a government-sponsored home loan, an FHA loan boasts a down payment of 3.5 percent on the loan amount. The FHA sponsorship on this mortgage protects your lender against any financial losses they may incur once you fail to pay the loan as required.
FHA loans boast lower minimum credit score limits and low mortgage insurance premiums besides having low down payment options. These features make applying for the loan appealing if it's your first time buying a home. If you are not new to the housing market, you can also turn to a loan if you meet the eligibility requirements.
Income Requirements and Interest Rates on FHA Loans
FHA loans undeniably stand out from other home loans since they come with low-interest rates. The competitive interest rates are courtesy of the FHA backing on the mortgage, which allows lenders to set low rates. However, the current interest rates in the mortgage market and your DTI ratio credit score, income, and down payment amount determines the interest rate lenders will set on your FHA loan.
Lenders with FHA approval always demand proof of employment before considering borrowers for an FHA loan. This is even though the mortgage eligibility requirements aren't tied to a particular income limit. Therefore, you need to present your bank statements, pay stubs, W-2s, and federal tax returns to the lender to verify your income.
Review the requirements on an FHA loan to get a clear picture of what lenders and the Federal Housing Administration expect from you. As you go through the loan process, your lender will expect the following from you:
Ensure that the home is appraised to FHA's appraisal standards
Use the FHA mortgage to finance a property that will be your primary residence instead of a vacation home or investment
Move into the house at least 60 days post-closing
- Hire an inspector to verify the property adheres to the FHA-mandated minimum property standards.
Besides these conditions, you must also satisfy certain down payments, mortgage insurance, credit score, and loan limit requirements. Here's a breakdown of these requirements:
The 3.5 Percent Down Payment
In the context of FHA loans, a down payment is an upfront amount you need to pay on a particular property before a lender grants you a loan. Making a down payment is a must once approved for an FHA-backed loan. Since it's usually a percentage of your qualifying loan amount, lenders refer to your FICO credit score when setting an appropriate down payment amount.
A FICO credit score of at least 580 can get you a 3.5 percent down payment on your FHA loan. Consequently, a credit score between 500 and 579 can get you a down payment of up to 10 percent.
You can use a gift or down payment assistance program to pay this amount. It's not a must to have adequate funds in your savings to raise the down payment. However, the down payment assistance should have proper documentation for it to be used on an FHA loan.
Mortgage Insurance on FHA Loans
It's widely accepted that low down payment loans have a mortgage insurance requirement. This is because they put lenders at risk of incurring significant financial losses with the rise in the number of defaulted loans.
Mortgage insurance premiums (MIP) on FHA-backed home loans are payable throughout the loans. The only way you can waive them after 11 years is when you pay a down payment of less than 10 percent on the home.
There are two ways of looking at mortgage insurance on FHA loans. First, the MIP comes from an upfront fee of 1.75 percent of the mortgage amount. Second, the MIP also forms annual premiums of 0.45 to 1.05 percent of the loan, depending on the loan term, your loan-to-value ratio, and the down payment amount.
Credit Score and Debt-to-Income (DTI) Requirements on FHA Loans
FHA loans must be among the few government-backed home loans with less strict credit scores and DTI requirements. With this said, credit bureaus in the country use the following factors to determine your credit score:
- The amount of credit (new and recent) taken on
- Gross amount you owe on credit cards
- Your ability to make on-time payments on bills
- Your credit utilization (amount of credit in use)
- Type of credit taken
Improve your credit score to increase the likelihood of getting FHA loans with highly-favorable terms. In particular, a high credit score can get you an FHA loan even if your DTI is high. DTI, expressed as a percentage of your monthly debt payments divided by your monthly income before taxes, helps indicate the portion of income directed to settling debts.
You can get an FHA loan with less strict requirements if you have a lower DTI ratio. Consequently, your chances of getting approved for the mortgage will instantly improve if your credit score is high but your DTI is higher too.
Your monthly mortgage shouldn't take more than 31 percent of your earnings, as the Federal Housing Administration mandated. Also, your DTI ratio should be less than 43 percent of your total monthly income.
FHA Loan Limits for Sarasota County, Florida
FHA loan limits are set to regulate the amount of money you can borrow to finance a home in a particular county. This means that the loan limits are country-specific.
As of 2020, borrowers may qualify for up to $970,800 when looking to finance a house situated in a large metropolitan or high-cost area. Consequently, the maximum FHA loan amount to finance a home in a low-cost area is $420,680.
Note that the current property values in the county largely determine the county-specific loan limits. In this case, multiple unit properties attract higher FHA loan limits than single unit properties. And in Madison County, you may qualify for up to $890,150 to finance a property with not more than four living units and $420,680 to finance a single-unit home.
Down Payment and Closing Assistance Programs Backed by Florida Housing
The Florida Housing Finance Corporation (also referred to as Florida Housing) has always been on a mission to remove barriers to homeownership in the Sunshine State. It takes less time to realize your homeownership dream through down payment and closing cost assistance programs. Provided you qualify, you may get a maximum of $10,000 that can go towards paying a down payment on a home.
