The Complete Guide To FHA Loan In Pennsylvania: Everything To Know

The Complete Guide To FHA Loan In Pennsylvania: Everything To Know

Gustan Cho Associates are mortgage brokers licensed in 48 states

Owning a home for first home buyers is now easy. There are plenty of financing options on the market to access to take the financial load off. Besides, purchasing a home can be pretty expensive, and it helps to have the security of a mortgage. Mortgages make the process of buying a house affordable and manageable. A borrower can either opt for conventional mortgages or an FHA loan as their house financing option. An FHA loan in Pennsylvania is an example of a suitable loan for financing your next dream home. This type of loan offers many benefits to novice homeowners earning low to moderate-income.

This article provides an essential outline of all there is to know about FHA loans in Pennsylvania.

The Complete Guide To FHA Loan In Pennsylvania: What Is A Federal Housing Administration Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration and issued by an FHA-approved lender. An FHA loan is ideal for low to moderate-income borrowers. Besides, this loan offers borrowers with lower credit scores a lower down payment than conventional loans for buying homes. Having a lower credit score does not limit you from taking out a mortgage. But, with an FHA loan, you can make your dreams of owning a home come true.

History Of FHA Loans

During the worldwide economic recession in 1934, the United States Congress developed the Federal Housing Administration to save the real estate industry. During that period, the housing market was experiencing a downward trajectory with foreclosure notices increasing, financing options were limited to 50% of a home’s property value, and the mortgage terms were increasingly difficult for most buyers. This situation made it challenging to buy a home. As a result, most United States residents rented their homes, with only a tiny percentage being homeowners. The introduction of the FHA loans resulted in a skyrocketing of homeowners within the United States. Besides, the loans reduced the risk terms of borrowing, making it easier for more people to qualify for loans.

Nearly seven decades later, the rate of homeownership in the US increased to 69.2%, an all-time high since the Great Depression. In 2021, the homeownership rate now stands at 65.4%.

How Does An FHA Loan In Pennsylvania Work?

As mentioned earlier, an FHA loan is useful for first home buyers who fail to qualify for conventional loans due to lower credit scores and low income. An FHA loan offers borrowers a down payment of 3.5% for those with credit scores of 580 and above. Before taking out an FHA loan, a requirement is the payment of mortgage insurance premiums. In case a borrower defaults, the premiums act as security to the lender. It is important to note that FHA does not provide loans to borrowers; it only approves them. FHA-approved banks or lending institutions issue the loans. The credit score limit is not fixed. A borrower with a lower credit score can make a down payment of 10% and still access the FHA loan. But, with a lower credit score, the interest rate will be higher.

FHA Loan Ins Pennsylvania Requirements

The two critical requirements for qualifying for an FHA loan are credit score and the minimum down payment amounts. But, as mentioned earlier, a lower credit score does not limit a borrower from accessing the loan. As someone with a credit score of 500 to 579, I would have to pay a minimum down payment of 10%. As a borrower, other FHA loan requirements I need to have are:

Income

  • A steady income flow or stable employment history or at least a two-year working experience for one employer.

Down Payment

  • A 3.5 percent minimum down payment can be a grant or a financial gift from a family member.

Property Appraisal

  • A property appraisal should be done by a registered and approved appraiser.
  • An appraisal should outline and meet the minimum FHA loan standards.
  • If the house requires repairs, the buyer and seller should agree on who pays the cost of repairs.

Nationality

  • A borrower must be of legal age, a US resident, and have a valid Social Security number.

Front- and Back-end Ratio

  • The front-end ratio should be less than 46.9% of my gross income.
  • This ratio includes a tally of homeowners insurance, mortgage insurance, property taxes, HOA fees, and mortgage payments.
  • The back-end ratio should be less than 56.9% of gross income. The ratio is a tally of any previous loans, car payments, or credit card payments.

Bankruptcy

  • A borrower should prove to be two years out of Chapter 7 bankruptcy.
  • Borrowers who are in the Chapter 13 bankruptcy repayment plan are eligible to qualify for an FHA loan after 12 months into the repayment plan with trustee approval and manual underwriting.
  • There is no waiting period after the Chapter 13 Bankruptcy discharge date.
  • If Chapter 13 bankruptcy has been discharged for less than two years, it needs to be a manual underwrite.

