FHA Loans For New Homes: Top Things You Need to Know

Posted on July 21, 2022 in Mortgage FAQ's

Today, we’re sharing a guide to the top things about FHA loans new homes and what you need to know. If you’re in the market for a new home, it’s important to know all of the FHA lending options that are available to you for new construction. An FHA loan is a government-backed mortgage loan that the Federal Housing Administration (FHA) insures. There are many advantages to securing this type of loan, including lower credit score requirements and minimal down payments. Yet, there are restrictions and limitations that you need to know about before moving forward. 

A History of the FHA Loan Program

An FHA loan is a type of mortgage that’s backed and insured by the FHA. Both 15-year and 30-year terms are available, and all have fixed interest rates. 

The FHA is part of the U.S. Department of Housing and Urban Development (HUD). Congresscreated this departmentin 1934 when the housing industry was in the most significant crisis of its time. The stock market had crashed and the Dust Bowl brought a severe drought across the Southern Plains. In addition, the Great Depression was in full effect. 

That year, two million construction workers were out of work, and homebuyers seeking mortgages found it difficult to secure loans with favorable terms they could afford. Created as part of the National Housing Act of 1934, the FHA program helped slow the pace of foreclosures and made home buying more accessible. 

Among other changes, it established a 20% down payment as the new norm, insuring mortgages for up to 80% of a home’s total value. Before then, homeowners had only been able to borrow between 50% and 60% of the home’s value. 

Throughout the 1940s, FHA was primarily focused on helping veterans and their families find housing after World War II. Throughout the years, it’s transformed into a wider-spread initiative, helping potentialhome buyersget the financing they need. 

The FHA Loan Program Today

Today, the FHA actively insures more than eight million single-family mortgages. It also insures other types of properties, including:

  • Multi-family properties

  • Residential care facilities

  • Hospital facilities 

An FHA loan carries a minimum down payment of only 3.5%. In addition, borrowers only need a credit score of 580 or higher to qualify. These terms are much more lenient than you’ll find in a conventional mortgage, which makes FHA loans especially popular among first-time home buyers or buyers with credit challenges. 

What Does It Cover?

The FHA insures mortgages that are issued by certain, FHA-approved vendors. These can include:

  • Banks

  • Non-banks

  • Credit unions

This insurance is in place to protect the lender in the event that the borrower defaults on the loan. With this safeguard in place, FHA lenders are more comfortable offering such favorable terms to buyers, including those who might not otherwise qualify for a conventional home loan. 

As you’re considering FHA loans for new homes, the top things you need to know include who owns your loan. While the government insures an FHA loan, it’s officially underwritten and administered by the third-party mortgage lender. 

Qualifying Property Types

Home buyers can use an FHA loan to purchase or refinance the following types of properties:

  • Single-family homes

  • Two-to-four-unit multi-family homes

  • Condominiums

  • Some manufactured homes 

In addition, some types of FHA loans are available to help individuals construct a new home or renovate an existing property.

Types of FHA Loans

There are a variety of loan options available under the FHA. These include:

  • Basic Home Mortgage Loan 203(b)

  • 203(k) Rehab Mortgage

  • Construction to Permanent (CP) Loan

  • Title I Property Improvement Loan

  • Energy Efficient Mortgage (EEM)

Let’s break these down to see how each one works. 

Basic Home Mortgage Loan 203(b)

Home buyers can use a Basic Home Mortgage Loan 203(b) to purchase or refinance a primary residence. The only caveat is that this loan cannot be used to help finance a house that requires more than $5,000 in repairs. 

203(k) Rehab Mortgage

Have your eye on a fixer-upper? A 203(k) Rehab Mortgage is designed for homes that have repair costs exceeding $5,000. However, those repairs must be completed in under six months and must be performed by a qualified professional.

Construction to Permanent (CP) Loan

Borrowers can use a CP Loan to purchase land, as well as to help finance the building of a new home on that property. These loans can be a little more complex to navigate and include stricter usage terms.

Title I Property Improvement Loan

A Title I Property Improvement Loan can supplement a 203(k) Rehab Mortgage Loan. Borrowers can get this loan without refinancing, but there are borrowing limits. You can only borrow up to $25,000 for a single-family property, or $25,090 for mobile homes with land. 

