FHA or the Federal Housing Administration loans are a great option for many borrowers here in San Diego County and nationwide. The most obvious being the minimum down payment of 3.5% which is very attractive to a lot of people especially first time buyers. Also, they have a higher Debt to Income ceiling than other loans (like conventional). This helps buyers who have limited income or other debts like auto, credit card and/or student loans qualify for the loan who would not have otherwise qualified.
One thing to remember is that FHA itself does not loan money. It is a government run agency that insures the lender against a loss if the borrower defaults on the loan. There are other low down payment programs available but FHA serves a great purpose and as an FHA approved lender we can walk you through qualifying. It’s fast and easy!
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FHA Loan Limits – California
FHA mortgage loans have loan limits determined by the county of the subject property and the number of units. Click on the arrows in the chart above to see your counties FHA loan limits. The FHA will periodically change the loan limits. We saw a slight increase in the beginning of 2017.
It’s important to remember that the loan limit applies to mortgage amount and not the purchase price. You can use an FHA loan purchase a home up $10,000,000 if you want to but they will only lend up to the county limit.
Let’s do an example for San Diego County where the loan limit is $612,950 and the buyer is putting a minimum down payment of 3.5%….
Purchase Price of Home $635,000
3.5% FHA Down Payment $22,225
Loan Amount $612,775
All FHA loans have mortgage insurance known as Mortgage Insurance Premium or MIP. See the chart below. This protects the lender against a default by the buyer. The rate of MIP is determined by a combination of loan term and down payment. FHA M.I. is typically calculated at 85 bps or basis points of the loan amount. This can be lower with a larger down payment or shorter term but 85 bps is a good rule of thumb.
Let’s do another example:
Purchase Price of Home $435,233
3.5% FHA Down Payment $15,233
Loan Amount $420,000
In this scenario 85 basis points of the $420,00 loan amount equals an annual premium of $3,570 which then divided by 12 months = $297.50 per month
These mortgages also have what is called Up-Front Mortgage Insurance or UPMIP. This is paid at the time of closing and is generally included in the loan amount not paid out of pocket. It’s 1.75% of the mortgage and is paid on all FHA backed mortgages. Using the same example 1.75% of the $420,000 loan amount = $7,350 in Up Front Mortgage Insurance.
The Good and The Bad
As with any mortgage there are things to consider and options to weigh. Here are some advantages and disadvantages that come with an FHA mortgage.
- Low Fico Requirements. 580 and even lower in some cases
- Low Down Payment. Typically 3.5%
- Very Low Interest Rates
- Higher Debt to Income ratio ceilings than other loans
- Loan Limits by County
- Up Front Mortgage Insurance. 1.75% of the mortgage amount
- Monthly Mortgage Insurance Premiums
- Primary Residence Only
- Slightly stricter Appraisal and Property Requirements
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