Foreclosure Notice

  • A minimum of three years out of foreclosure notices. But, exceptions can be made if the credit score improves.
  • A new FHA loan is only applicable for primary residency.
  • But, most of these requirements have exceptions tied to them and are flexible, depending on different circumstances.

Types Of FHA Loans

The FHA provides a variety of loan packages accessible by low- to moderate-income earners such as:

Home Equity Conversion Mortgage

  • For seniors above the age of 62, this loan option offers the benefit of selling their homes through converting equity to cash.
  • The advantage is the title ownership remains with the individual.
  • Besides, you get to choose how to obtain the funds, either through a line of credit or a monthly fixed payout.

FHA 203(k) Improvement Loan

  • This loan option takes into consideration the cost of repairs for a home.
  • As a borrower, if I make a down payment and end up with no cash for renovations or repairs, this loan factors in the costs of repairs for the home.
  • The limitation to this type of loan is that the repairs should be done by a professional. In addition, the cost of repairs should exceed $5,000, with a maximum of six months for completion.

FHA Energy Efficient Mortgage

  • Like the FHA 203(k) Improvement Loan, the only difference is that it focuses on improving the efficiency of a home.
  • The concept behind this loan is that an efficient home will have lower utility costs.
  • A borrower can take out this loan when planning to install new insulation or solar systems within their home.

Section 245(a) Loan

  • This loan is a Graduated Payment Mortgage, for which borrowers with the likelihood of an income increase can qualify.
  • The loan starts with minimal initial payments that slowly increase over time, resulting in a shorter loan term.

Streamline Refinance

  • This type of mortgage allows borrowers to refinance a mortgage that is already existing. In addition, the process requires less documentation than applying for an FHA loan with fewer underwriting guidelines, hence why it is named “streamline.”

203(h) Disaster Mortgage Victims

This type of mortgage provides 100% of financing for borrowers residing in disaster-prone areas. A borrower does not need to give a down payment, and the funds should only be utilized to reconstruct damaged houses or purchase a new home.

How Does an FHA Loan Differ from Conventional Loans?

There are differences between these two loans. They include:

Credit Score

A borrower with a credit score of 500 to 579 can qualify for house financing with an FHA loan. This is with the assumption that the borrower can make a minimum down payment of 10%. With a higher credit score of 580, a borrower can make a minimal down payment of 3.5%. For conventional loans, a minimum requirement is a credit score of 620, with a down payment of 3% to 20%. This rate tends to be higher for people in the lower-income bracket.

Loan Terms

  • An FHA loan provides 15- or 30-year loan terms, whereas conventional loans offer 10, 15, 20, or 30 years.

Mortgage Insurance

  • FHA loans need buyers to pay mortgage insurance upfront or annually for 11 years or a loan period.
  • Borrowers do not have to pay for mortgage insurance with a 20% down payment with conventional loans, or if the loan is paid up to 78% LTV.
  • FHA loans require borrowers to pay an upfront fee of 1.75% of the loan. Alternatively,  borrowers need to pay a 0.85% annual mortgage insurance premium on 30-year fixed-rate mortgages. Conventional loans have a lower mortgage insurance premium rate of 0.5% to 1% of the loan amount. This premium is paid annually by the borrower.

Down Payment Gifts

  • A borrower can get 100% of the down payment as a financial gift with an FHA loan from a family member.
  • At the same time, a borrower can receive the down payment as a gift for a conventional loan if it is less than 20%.
  • Conventional loans require private mortgage insurance if the borrowers put less than a 20% down payment.

Down Payment Assistance Programs

  • For an FHA loan, a borrower can get a down payment assistance program.
  • Conventional loans do not offer these programs.

How to Apply For An FHA Loan

  • To apply for an FHA loan, a borrower needs to find an FHA-approved lender.
  • Lenders will differ in their cost rates and standards for accessing the loan.

