FHA LOANS EXPLAINED - 2024 | The Mortgage Patriot

hi folks I'm the mortgage Patriot and we're going to talk about FHA Loans because I want you to know that there's reasons why you'd want one there's certainly reasons why you would not want one and we're going to talk about the differences pros and cons loan limits loan restrictions and basically everything there is to know and at the end you're going to be a little surprised because FHA I'll tell you right now a little spoiler alert does have one really great Niche product that you probably didn't know about you're going to want to hear about so let's kick this off right now foreign I'm Kevin Fagan I'm the mortgage Patriot and let's talk about a deep dive into fhas now FHA is not for everyone FHA LOANS EXPLAINED typically it's for first-time homebuyers it doesn't have to be so it's not restricted to first-time home buyers the FHA loan can be applied to anyone there is no income restriction for that matter fifty thousand dollars a year if you make five hundred thousand dollars a year you could still apply and still be qualified for an FHA loan what are some of the advantages well there's two main ones that I'll point out a third later on as I talk about the niche product but the first two advantages are lower FICO scores lower credit scores and lower down payments let's get into that right now what are the FICO score limitations or criteria if you have a 580 score or better you can get an FHA loan and it'll allow you to have a three and a half percent down payment so you're only coming out of pocket for three and a half percent on an FHA loan a 580 score or better so that's an incredible advantage over a conventional loan most conventional loans only allow you go down to 620. some will allow you to go down lower than that it's true and I have availability to those lenders but the interest rate becomes this astronomical and so it doesn't make any sense at all to try to do that what are your options below 620 if your scores are say 608 down to 580 you can apply and qualify for under most circumstances an FHA loan and still enjoy that three and a half percent down payment there is a caveat to that FHA FICO score you can go below 580. you can go all the way out of 500 in some circumstances 500 to 579 in that range of scores the FHA does require 10 down instead of three and a half percent down so again 500 to 579 just below 580. you're allowed an FHA loan if you can come up with 10 down now let's talk about the down payment 580 score better FHA allows you to come out of pocket for only three and a half percent again that's a tremendous Advantage most conventional loans only go down to five percent there are some conventional loans that do that will allow you to go down to three percent but that's an income restricted type of product so the FHA loan allows again three and a half percent which is a striking difference secondly most down payment assistance programs are linked to FHA Loans so in other words I can provide for example down payment assistance programs but all of them say you have to go through the vehicle of an FHA loan most of them do not allow for a conventional loan which is fine so again that's just an advantage of the FHA product is that it links to most down payment assistance programs whereas conventional loans don't allow for that a great deal and again as we mentioned below 580 you have to come out of pocket for 10 another advantage of the FHA loan is that it is easier to qualify for it's got looser guidelines so what do I mean in a conventional loan for example your debt to income ratio your size of your debts DEBT TO INCOME RATIO relative to your income is lower than the debt to income and an FHA loan now I don't want to get into the weeds of what those numbers necessarily are but just understand that your debt to income ratio is simply just your number of debts your car payments your you know credit cards your student loans installment debt all that wrapped together uh and your mortgage for that matter your principal interest property taxes and your insurance all those debts divided by your income so that is the debt to income ratio that's the components of it and in the FHA World those debts can be much higher as a ratio than a conventional world so that's a tremendous Advantage for the FHA so not only you come out of pocket for Less your FICO scores are less than a conventional loan but lastly the debt to income ratio can be higher you are allowed more debts relative to your income than a conventional loan so this leads into why then wouldn't everyone want to be in an FHA loan the answer is an easy one and it's a harsh one once you learn it it is the mortgage insurance premium there is a monthly mortgage insurance premium attached to every FHA payment so in other words on a monthly basis not only are you paying the principal and interest but you're also paying what they call mortgage insurance why are you paying the mortgage Insurance because the FHA ensures these loans on the lender level MORTGAGE INSURANCE PREMIUM meaning whoever you take this loan out through who's ever providing the funds to you is going to be insured that if you in the case of bankruptcy on your part that lender is covered and they will not have any losses attached to that loan there's an incentive for the lender then to extend the FHA loan because they know that it's insured but who's paying for the insurance well you are so that's why you have what they call an upfront mortgage insurance