FHA loans have been around for a long time, as far back as 1934 when the program was first introduced. FHA loans have an inherent guarantee to the lender that compensates the lender at 100% of the foreclosed loan amount. FHA loans also have a very low down payment requirement of just 3.5% of the sales price making it a popular choice for first-time buyers due to the low cash-to-close requirement for FHA loans. As long as the lender uses proper FHA protocol when approving the application the guarantee to the lender will apply. But the guarantee is in fact a form of insurance and paid for by the borrowers.
The upfront fee for FHA loans is now 1.75% of the loan balance but isn’t considered an out-of-pocket expense because the upfront fee can be included in the final loan. If a loan amount is $100,000 then the upfront fee is $1,750 for a final loan amount of $101,750. It’s this loan amount upon which the monthly payments will be calculated. Once the loan has funded, the lender is required to forward this fee directly to the Department of Housing and Urban Development within 10 days after closing.
There is also one other premium that is calculated annually and paid in monthly installments and included within the total monthly mortgage payment along with principal and interest, taxes and insurance. This premium today is 0.85% of the loan amount with a down payment of less than 5.0%. On a $101,750 loan amount with a 3.5% down payment, the annual premium is $864 paid monthly at $72 and is recalculated each year as the loan balance is drawn down over time.
These two fees are one of the reasons lenders feel more comfortable approving an FHA loan application because unlike a conventional loan, should the lender be forced to foreclose on the property at least the lender is compensated for the loss on the loan. Conventional mortgages carry no such guarantee.
FHA loans do however have maximum loan limits based upon the Metropolitan Statistical Area. Today, that limit is at 65% of the current maximum conventional conforming loan limit. Conforming loans, those underwritten to Fannie Mae or Freddie Mac guidelines, currently have a maximum loan limit of $510,400. The maximum FHA loan cannot be greater than $331,760, or 65% of $510,400. This is the maximum, however. For properties located in cities where homes are much higher in price compared to the median home price for the entire state of Texas. In Travis County for example where Austin, Texas resides the FHA loan limit $404,800, not $331,760.
Finally, loan limits set by the FHA may not be the same as what a borrower may qualify for. Just because Austin, Texas has an FHA loan limit of $404,800, FHA loans utilize debt ratios just like other loan programs do. Lenders will calculate monthly mortgage payments which include amounts toward principal and interest, taxes, insurance and a monthly mortgage insurance payment. Lenders like to see this total housing payment be around 31% of gross borrower monthly income. The lender also considers additional monthly credit obligations such as car payments or student loans. When adding these additional debts to the housing payment, the ideal debt ratio should be around 43% of monthly income, with exceptions up to 48%.
Homebuyers that have questions can contact us by calling Ph: 904-810-2293