Federal Housing Administration (FHA) loans are approved and backed by the federal government, thus this provides a guarantee for the lender to approve the loan. People need mortgages to buy homes or refinance them, but what if you were rejected a loan due to low credit scores or because your lender thinks you will default?
Well, this is where FHA loans come in. This article will tell you important aspects about FHA loans and whether you can own more than one.
FHA loans, as opposed to conventional loans, are very popular in the mortgage market. They are backed by the federal government, meaning the government gives lenders some guarantee on the loan, making it easier for lenders to trust the borrower.
The lender or banks who give out these mortgages are backed by FHA, which is why they have a downpayment as low as 3.5%. This is what gives lenders an edge even if the borrower defaults on the loan.
As compared to a conventional loan, the interest rates of FHA loans are relatively low because of their backing from the FHA. The interest rate today is 2.81% as compared to the interest rate of conventional loans which is 2.99%.
Essentially, there are 5 types of FHA loans:
| FHA LOAN TYPE | WHAT IT IS |
| Traditional Mortgage | A mortgage used to finance a primary residence |
| Home Equity Conversion Mortgage | A reverse mortgage that allows homeowners aged 62+ to exchange home equity for cash |
| 203(k) Mortgage Program | A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills |
| Energy Efficient Mortgage Program | A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills |
| Section 245(a) Loan | A Graduated Payment Mortgage (GPM) with lower initial monthly payments that gradually increase (used when income is expected to rise), and a Growing Equity Mortgage (GEM) where scheduled increases in monthly principal payments result in shorter loan terms. |
Loan limits are the maximum amount a person can borrow on a mortgage. In 2020, the FHA limit is set at $331,760, an increase of nearly $17,000 over the 2019 limit of $314,827. The FHA ceiling is a higher limit that only applies to high-cost areas.
In 2020, that’s generally $331,760 for single-family homes in low-cost areas and $765,600 in high-cost areas.
Naturally, a person may have one mortgage loan for one house, so no, it sounds absurd for a person to have two FHA loans under their name. If they wish to apply for another one, the first one needs to be paid off.
However, under the Housing and Urban Development (HUD), one borrower may ask for another FHA loan IF their job is being relocated or if the family size is getting bigger.
Even if all circumstances rule in the favour of the borrower, they will need to fulfil certain criteria to be approved for another FHA loan while they still already have one. Such as the current home equity must be at least 25%, and the debt-to-income ratio should be enough to support two mortgages now.
It’s hard luck if you don’t fit in the standard set by the criteria in multiple FHA Loans, so what is your option then? Here are a few alternatives that borrowers may apply in order to avoid getting a second FHA loan:
Every borrower’s loan situation is a lot different than others, therefore don’t just get on the bandwagon. Evaluate your situation fully before you opt for any of these alternatives.
Even though it may seem that it is relatively easier for a borrower to obtain an FHA loan, there are certain requirements that set the bar for applicants. Here is what you need to know.
Credit Score and Downpayment: Just like any other loan, an FHA loan is also heavily dependent on the credit rating of the borrower. It should be at least 500-579, that is when you get a downpayment of 10%. But if your score is 580+, you could be eligible for only a 3.5% down payment rate. It all comes down to this: having a higher credit score will get you a good deal.
Debt-to-income ratio: A DTI is a measurement metric that simply evaluates how much debt you have against your current income. More DTI will reduce your chances of being qualified. The DTI should not be more than 50%, and you’re in the safe zone if it is below 43%.
Primary residence: One of the requirements for an FHA loan is that the property should be the primary residence of the borrower, and that it should meet the minimum criteria of FHA property requirement.
Proof of employment: The borrower needs to prove that he is employed and has a steady source of income to be able to pay for the mortgage loan. This is not a very hard requirement to fulfil though, because most people look for mortgages while they already have a steady income from their employment.
If you’re meeting the above set requirements for an FHA loan, the next step is running the numbers through an FHA Loan Calculator to see how much loan you can qualify for based on your credentials.
You will enter the basic information like the property’s value, interest rate, downpayment, tax records etc into the calculator and it will run the numbers to give you a close estimate of what you should be expecting. Using a loan calculator beforehand can really tell you what your current financial position is before you start on with all the effort of obtaining an FHA loan.
Qualifying for FHA loans isn’t that hard; because of low down payments and low interest rates, it may actually work for some people. The eligibility criteria is also relatively smooth to facilitate low-to-moderate income borrowers.
Owning a home shouldn’t be made hard, but most lenders do keep their huge cuts in deals while closing. The best way of getting ahead of this is to shop around and look for reasonable rates. Or better yet, have an expert opinion about your personal case and see what they’re suggesting you should do.
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