premium and you have a monthly mortgage insurance premium I'll say that again you have upfront mortgage insurance premium and that is about 1.75 percent of the loan amount and then you have an internal monthly mortgage premium involved in every mortgage payment to the tune of about 0.8 percent point eight percent of the loan amount how does that all work well here's an example so let's go back to the concept of the monthly mortgage insurance premium and again that's an added cost in addition to your principal and interest how much is it on a 300 000 purchase on a property the loan amount is going to be 289 500. where did that number come from it's 96.5 of 300 000 because again you're going to come up with three and a half percent and the loan itself is going to be for 96.5 percent of in this case 300 289 500 now how much is the monthly mortgage insurance premium we multiply that amount times 0.8 and divide that by 12 and what do we get in this example we'd have an expense of 193 dollars per month for mortgage insurance because it's an FHA product and you have to pay that monthly fee that's uh that could be a pretty good chunk of change for a lot of people so this is the big downside of an FHA loan and why not everyone is suitable for it nor would you want one because here's the other thing about that mortgage premium it never goes away but over time there's going to be better alternatives for you're going to want to get rid of that and you can get rid of it in the form of a refinance so most people start off in an FHA loan and once they gather Through The Years enough equity in their property to the tune of 20 or more than they convert they refinance into a conventional loan thereby dropping the mortgage insurance premium let's talk about one Niche product that the FHA has that really is outstanding and that is the renovation loan they RENOVATION LOAN call it the FHA 203k loan this allows you imagine this if you want to buy a home and uh maybe an older home uh but it needs some either upgrades or it needs to some flat out fixing you know AC's out or it's got just you know shag carpet and you want to replace that of course you want to place some lighting fixtures because they're from the 80s or 90s you want to just basically do a complete upgrade on the home FHA allows you to do that and roll those costs into the loan so what an incredible Advantage let's say you're looking at a home for 250 000 but it's priced that way because frankly it needs 30 to 50 000 worth of renovation but you obviously don't have that kind of cash after certainly paying down that down payment and closing costs you don't have anything else left over or you have little you don't want to use up all your capital and but you want to have upgrades to your home this is the perfect remedy and the perfect answer and solution for this kind of scenario so let's talk about the last real big advantage to an FHA loan and that is with multi-family so what do I mean I MULTI-FAMILY mean you can obviously buy a single home with an FHA loan but you can also buy a duplex you could also buy a Triplex or even a quad Plex or a four unit home so FHA allows you to go to from a one unit to a four unit and these price points increase per the number of units so for example in most counties fha's extend to about in terms of a loan limit to about four hundred twenty thousand dollars but if you're buying a duplex where you're obviously moving in on one side and you want to rent out the other side then your loan amount goes to about 538 thousand dollars that's a major advantage as well also on a Triplex it goes to about six hundred and fifty thousand dollars so this and these are all still with three and a half percent down so imagine buying for example a a Triplex and you're spending somewhere in the neighborhood of 665 000 on a purchase you can do all that with three and a half percent down that's incredible and then of course you would rent out those other two units and maybe get some cash flow and really build some family wealth so there's so there's some great wealth building strategies inherent in an FHA loan because of its low down payment abilities and it's the ability to buy multi-unit properties so let's recap very quickly uh and I if before I do that can you please do me a favor because I really want to keep providing some good content for you as the mortgage Patriot so hit that subscribe button and hit a like if you would and that really helps with the algorithms of YouTube and puts me in a spot where maybe people can see my content that'd be appreciated so thank you for that uh but let's talk about the recap Once Again FHA Loans allow for low down payment scenarios low FICO scores it has greater latitude in your debt versus your income so those and it provides for renovation loans uh if you're trying to you know build something or impair repair something uh on a purchase that you wouldn't normally be able to come out of pocket for and it allows for multi-unit purchases and still keep that three and a half percent down um scenario so wonderful uh attributes to the FHA loan the one downside is that ongoing monthly mortgage insurance premium which can be either refinanced away or um you know it'll be paid off otherwise over the course of the year so you want to avoid that but I can again I can have strategies to help you offset that over time so I am the mortgage Patriot Kevin Fagan here on your side and have a great day thank you 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