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Would an FHA Mortgage Be Right for Me?

2021-08-10

A lot of people know that AAFMAA Mortgage Services (AMS) underwrites VA Loans — truly, they are our bread and butter. But we also offer conventional loans, USDA loans and, most recently, we have been approved to offer Federal Housing Administration (FHA) loans.

FHA loans are a great option for our Members whose credit scores are 580 and higher and can make a 3.5% down payment. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan. Another advantage of an FHA loan is that it’s an assumable mortgage, which means that if you want to sell your home, the buyer may be able to “assume” your loan.

If you cannot afford a 20-percent down payment, have a lower credit score, or cannot get approved for private mortgage insurance, consult your AMS Military Mortgage Advisor to find out if an FHA loan would be the best option for you.

What Is an FHA Loan?

FHA mortgages are insured by the Federal Housing Administration (FHA) and are popular among first-time buyers because of the minimum down payment and credit score requirements. However, with an FHA loan you will be paying mortgage insurance premiums.

Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront – or, it can be financed into the mortgage – and the other is a monthly payment.

Upfront mortgage insurance premium (UFMIP) — Appropriately named, this is a one-time upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
Annual MIP (charged monthly) — Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s loan-to-value (LTV) ratio, loan size, and length of loan term.

Who Can Qualify?

If your credit score is 580 or higher, an FHA loan will only require you to put 3.5% down. If your credit score is 500–579, you will need to put 10 percent down. It’s important to remember, though, that a higher credit score will help you get a better interest rate. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.

The credit score and down payment amounts are just two requirements of FHA loans. Here are a few more of FHA loan requirements for borrowers:

You must have a steady employment history or must have worked for the same employer for the past two years.
You must have a valid Social Security Number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
You must pay a minimum down payment of 3.5 percent. The money can be gifted by a qualifying family member.
New FHA loans are only available for primary residence occupancy.
You must have a property appraisal from a FHA-approved appraiser.
Your’ front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowners insurance) needs to be less than 31% of your gross income, typically. You may be able to get approved with as high as 40 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval (with an automated decision engine approval, you can go up to 56.99%).
Your back-end ratio (mortgage plus all your monthly debt (i.e. credit card payment, car payment, student loans, etc.)) needs to be less than 43% of your gross income, typically. You may be able to get approved with as high as 50 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
Typically, you must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
Typically, you must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
The property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are completed).

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