The key steps a borrower needs to consider when applying for a loan are:

Gather Your Documents

  • Any borrower wanting to access a loan should demonstrate their financial incapacity with the relevant documents at hand.

Documents every borrower should have when making an FHA loan application include:

  • Driver’s license / valid social security number
  • Full asset statements showing where the down payment and closing costs is coming from
  • Two-year tax returns
  • Two recent paychecks

Set a Budget

  • Before making an FHA loan application, a borrower needs to understand the amount they can afford to pay for a home.
  • Then, using a mortgage calculator, one can work out the monthly payment to service the loan after the daily expenses are removed.
  • This can help borrowers know the type of housing to go after and home prices within their budget.
  • Going blindly without this estimation can result in a borrower footing monthly costs beyond their limits.

Compare Offers

  • It is essential to look for different offers from many lenders for comparison of rates.
  • Some may be cheaper and within the limits of a borrower’s financial capacity.

Pros and Cons of FHA Loans

Lower Credit Score of FHA Loans

Before deciding to take this type of loan, there are specific considerations you need to make. They include:

Pros on FHA loans include the following:

Lower Credit Score

  • Borrowers with lower credit scores can still enjoy the benefit of owning a home with an FHA loan. A minimum credit score of 500 is acceptable when applying for an FHA loan.

Lower Down Payment

  • FHA loans provide the borrower the opportunity of making lower down payments.
  • For example, a borrower with a credit score of 580 will pay a down payment of 3.5%.
  • A lower credit score will need the borrower to make a down payment of 10%.

Stop Renting

Instead of waiting to build equity as conventional loans do, a borrower can own a home without the need to improve their credit score.

Cons

Mortgage Insurance Payment

  • Borrowers with a lower credit score are considered a risk of defaulting on loan payments.
  • As a result, an FHA loan requires borrowers to pay mortgage insurance, which secures the lender.
  • Borrowers have the option of paying the insurance upfront or annually, which is divided into monthly installments.
  • With a down payment of less than 10%, as a borrower, I will have to pay the insurance for the loan’s lifetime.
  • With conventional loans, building equity of 20% exempts borrowers from paying mortgage insurance.

Property Requirements

  • Not every property can qualify for an FHA loan.
  • For starters, an FHA loan limits the houses a borrower can purchase in terms of price.
  • In addition, there are specific amounts a borrower cannot exceed in the purchase.
  • Secondly, FHA loans are for primary residency and cannot be used for purchasing a second home.
  • A borrower must reside in the property.

The Cost is Higher

  • Mortgage rates between FHA loans and conventional loans are lower for FHA loans.
  • However, the Annual Percentage Rate for FHA loans tends to be higher compared to traditional loans.
  • An annual percentage rate is an amount or yearly interest charged to a borrower.

Qualifying For FHA Loans In Pennsylvania

Before applying for an FHA mortgage, here are a few tips to help borrowers get the best rates from their loans.

Check Credit Report

  • Credit reports are crucial when applying for an FHA loan.
  • Not only should borrowers get their credit reports, but they should also check for inconsistencies within the report.
  • For example, if you made a payment that does not reflect in the credit report, it is essential to rectify it before submitting your credit report.
  • This step is vital since it can boost borrowers’ credit scores, qualifying them for a lower interest rate.

Pay a Bigger Down Payment

  • The minimum payment an FHA loan allows is 3.5%.
  • However, a borrower can make a larger down payment, which will reduce the interest rate.
  • A significant amount in down payment will increase a borrower’s loan value.

Pay Off Debt

  • A key consideration when applying for a loan is the debt-to-income ratio, which is the amount of debt a borrower owes divided by their monthly earnings.
  • Paying off debt will help borrowers improve their credit score and lower the debt-to-income ratio.

First-Time Home Buyer Programs

  • First-time home buyer programs are ideal for finding better FHA mortgage rates since they combine the mortgage with closing cost assistance.

Compare APR

  • Another way of finding favorable FHA mortgage rates is through comparing the Annual Percentage Rates.
  • This gives a borrower an idea of how much they’ll pay in fees.

