FHA is a government sponsored loan. If you plan on buying a home to occupy, you are eligible to seek FHA financing.
Any person looking to buy a home or refinance their existing mortgage is eligible if they intend to occupy the property. While associated with first time homebuyers, it is NOT exclusively for first time homebuyers.
Lenders do check post-closing so keep that in mind. Occupancy misrepresentation is considered fraud and can carry severe criminal penalties so make sure you move in, stay for at least one year and really use it as your primary home.
There are several reasons one might choose an FHA loan…some may individuals may not have any other option.
WHY
- FHA allows as little as 3.5% down payment.
- FHA will allow for a credit score as low as 560 with compensating factors.
- FHA allows for non-occupying cosigners.
- The monthly PMI factor is often lower than conventional PMI, especially at the lower credit scores.
- Interest rates are typically lower for an FHA loan than conventional.
- More lenient on debt-to-income thresholds. Most conventional loans receive “Approve/Eligible” up to 45% but FHA may go above 55% with compensating factors.*
WHY NOT
- Depending on the loan term and down payment, most PMI payments cannot be cancelled. Even if you pay the loan down to a 78% loan-to-value (greater than 20% equity), most individuals cannot cancel their PMI.
- Regardless of down payment, your loan will have PMI.
- All FHA loans have an Upfront Mortgage Insurance Premium (currently 1.75% of the loan amount) charged at the time financing is obtained.
*All files are run through Fannie Mae’s Desktop Originator to receive initial automated underwriting findings. This systems looks at the strength of the entire file before issuing positive or negative results.
The minimum down payment requirement for an FHA home purchase is 3.5%. You can still put more down, which will affect your monthly PMI factor, but one of the benefits of an FHA loan is this minimum down payment requirement is less than the conventional requirement of 5%.
Yes. There are two forms of mortgage insurance. An up-front mortgage insurance premium and annual (paid monthly).
Upfront Mortgage Insurance Premiums
Current FHA upfront mortgage insurance premiums are 1.75 percent of the loan size. If you use an FHA-backed mortgage for a purchase mortgage and your loan size is $300,000, then your Upfront MIP will be 1.75 percent of $300,000, or $5,250.
Upfront MIP is not paid as cash. Upfront MIP is automatically added to your loan balance by the Federal Housing Administration. With the same $300,000 loan size, then, accounting for Upfront MIP, your actual borrowed amount will be $305,250.
Upfront MIP does not affect your loan’s loan-to-value (LTV) calculation.
FHA Annual Mortgage Insurance Premiums
Annual MIP is required for all FHA mortgages, is paid in 12 installments per year and is included in your monthly mortgage payment.
Although today’s 30 Year Fixed annual premium is 0.55% for 3.5% down payment, it is reduced to 0.50% if you choose to put 5% down. Should you qualify for a 15 Year Fixed, the premium is 0.40% with less than 10% down payment but just 0.15% with more than 10% down.
Today’s FHA Premiums (as of 4.29.2024)
– FHA loan caps can differ amongst counties throughout the nation. The numbers I used are for Cook County, Illinois and most other counties surrounding Chicago.
– While FHA financing is possible for multi-unit properties at higher loan caps, the example below if or one-unit residential homes.
FHA Loans Greater Than 15 Years
| Base Loan Amount | LTV | Annual MIP | Duration |
| ≤ $498,257 | ≤ 90.00% | 50 bps (0.50%) | 11 Years |
| ≤ $498,257 | > 90% & ≤ 95% | 50 bps (.50%) | Mortgage Term |
| ≤ $498,257 | > 95.00% | 55 bps (.55%) | Mortgage Term |
FHA Loans Less Than or Equal to 15 Years
| Base Loan Amount | LTV | Annual MIP | Duration |
| ≤ $498,257 | ≤ 90.00% | 10 bps (0.10%) | 11 Years |
| ≤ $498,257 | > 90.00% | 40 bps (.40%) | Mortgage Term |
**FHA has different factors if the loan amount is greater than $726,200 – For some high-lending counties**
Unlike conventional loans, PMI may remain on for the life of the loan.
Most FHA borrowers use 30-year loans with a down payment of 3.5%. This means they have a loan-to-value (LTV) ratio above 95%. It also means that most borrowers have to pay the annual MIP for the life of the loan. If this is the case, the only way to remove PMI is by paying off the loan or refinancing to a conventional product.
Here is chart of PMI costs and cancellation term:
MORTGAGE INSURANCE PREMIUMS – DURATION
FHA Loans Greater Than 15 Years
| LTV | Duration |
| ≤ 95.00% | 11 Years |
| > 90% & ≤ 95% | Mortgage Term |
| > 95.00% | Mortgage Term |
FHA Loans Less Than or Equal to 15 Years
| LTV | Duration |
| ≤ 90.00% | 11 Years |
| > 90.00% | Mortgage Term |
FHA loans are only provided for primary residence purchases. So, if you want to purchase a multi-unit and use an government sponsored financing, you must live there. Lenders do check post-closing so keep that in mind. Occupancy misrepresentation is considered fraud and can carry severe criminal penalties so make sure you move in, stay for at least one year and really use it as your primary home.
Although the stated required minimum down payment is just 3.5% for FHA, three and four unit buildings must meet a net self-sufficiency rental income calculation. Basically, 75% of the appraiser’s estimate for rents in the building (including the estimated rent for the owner’s unit if it could be rented out) must meet or exceed the total mortgage payment including taxes and all insurance payments. If it down not, the down payment must be increased until the transaction meets that requirement.
If you are interested in purchasing a rental income property, do some research. Look at multi-unit properties on-line. Do the math. What are the total rents generated by the building? What would the total mortgage payment be including taxes and insurance? What other expenses, such as utilities, would have to be paid by the owner? What vacancy factor should you apply to your rents?
FHA Loan Limits for Cook County Illinois
- FHA 1 Unit: loan amounts ≤ $472,030
- FHA 2 Unit: loan amounts ≤ $604,400
- FHA 3 Unit: loan amounts ≤ $730,525
- FHA 4 Unit: loan amounts ≤ $907,900
