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FHA Loan in Pennsylvania

Nice PA houseThe FHA 203(b) home loan program is popular with Pennsylvania home buyers because this loan only requires a minimum down payment of 3.5%. And, the seller is permitted (not required) to pay as much as 6% of the buyer's closing costs (seller assist). The required cash at settlement loan can be provided as a gift from a relative, government agency or a non-profit organization. The credit requirement is not as strict as other home loans. The minimum credit score for an FHA home loan is 580. The FHA home loan program is more forgiving with a few credit problems or the lack of traditional credit.

The FHA 203K loan program combines the purchase (or refinance) and rehabilitation in one loan.
Read more about the FHA 203K loan

The FHA mortgages are backed by the federal government. Each home buyer (or homeowner who is refinancing) pays a little extra at settlement. The upfront cost is called a funding fee. The borrower also pays a little extra each month with their mortgage payment; that charge is called MIP (mortgage insurance premium).

The Federal Housing Administration (FHA) does not make the loan to the borrower, but insures the loan. FHA home loans are made through banks and mortgage lenders who are approved by the FHA. When a a lender forecloses on a homeowner, the FHA reimburses the lender for the loss and takes ownership (HUD homes) of the home. The source of the reimbursement comes from the funding and MIP fees.

Here are some of the lending guidelines and highlights for the conventional mortgage.

Upfront mortgage insurance

All borrowers pay an upfront cost of 1.75% of the loan amount. For example, if the loan amount is $100,000, the borrower is required to pay (or finance), $1,750. The funding fee and monthly mortgage insurance is the reason why lenders are willing to loan money on such generous terms.

Minimum down payment for an FHA loan

For applicants with a 580 credit score or higher, the minimum down payment is 3.5% of the sales price. The Federal Housing Administration will permit an applicant with a credit score of 500 to 579; however, the down payment requirement is 10%

FHA mortgage insurance

The FHA home loans require private mortgage insurance regardless of the down payment. Even if the borrower is making a 20% down payment, the FHA requires monthly mortgage insurance.

The monthly cost is determined by the down payment (or equity in the case of a refinance) and length of the mortgage. The FHA does not use credit scores or property location as a rating factor. The private mortgage insurance with conventional loans can get pretty expensive when the credit score is below 680. Here's a chart that displays the monthly MIP cost.

FHA monthly mortgage insurance table

I know it looks a bit confusing, but it is really simple. Is the loan amount less or equal to $625,000? How much is the down payment? Is the down payment greater or less than 5%, and is the term 30 years or 15 years? If the loan amount is less than $625,000, with the minimum down payment of 3.5% for a 30 year term, the mortgage insurance cost factor is .85%.

Here's how to calculate the FHA monthly insurance cost:

FHA Monthly MIP Calculation
Loan Amount $100,000
MIP factor 0.85%
Annual Cost $850.00
Divided by 12 months $70.83

Seller paid closing costs

The FHA loan program is very generous with seller paid closing costs. The assistance limit is 6% of the sales price or actual costs. The seller paid closing costs include the prepaid costs as well (i.e. real estate taxes, homeowners insurance and per diem interest). Home buyers should be careful when asking the seller to pay their closing costs, because if the request is for 6% and the closing costs and prepaids add up to 5%, that additional 1% will revert back to the seller at settlement. The FHA does not allow cash back with an excess seller paid assistance. Read more about seller assistance

FHA loan limits

Each year the the Federal Housing Finance Agency (FHFA) establishes the maximum loan limit for FHA home loans. Most US counties have the following loan limits for 2020:

  • 1-unit home - $331,760
  • 2-units (duplex) - $424,800
  • 3-units - $513,450
  • 4-units - $638,100

There are exceptions for high cost US counties. See FHA loan limits for 2019

Debt to income ratio

Lenders use a formula to determine the maximum loan payment/loan amount. The formula is known as debt to income. There are two parts to the formula, the payment limit is called the front end ratio and the monthly debt and proposed mortgage payment is known as the back end ratio. The maximum borrowing limit.
Read more about FHA debt to income

Is an FHA mortgage right for you?

The FHA home loan is a good choice for borrowers with a minimal down payment and limited cash assets. The FHA monthly mortgage insurance cost is lower than conventional loans.
Learn more about PMI and MIP

The interest rates tend to be lower with FHA mortgages than with conventional mortgages. The reason is because of the federal backing and associated risk. The downside to an FHA mortgage is the upfront mortgage insurance and monthly mortgage insurance premium. The MIP never falls off with FHA home loans, even with 20% equity. The only way to remove the monthly MIP is to refinance the mortgage to a conventional loan, assuming 20% equity.

Rotating question mark  Frequently Asked Questions About FHA Loans

Q. Are FHA loans a bad idea?
A. FHA loans are a good option for home buyers with a credit score less then 620. And since interest rates are driven by credit scores, the interest rate is likely to be lower with an FHA loan. The FHA permits co-signers and co-borrowers. Additional borrowers can be the difference between approval and denial. The biggest disadvantage of an FHA loan is the mortgage insurance. There is an upfront cost and a monthly premium. The monthly payment never goes away! There is no first time home buyer requirement.

Q. Are FHA loans bad for sellers?
A. The FHA loan program is a bit fussy about the condition of the home. Flaky paint brings the most complaints from home sellers. Defective paint on, or inside any structure including garages, storage buildings, and decks must be remediable. That means the flaky paint must be scrapped and repainted. Paint chips must be removed from the property. The FHA wants the house to be in safe, habitable and in good condition. Repairs are required to be made prior to settlement.

Q. Are FHA loans good or bad?
A. The FHA loan is a great way to finance a home for credit challenged borrowers. The FHA loan program is more forgiving than the conventional loan programs. Home buyers with a credit score of 680 or higher and a down payment of 20% or more might be better of with a conventional loan.

Q. Can a home seller refuse a FHA loan?
A. Home sellers can refuse an offer that includes an FHA loan.

Q. Can closing costs be included in an FHA loan?
A. The only closing cost that can be "rolled in" is the FHA upfront mortgage premium. The mortgage insurance fee is technically not a closing cost, but this fee can be financed. The seller paid closing costs (up to 6% of the sales price) can reduce the out of pocket closing costs.

Q. Can I get an FHA loan with no money down?
A. Maybe. The Federal Housing Administration offers 100% financing with the 203(h) loan program. This is a niche FHA loan program that provides help to disaster victims purchase new properties or rebuild after their homes have been substantially damaged. Seller paid closing costs up to 6 percent are allowed. Applicants must have a 620 minimum FICO score. Summary of the Mortgage Insurance for Disaster Victims Section 203(h)

Q. Can I get an FHA loan without 2 years employment?
A. The answer is yes or maybe. You may be approved for an FHA loan with less than 2 years of employment if you meet one of the exceptions. A skilled loan officer should be able to determine if you satisfy the employment guidelines.