FHA Loan Limits in 2021

  • FHA loan limits vary every year, and they depend on the property’s location.
  • For example, for a single-family home, the loan limit for low-cost areas is $356,362, while in high-cost areas, the loan limit stands at $822,375.
  • For a duplex home, the limit in low-cost areas is $456,275, while in high-cost areas, it’s $1,053,000. A tri-plex home’s limit is $551,500 for low-cost areas and $1,272,750 for high-cost areas.
  • Finally, if a borrower is interested in a four-plex home, the low-cost area limit is $685,400, while in a high-cost area, the limit is $1,581,750.

FHA Loan FAQs

There are multiple FHA loan FAQS. They include:

How Can I Remove MIP Imposed on an FHA Loan?

  • Every FHA loan has a requirement of paying mortgage insurance premiums (MIP) for the lifetime of the loan.
  • The premiums are security for lenders since borrowers with a credit score are at risk of defaulting.
  • However, a borrower can get rid of MIP by paying off 20% of the mortgage.
  • Another way of getting rid of MIP is through paying the mortgage early.
  • It demonstrates accountability and creates trust with the lender.

Can I Refinance My FHA Loan?

The answer is yes. There are plenty of options when it comes to refinancing an FHA Mortgage loan. If a borrower wishes to convert the loan into a conventional one, they would have to wait seven months after paying off the original mortgage before applying for a new one. With 20% equity or more, a borrower may not be required to pay private mortgage insurance with their mortgage refinance. Therefore, a quicker option when opting for refinancing is through using streamlined refinancing. The process of applying for a streamlined refinance has fewer documents and fewer underwriting guidelines as a requirement.

What If the Property I Want Does Not Meet the Inspection Standards?

FHA guidelines stipulate that every home has to undergo an inspection before financing. A house that fails to meet the standards in an appraisal may not be eligible for an FHA loan. However, you can opt for a 204(k) Rehab Mortgage. This type of mortgage allows borrowers to take up to $25,000 for repairs within the home. In addition, the loan can qualify for rebuilding the home without tampering with the foundation. The only limit is the total repairs should not take more than six months to complete. A rehab mortgage loan only applies when the cost of repairs is more than $5,000. If the home fails the inspection and the repair cost is less than the amount, a borrower can negotiate with the seller to improve before purchasing.

If I had a Foreclosure, How Long Do I Have to Wait?

If you have experienced a foreclosure in the past, getting an FHA loan may be a bit difficult. When applying for a conventional mortgage, you may have to wait close to seven years from the foreclosure. For an FHA loan, you may only need to wait for three years to reapply for a loan after a foreclosure.

What is a 90-Day Rule?

The 90-day rule applies to sellers, whereby they have to own the home for at least 90 days before selling the home to a borrower. This period is referred to as “title seasoning.” The FHA uses this period to keep away fraudulent people posing as homeowners who end up being home flippers.

When the 90-day period elapses, you can apply for an FHA loan unless two possible limitations occur within 180 days:

  • If the selling price of the home is twice as much as its original price
  • The lender classifies the loan as a high-priced mortgage loan (HPML)

In such cases, a borrower will have to undertake a second appraisal to ensure that the home is correctly priced and the price is not part of a fraudulent scheme.

How Long Will it Take for My FHA Loan to Close?

On average, closing an FHA loan does not differ as much compared to conventional loans. The process of applying for an FHA loan may require an in-depth analysis of a borrower’s financial capacity. But, the process is estimated to take four to six weeks.

FHA Loans In Pennsylvania: Is An FHA Loan Right for Me?

Applying for an FHA loan in Pennsylvania sounds excellent, but not for everyone. People with credit scores lower than 500 can opt for a personal loan instead. If you can make a big down payment on your loan, you should apply for a conventional loan. It is essential to use a platform that offers the best mortgage repayment rates with an FHA loan. At Gustan Cho Associates Mortgage Group, we provide favorable mortgage rates. When applying for an FHA loan in Pennsylvania, you can check our website at Gustan Cho Associates to learn more about our services and mortgage rates.

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