You may find FL Housing's down payment assistance programs appealing if you are new to the housing market or haven't occupied a home (that you own) in the past three years. The programs can also be attractive if you want to buy a property in a federally-designated target area or if you are an eligible active-duty military member or veteran. Here are the two options you may want to consider:
The Florida Assist (FL Assist)
The FL Assist is a highly beneficial program with a second mortgage that offers up to $10,000 in down payment assistance to borrowers with existing conventional, FHA, VA, and USDA loans. Though the second mortgage can't be forgiven in any way, your lender may defer the repayment.
The Florida Homeownership Loan Program (FL HLP)
You can turn to the FL HLP program for a loan of up to $10,000 that you can direct toward your down payment for an FHA loan. The 3-percent fully-amortizing loan is payable in 15 years, while the unpaid loan balance can be deferred under certain conditions.
Why isn't it Wise to Keep Money for a House Purchase Under the Mattress?
Skepticism about the reliability of modern banking systems has led some people to consider keeping large stacks of cash hidden in their homes. Most of them worry that banking systems may crash and their hard-earned money will go down the drain.
The truth is that most central banks are nowhere near crashing. And if they do, there are measures to ensure people's deposits and savings don't disappear. This is why it's not a good idea to keep the money you intend to use in your next home purchase hidden in your home, even amid a market meltdown.
One of the requirements of a home loan is verifiable income and assets. When you start the loan application process, it isn't easy to verify that the hidden money is yours. The stacks of cash won't have a paper trail that helps the lender to identify their source.
You can only use the funds for your upcoming home purchase by depositing them in a savings account and leaving them to mature for at least 60 days. Once the 60-day period elapses, you'll have two months' worth of bank statements that can help you apply for a home loan.
Ways to Deposit the Hidden Money
The outcomes of any home buying process depend on your discipline in handling finances. Before considering a home loan, you need to save up for the down payment and closing costs. And if you have a pile of cash hidden somewhere in your home, consider depositing it with a traditional bank, online bank, or stock market.
Therefore, choose a banking partner that balances reward, timing, flexibility, and risk when opening a savings account. Whichever means you use to save the money, ensure that it's easily retrievable when you want to make a down payment. You also have to retrieve it in a form that is easy to transfer and get a paper trail after it earns returns.
It's a good idea to deposit the cash in a savings account at a bank or any bank (or financial institution) where you hold a checking account. Doing this allows you to save time on the account opening process and transfer the funds to the new account. Opening a high-yield savings account at your current bank would be perfect if you wanted the saved cash to accumulate a higher interest.
Activities for Kids in Sarasota County, Florida
Situated in southwest Central Florida, Sarasota County boasts plenty of families and children-friendly attractions, from natural aquariums to art museums, for your enjoyment. It's a great place to watch manatees, relax on the sandy beaches or explore a top-rated farmers market.
Here are five activities to consider if you want to get the most out of your stay in Sarasota County, Florida:
Hiking Around Red Bug Slough Preserve
The Red Bug Slough Preserve is one of the best spots in Sarasota County, Florida, to admire the natural flora, trails, and critters of the Sunshine State. Filled with sandals and sneakers-friendly trails, it takes less effort and time to explore the preserve. You can also accompany your kids on a fun-filled trek to Myakka.
Immerse Your Kids in Art at The Ringling Art Museum
The Ringling Museum of Art ranks among the best art-filled spots you can't miss to visit when you are in Sarasota County. The Florida State University-operated facility prides itself as the official state art museum in the Sunshine State. Your kids can take advantage of the no-admission or free admission incentives on Mondays to witness diverse creative art projects.
Head Over to the County's Parks to Jump, Slide, Climb, and Swing
Sarasota County features plenty of playgrounds where you can take your kids for a fun time. Your children can join the circus, ride a train or enter a rainforest during these playtime excursions.
Ann Goldstein's Children's Rainforest Garden, in particular, is surrounded by a waterfall, allowing kids to explore the natural scenic area. Your kids can cross a rope bridge, meander the labyrinth of foliage, hide in caves or play in the themed huts for maximum pleasure. Educational and information games also pop up unexpectedly throughout the rainforest garden, giving your kids a chance to test what they've learned.
You can also take your children to David F. Bolger Playspace, free for children aged 17 and below. The playspace is hidden in a serene location surrounded by ancient banyans and never appears too crowded. Your kids can climb, frolic in the water, or swing on net swings.
Wildlife Viewing at Mote Marine Aquarium
If you can spare at least two hours, you can visit Mote Marine Aquarium, where you will be met by otters, sea turtles, sharks, and manatees. Your children get to enjoy hands-on exhibits and touch pools at the facility. Even more, events at the aquarium combine fun, education, and science besides running throughout the year in-person or virtually.
Feed Ligers at Big Cat Habitat
As an ever-growing rescue center for large animals in Sarasota County, Florida, Big Cat Habitat and Gulf Coast Sanctuary is home to bears, tigers, and lions. The nonprofit sanctuary offers placement for endangered animals, serves as a permanent home for exotic animals, and seeks to emancipate people on conservation and animal care.
The Bottom Line
FHA loans are the most promising of all government-sponsored home loans you can turn to if you want less strict requirements on your next mortgage. They come with low credit scores, DTI, and income requirements on top of the 3.5 percent down payment requirement and low mortgage insurance.
All the best while applying for an FHA loan in Sarasota County, Florida, and maximizing the benefits of the loan.