Everything You Need to Know About FHA loans in California
What is an FHA loan?
FHA loans continue to be a popular loan program for home buyers in California and are commonly used in combination with down payment assistance programs. FHA loans are administered by the Federal Housing Administration (FHA), a government agency created in 1934 to offer mortgage insurance that would insure banks against losses from home loan defaults. Since 1965, the Federal Housing Administration has been part of the Department of Housing and Urban Development.
Because of the mortgage insurance offered by FHA, FHA loans present less risk to lenders. As a result, it has traditionally been easier to be approved for FHA loans than other loan programs. What’s more, lower risk allows lenders to offer FHA loans with low interest rates in California and the rest of the country. As a result, FHA loans, with their many features and benefits, are a popular option for first time home buyers.
Do I have to be a first time home buyer to get an FHA loan?
FHA loans have historically been a popular option for first time home buyers. This leads many people to assume that you are required to be a first time home buyer to obtain an FHA loan. This is not the case.
Yes, you can get an FHA loan in California even if you’ve bought a home before.
But, that doesn’t mean that you can use an FHA loan to buy rental properties and vacation homes. FHA loans are meant for people looking to buy their home and use it as their principal residence. So, if you buy a home using an FHA loan, you are expected to move into the home within 60 days and continue occupying the home for at least a year.
As a rule, FHA will not insure more than one property as someone’s principal residence. So, if you own a home and it is financed with an FHA loan, you typically have to sell it before buying another home with an FHA loan. With that said, there are exceptions to the rule. They are as follows:
Relocation – If you are relocating more than 100 miles away for employment-related reasons, you can buy another home using an FHA loan without being required to sell your existing home.
Increase in family size – If you have an increase in legal dependents and you’ve outgrown your current home, you can buy another home using an FHA loan without being required to sell your existing home. But, the balance of the loan on the existing home has to be less than or equal to 75% of the appraised value of the home.
Vacating a jointly-owned property – If you co-own a home currently and you are vacating the home with no intent to return and the existing home will continue to be occupied by the other co-owner, you can buy another home in California using an FHA loan. The typical scenario for this is if a husband and wife are getting divorced and one is moving out of their existing home that is financed with an FHA loan and he or she wants to buy another home using FHA financing.
Non-occupying co-borrower – A non-occupying co-Borrower with an existing FHA loan may qualify for another FHA loan on a new house to be their own Principal Residence. For example, if you co-signed on your kid’s FHA loan to help him/her buy his/her home, you can still use an FHA loan to buy your own home that you plan to live in.
A Borrower with an existing FHA-insured Mortgage on their own Principal Residence may qualify as a non-occupying co-Borrower on other FHA-insured Mortgages. So, if you own your own home and you have an FHA loan, you can co-sign for someone else’s FHA loan.
How do I qualify for an FHA loan?
The current FHA Policy Handbook is over 1000 pages long and we don’t expect you to know every detailed guideline that pertains to qualifying for an FHA loan. To make it easy, we will talk about FHA’s four general qualification standards. These are known as the “4 Cs of FHA Underwriting” and they are as follows:
Credit history – Do you have good credit history? Although FHA prefers good credit history, they do allow for some past blemishes.
Capacity to repay the loan – Do you make enough money to consistently make your monthly mortgage payments?
Cash assets – Do you have money available (including a gift or down payment assistance) for a down payment and closing costs?
Collateral – What is the value and condition of the home that you are buying?
Everyone’s financial situation is different and FHA’s loan approval guidelines allow for a flexible interpretation of their guidelines. In order to know for sure if you qualify for an FHA loan, you should talk to a licensed mortgage loan officer in California who is experienced with FHA loan guidelines.
What is the minimum credit score for an FHA loan in Arizona?
Currently, the minimum credit score that is required to qualify for an FHA loan is 500, but there is a catch. FHA guidelines state that if your credit score is below 580, you can be approved, but you can only finance up to 90% of the value of the home. In other words, if you want to buy a house and use an FHA loan to finance the home, you have to put 10% down. To make matters slightly more complicated, if you are planning on using down payment assistance to buy a home with an FHA loan, California’s down payment assistance programs require a minimum credit score of 640. But to be clear, the 640 minimum credit score requirement is for down payment assistance and not for FHA. So, in summary:
- FHA minimum credit score allowed with 10% down is 500.