If you’re fixing up a multi-family home, the borrowing limit is $60,000. 

Energy Efficient Mortgage (EEM)

Increasingly, home buyers are looking for properties that are aseco-friendly and energy-efficientas possible. To support this initiative, the FHA offers an Energy Efficient Mortgage (EEM) program. 

Borrowers can use an EEM loan to make adjustments to their property that make it more efficient and sustainable. To qualify, they must pay for a professional analysis and have the ability to show that the improvements will be cost-effective. 

FHA Loan Qualifications

Lending guidelines help control who can apply for an FHA loan. In 2022, qualifying borrowers must be able to show that they meet the followingloan requirements:

  • A FICO score of 500 to 579 if applying 10% down

  • A FICO score of 580 or higher if applying 3.5% down

  • A verifiable employment history covering the past two years

  • A verifiable income (e.g. pay stubs, federal tax returns, bank statements)

In addition, FHA-approved lenders want to make sure that the borrower isn’t taking on too much of a financial burden. They limit the borrower’s monthly mortgage payments (known as their front-end debt ratio) to no more than 31% of their gross monthly income. If the payments exceed that amount, then the buyer may not qualify. 

In addition, the FHA also requires that all borrowers must have a back-end debt ratio (their mortgage plus all other monthly debt payments) that equals no more than 43% of their gross monthly income. Some lenders are more flexible and will increase this ratio to 50%. 

If a buyer has experienced bankruptcy or foreclosure, these events may also affect their home-buying timeline. To qualify for an FHA loan, they must wait two years to apply after filing for bankruptcy and three years after foreclosure. If there are extenuating circumstances involved, some lenders are willing to make adjustments to these specified waiting periods. 

Property Requirements

In addition to a borrower’s financial health, FHA lenders will also assess the property type before agreeing to help fund the purchase. To qualify for an FHA loan, the property must:

  • Be a primary residence

  • Be appraised by an FHA-approved lender

  • Meet HUD guidelines

FHA Mortgage Insurance Premiums

With a conventional loan, borrowers who are unable to make the standard 20% down payment on the home’s purchase price are usually required to pay private mortgage insurance (PMI).

While this isn’t the case with an FHA loan, there is a similar fee that borrowers are required to pay, called FHA mortgage insurance. Because the FHA follows such flexible underwriting standards, this insurance is in place to protect approved lenders from shouldering a loss if a borrower defaults on the loan. 

All borrowers who receive an FHA loan are required to pay two separate mortgage insurance premiums:

  • Upfront mortgage insurance premium

  • Annual mortgage insurance premium

Let’s take a look at these two payments in greater detail.

Upfront Mortgage Insurance Premium

Borrowers will pay this premium as soon as they receive their loan. It will equal 1.75% of the total loan amount. Instead of paying it all at once, borrowers can choose to roll the upfront payment into their financed loan amount. 

Annual Mortgage Insurance Premium 

The borrower will also pay another type of premium to cover the mortgage insurance requirement. This payment can range from 0.45% to 1.05% of the loan amount, depending on the following factors:

Once the lender calculates the total premium amount, they’ll divide it by 12 and the borrower will pay that amount monthly. 

While these payments can add to the total cost of the mortgage, the good news is that they don’t last forever. As long as a buyer only financed 90% or less of the property’s total value (a down payment of at least 10%), then the premium payments will cease after 11 years. 

To ensure the payments will stop, the buyer must also stay up-to-date on all of their monthly mortgage payments. If the LTV ratio was higher than 90%, then the lender will continue to charge insurance premiums until the mortgage is repaid in full. 

Navigating FHA Loan Requirements 2023

An FHA loan can be an ideal financing opportunity for home buyers who may not qualify for a conventional mortgage due to credit restraints. However, it’s important to understand how this program works before diving into it. 

The FHA loan requirements 2023 are listed above. In addition to FICO score limits, there are other parameters to consider, including the mortgage insurance premium, debt-to-income ratio, and FHA-specific qualification terms. FHA loans for new homes and the top things you need to know could bring you to owning that home that you thought was out of your reach!

If you’re ready to take the next step, we can help you find a Triangle home you love. Take a look at our available properties online andcontact usto get started!