The dream of owning a home may seem out of reach for younger Americans burdened with student debt who have vivid memories of the Great Recession and housing collapse of 2009. Yet, homeownership is a very real option, especially with financing choices like Federal Housing Administration (FHA) loans.
These government-backed mortgages open the door to owning a home for people who might not qualify for traditional loans. We will take a closer look at the Florida FHA loan requirements and how you can take the first steps toward homeownership.
What Is an FHA Loan?
The term “FHA loan” is somewhat of a misnomer, because FHA does not actually issue the loan. Rather, it ensures the FHA loan is made by its approved lenders. That means you are still working with traditional lenders who offer conventional mortgages, but with the FHA loan program in Florida, these same lenders can offer you the opportunity to own a home at an affordable rate, even with less than perfect credit or a lower down payment.
The FHA has been around since 1934 when it was created by the National Housing Act and insures lenders. That means if a borrower defaults on a mortgage, the FHA will repay the lender. FHA mortgage insurance was developed to convince more lenders to offer affordable mortgages.
In doing so, it has expanded the availability of mortgage loans to people who might not otherwise get one. In 2018, the FHA insured more than one million mortgages with a combined principal balance of $209 billion. The result is that families have access to the financing necessary to purchase a home within their local Florida community.
What Are the Benefits of an FHA Loan?
There are three primary reasons why FHA loans are attractive, especially to first-time home buyers. We will take a look at each of these in detail later in this article.
- Lower Interest Rates
- Flexible Credit Requirements
- Smaller Down Payment
Those three factors make it easier for potential buyers to qualify for a mortgage.
Who Can Apply for a Florida FHA Loan?
The eligibility requirements to apply for an FHA loan are substantially different than they are for a traditional mortgage. They are:
- Must be at least 18 years old
- Must show proof of income
- Plan to occupy the home as a primary residence (not a vacation home or investment property)
- Have a debt-to-income ratio of less than 50%
If you meet the above requirements, you can apply for a Florida FHA loan. Whether or not you qualify is another matter.
Remember, although the loans are insured by the FHA, you will still need to work with a private lender. Lenders have their own requirements for approving a mortgage. There are some basic requirements, however, that will help you decide if pursuing an FHA loan is right for you.
Can I Qualify for an FHA Loan?
More potential home buyers qualify for FHA loans, because the lending requirements are much less strict than what is required for a traditional 30-year loan. For one thing, you can qualify with a much lower credit score, as low as 500.
Most traditional mortgage lenders require a score higher than 680 at a minimum. Even if you qualify with a 680, you will pay a significantly higher interest rate, which will cost you more over the life of the loan.
Here is a look at the FHA requirements:
- Since October 4, 2010, borrowers with credit scores of 580 or above are only required to make a down payment of 3.5 percent.
- Borrowers with scores between 500 and 579 are required to put down 10 percent.
- FHA does not insure loans made to people with credit scores below 500.
Like a traditional mortgage, the amount you qualify for will depend on a number of things, such as your income, debt-to-income ratio, and how much you are able to put down. Even though the FHA insures the loan, the lender will want to make sure you can make the payments.
Generally, FHA-approved lenders want to see that your mortgage payment won’t exceed 31 percent of your gross monthly income. Let’s say you make $3,000 a month. Your total monthly mortgage payment should be no more than $930.
As part of this process, it is important to be familiar with what is on your credit report and what your current debt to income ratio is. By pulling your credit report prior to applying for an FHA loan Florida, then you can determine if there are any errors negatively impacting your score and dispute them. By having errors corrected, you can positively impact your credit score, which can make it easier for you to qualify for a loan when you are ready to purchase your first home in Florida through the FHA loan program.
Do I Have to Use My Savings for the Down Payment?
Not necessarily. While traditional mortgage requirements often limit the source of your down payment, FHA loans do not.
In addition to the money you have in savings, you may be able to use funds from stocks, retirement accounts, and gifts. This option is particularly helpful for first-time buyers who may be able to receive financial help from family members for their down payment.
As you think through your down payment, remember to keep some money in savings for the regular maintenance and upkeep on your new home. The general rule of thumb is to have about one percent of the home’s value set aside to pay for these expenses.
What About Mortgage Insurance?
One of the requirements of an FHA loan is that you pay for mortgage insurance. There are actually two types of insurance that you are responsible to have.
One is called an Up Front Mortgage Insurance Premium. It is a lump sum insurance payment that is due at closing. You may be able to wrap it into your mortgage, so be sure to ask your lender if this is an option.
The second type of insurance is a Mortgage Insurance Premium. This fixed amount of money will be paid every month for at least the first 11 years of your loan. It is insurance that protects the lender if you default.
Both types of insurance are similar to Private Mortgage Insurance (PMI) in the context of a traditional mortgage. Typically, a borrower will pay PMI if his down payment is less than 20 percent of the mortgage loan.
One of the key differences between PMI and insurance on an FHA loan is that the FHA insurance payment cannot be eliminated except through a refinance. Thus, you will have to apply for a refinance to have this insurance removed from your FHA loan in Florida once you have paid down your loan to under 80% of the value of your home. The FHA loan in Florida can be refinanced, but you have to contact your lender to learn more about what is involved in a refinance and to determine if you qualify.
Are There Limits on How Much the FHA Will Lend?
Yes. The FHA sets maximum loan amounts that are determined by the median cost of a home where you live. You can look up the FHA loan limits in your county through this online tool.
For example, the median sale price for single-family homes in Pinellas County was $285,000 in May 2020. The FHA loan limit for a single-family home in Pinellas County is $331,760.
It is important to know the limits for your county before you start your house hunt, to avoid spending time looking at homes that are outside of the range of your FHA loan in Florida. The FHA loan limits in Florida will vary from county to county, but the limits can rise based on the housing market in a particular county. Therefore, it is important to get familiar with these limits and see how they match up with your debt-to-income ratio to make sure that you are getting a mortgage that you can comfortably afford.
Wrapping It Up
FHA loans provide potential home buyers with options they might not otherwise have with traditional mortgages. Bottom line, the Florida FHA loan may be a solid option for borrowers with lower credit scores and less money for a down payment. If you are ready to purchase a home, the FHA loan in Florida could be the right option for you and your family.
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