- FHA minimum credit score allowed with only 3.5% down is 580.
- The minimum credit score to use down payment assistance combined with an FHA loan in California is 640.
What are the FHA loan income requirements?
FHA guidelines state that income must be reasonably likely to continue through at least the first three years of the mortgage. Further, if you want to qualify to buy a house using an FHA loan, you may only use income that is legally derived and, when required, properly reported as income on your tax returns.
Here is what is generally considered regarding income to qualify for an FHA loan.
- Has your income been stable for the past 2 years?
- Are you currently earning income?
- Is your income durable and likely to continue for at least the next three years?
Do California FHA loans have an income limit?
No, FHA loans do not have a maximum income limit. However, the individual down payment assistance programs do.
You can find the maximum income limits for current Arizona down payment assistance programs here.
What is the maximum loan amount for FHA loan in California?
FHA sets maximum loan limits for each county every year. You can find the current maximum loan limit for all counties in Arizona here.
What is the minimum FHA down payment requirement in Arizona?
As stated above, the minimum down payment requirement for an FHA loan is 3.5% of the purchase price of the home as long as your credit score is above 580. If your credit score is between 500 and 580 then the minimum down payment required is 10%.
Are there any down payment assistance programs for FHA loans in Arizona?
Yes, all three major down payment assistance programs in Arizona allow for you to use an FHA loan to qualify to buy a home in Arizona.
What are the closing costs for an FHA loan in California?
The closing costs that are required to buy a home in Arizona using an FHA loan are not too different from any other type of loan. The costs related to buying a home are discussed in detail here.
One cost that is unique to FHA loans is the FHA mortgage insurance premium. FHA offers various mortgage insurance programs that insure lenders against losses on mortgages. FHA collects a one-time upfront mortgage insurance premium at the time that you buy a home and an annual insurance premium that is collected from you in monthly installments. In other words, it’s part of your monthly mortgage payment.
A common FHA loan scenario in Arizona is buying a house with a 3.5% down payment amount (even if using down payment assistance) and getting a fixed interest rate with a 30-year loan term. In this scenario, the upfront mortgage insurance premium is equal to 1.75% of the base loan amount. It is almost always financed into the loan. The annual premium that is collected monthly is equal to .85%. FHA requires that you pay the annual premium over the entire life of the loan.
Here is a current chart of FHA mortgage insurance premiums.
Can the seller pay my closing costs for an FHA loan in Arizona?
Yes, when you are buying a home, FHA allows that the seller contributes up to 6% of the sales price to cover your closing costs.
Does FHA allow me to get a gift from someone to pay my down payment and closing costs when buying a home in Arizona?
Yes, you can get a gift to help you pay for your down payment and closing costs as long as there is no expectation of repayment. In other words, the person giving you the money is giving it to you and not loaning it to you.
FHA allows you to get a gift from the following:
- a family member
- your employer or labor union
- a close friend
- a charitable organization
- a governmental agency or public entity
To document the gift, FHA requires that you get a letter that is signed and dated by you and the donor. The letter must have the following:
- the donor’s name, address, and telephone number
- the donor’s relationship to the Borrower
- the dollar amount of the gift
- a statement that no repayment is required
What kind of house can I buy with an FHA loan in Arizona?
In general, FHA loans require that the house that you buy is structurally sound and in good enough condition that it does not endanger your health and safety (ex. exposed electrical wires, mold or lead-based paint). An appraisal report is required for the home that documents the safety and soundness of the home.
FHA loans in Arizona can be used to buy the following homes that are designed for the occupancy of 1 to 4 families. Property types that are eligible for FHA loans include the following:
- detached or semi-detached houses
- townhouses
- condos as long as they are located in an FHA-approved condominium project (contact us and we will check for you)
- manufactured homes (restrictions apply and some lenders will not offer financing)
You cannot get an FHA loan to buy the following types of properties:
- commercial enterprises
- boarding houses
- hotels, motels and condotels
- tourist houses
- private clubs
- bed and breakfast establishments
- vacation homes
- fraternity and sorority homes
