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Questions to Ask About FHA Loans

House with a sold signHere are the most frequently asked FHA mortgage questions, including eligibility requirements and mortgage insurance.

FHA mortgage eligibility requirements are significantly less than other mortgage programs. The credit score requirement for an FHA loan is 500. The down payment & closing costs can be "gifted" by family members and other eligible donors. The minimum down payment is only 3.5%. Cosigners are permitted with the FHA loan

FHA frequently asked questions:

Q. Can you remove PMI from an FHA loan?
A debt or loan that has been sent to a collection agency by a creditor is referred to as a collection account on the applicant's credit report.

If the credit report shows that there are $2,000 or more in outstanding collection account amounts, the lender must: A. Unfortunately, the FHA does not allow the PMI (also known as MIP) to be eliminated for FHA mortgages with less than a 10% down payment that were completed after June 3, 2013.

It makes no difference whether you put down 20% or more on your home or if you've paid down your mortgage by 20% or more after closing.

It is not possible to delete the PMI/MIP. The only way to get rid of PMI is to refinance your FHA loan.

After five years from the settlement date, FHA loans that were completed before June 2013 are eligible for MIP cancellation. You must own your house for at least 22 percent of its value and have made all of your payments on time.

Monthly premium cancellation is only possible for active risk-based cases that have a closure date after December 31, 2000 and a case number assignment date before June 3, 2013, and meet the qualifying requirements stated in:

Mortgagee Letter 2000-46 (with Attachment).

Q. Do FHA loans require PMI?
A. All FHA loans require PMI (also known as MIP ("mortgage insurance premium"); and, the monthly FHA PMI cannot be removed regardless of down payment or mortgage balance reduction. Read more - FHA funding fee MIP explanation

Q. Do FHA loans require mortgage insurance?
A. All FHA loans require an upfront mortgage insurance payment and a monthly PMI/MIP monthly payment.

Q. Does FHA require collections to be paid off for a borrower to be eligible for FHA financing?
A debt or loan that has been sent to a collection agency by a creditor is referred to as a collection account on an applicant's credit report.

If there are $2,000 or more in overdue collection account amounts on the credit report, the lender must:

  • ensure that the debt obligation is paid in full using an appropriate source of funds at the time of or prior to settlement;
  • The lender must confirm that the Borrower has made arrangements with the creditor for payment.
  • The monthly payment must be included into the Borrower's debt-to-income ratio; alternatively, if a payment plan is unavailable, the monthly payment may be calculated by taking 5% of each collection account's outstanding balance(s).
  • The monthly payment must be included in the debt-to-income ratio.

In a community property state, collection accounts of a non-borrowing spouse must be included in the $2,000 cumulative total and evaluated as part of the Borrower's capacity to pay all collection accounts, unless state legislation exempts them.

Q. Does the FHA require a termite inspection?
A. Termite (or pest) inspection is no longer required by the FHA unless there is evidence of active infestation or it is required by the state or local jurisdiction, is customary to the area, or at the lender’s discretion. Mortgagee Letter 2005-48. HUD Questions & Answers

Q. How do you know if a condo is FHA approved?
A. The FHA has a web site that lists the approved condo developments. Read more - FHA condo approval list

Q. How many FHA loans can you have?
A. The FHA program requires the borrower to reside in the home as the principal residence. There are a few exceptions however. A change in family size and relocation due to employment. Non-occupying co-borrowers may also be eligible for a second home, provided the borrower intends to occupy the second home as their principal residence. The FHA loan program does not permit investors. - Learn more about FHA second homes

Q. How much is the FHA down payment?
A. The minimum down payment for an FHA loan is 3.5% with a credit score of 580 or higher. The FHA requires a 10% down payment with a credit score less than 580.

Q. How To Stop An FHA Foreclosure

Most consumers are unaware that FHA loans have many distinct regulations for FHA lenders. When it comes to foreclosure, subprime and conventional loans do not have these requirements.
These regulations must also be followed by FHA lenders in order for them to be able to foreclose.

To begin with, FHA loans include a unique provision that compels the lender to meet with you in person if you fail.
Read more

Q. Is there an FHA inspection?
A. The FHA does not require a home inspection, although, the FHA strongly encourages all home buyers to obtain a home inspection prior to closing. The FHA feels so strongly about home inspections that the lender will ask you to sign a form to inform you about the importance of a home inspection. For Your Protection: Get a Home Inspection.PDF

Q. What are the benefits of an FHA mortgage?
The FHA home loan has numerous benefits for the home buyer, including a low down payment, currently 3.5%, low credit score requirements, and lower interest rates. Borrowers can have co-borrowers (co-signers) on the mortgage to help the borrower qualify for the loan. Required cash at settlement can be reduced by having the seller pay some of the closing costs. Another benefit is gift money. Borrowers are permitted to use gift money received from relatives (and other donors) toward the down payment and or closing costs.

Q. What is the debt to income ratio for FHA loans?
A. For most FHA borrowers, the (back-end) debt-to-income (DTI) ratio limit for an FHA mortgage is 43%. This means that the proposed mortgage payment (principal & interest, 1/12 of the annual real estate taxes, 1/12 of the annual homeowner's insurance and monthly mortgage insurance premium should not exceed 43% of the gross monthly income. The FHA also requires a "front-end" ratio calculation. The monthly mortgage payment should not exceed 31% of the borrower's gross monthly income. But, the FHA will permit higher debt to income ratios with compensating factors. The "front-end" ratio can be as high as 40% for the mortgage payment and 50% for the back-end (monthly payment and monthly debts).

Q. What is the difference between conventional and FHA home loans?
A. The biggest difference between the two types of mortgages is the mortgage insurance premium. The FHA requires a mortgage insurance premium paid at settlement, although the upfront mortgage insurance premium can be financed in the loan. The conventional loan does not require this upfront mortgage insurance premium. The FHA also requires a monthly insurance premium (MIP) regardless of down payment. The conventional mortgage also requires a monthly premium if the down payment is less than 20% (PMI). It should be noted that the mortgage insurance companies offer various payment plans, other than the monthly payment. The mortgage insurance will fall off a conventional mortgage after there is 22% equity in the property. The monthly FHA insurance premium never goes away . . . even with 50% equity or more.

The minimum credit score requirement on conventional loans is usually higher than FHA loans. The reason is due to the federal government backing of FHA mortgages. Conventional loans follow the underwriting requirements of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac). The conventional loans are not backed by the federal government.

Seller paid closing costs (seller assist) are more generous with FHA loans. The home seller is permitted to pay up to 6% of the sales price toward the buyer's closing costs regardless of down payment percentage. The conventional loan only permits the seller to pay up to 3% with the minimum down payment.

The maximum loan amount is higher (in most US counties) with the convention loan than the FHA loan. The maximum loan amounts are set by Congress each year.

Q. What is the Federal Housing Administration?
A. The Federal Housing Administration (FHA) is a subsidiary of the Department of Housing and Urban Development (HUD). The FHA establishes the lending requirements/guidelines for FHA approved lenders and home buyers. The FHA determines the cost of the default insurance that is paid at closing/settlement. There is an upfront fee, called a funding fee and a monthly fee called monthly mortgage insurance (MIP). The upfront funding fee can be paid in cash or financed with the loan amount. In the event of a foreclosure, the government uses the funding fee and monthly premiums to reimburse the lender for the mortgage balance and then takes ownership of the foreclosed home. FHA owned homes are called HUD houses or FHA foreclosures.