Learn what it takes to get approved for FHA loans in Utah. Understand the pros and cons of buying a home with an FHA loan.
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The FHA approval process can be confusing, even for experienced homebuyers. If you're anything like me, you'll do plenty of research before deciding if an FHA loan is the right mortgage option for you.
Lucky for you, this article answers the most common FHA questions buyers ask me as their discount real estate broker.
You will learn who qualifies for an FHA loan if you can purchase investment properties with an FHA loan, and common repair issues that will kill an FHA real estate transaction.
After reading this article, you will know where to apply for FHA loans in Utah, how much down payment you'll need to close, and how to finance repair cost into your FHA home loan.
What Is A Utah FHA Home Loan?
An FHA mortgage - a loan that's backed by the Federal Housing Administration (FHA).
The Federal Housing Administration (FHA) is a division of the U.S. Department of Housing and Urban Development (HUD) providing security for these mortgages.
FHA does not directly lend money to homebuyers. Instead, they insure FHA-backed mortgages offered by private lenders, credit unions, or banks.
Thanks to the federal government's backing, lenders face a reduced risk in the event of borrower default.
This translates to greater chances of mortgage approval for individuals with lower credit scores or less cash for a downpayment than required for conventional mortgages.
An FHA mortgage could be the key that unlocks the door to your dream home.
What Credit Score Is Needed For FHA Loans?
FICO scores below 580 don't qualify for the minimum down payment of 3.5% of the purchase price. Home buyers with a credit score between 500-579 will need a 10% down payment.
Debt To Income Ratio - FHA Loan
The payment-to-income (PTI), or the front-end debt ratio, refers to the percentage of your gross monthly income dedicated to making your monthly mortgage payments.
Are FHA Loans Hard To Qualify For?
One of the major benefits of FHA mortgages is the relaxed approval requirements, making it easier than conventional loans for borrowers to qualify. FHA mortgages provide home buyers with less-than-perfect credit scores the ability to purchase an owner-occupied home.
Furthermore, FHA mortgage loans offer low-interest rates to help homeowners manage their monthly housing payments more affordable.
Can You Buy An Investment Property With An FHA Loan?
To put it simply, the answer is yes and no.
Utah FHA loan requirements dictate that the property you purchase must be your primary residence.
However, some homebuyers purchase a multifamily property with up to four units using an FHA loan for investment purposes. The owner can live in one unit while renting out the other units to tenants and generate rental income.
Utah FHA Loan Limits (2023)
Search Housing and Urban Development (HUD) for FHA loan limits in all Utah Counties.
Is It Harder To Buy A House With An FHA Loan?
Yes, purchasing a Utah home with an FHA mortgage loan is more difficult.
Before accepting a real estate purchase contract (REPC), the listing agent will explain the added risk of working with an FHA home buyer versus a conventional home buyer to the seller.
Sellers may be hesitant to work with FHA borrowers since they typically have less-than-perfect credit scores, less disposable money, and additional appraiser property condition requirements, all of which increase the chances of the transaction failing.
If there are multiple offers, and one offer is a conventional mortgage, and the other offer is an FHA loan, the seller will likely accept the offer from the conventional loan borrower unless the FHA borrower removes some contingencies or offers a significantly higher purchase price.
Do You Need To Be A First Time Homebuyer To
Qualify For FHA?
No, you do not need to be a first-time home buyer to qualify for an FHA loan.
You can qualify for FHA mortgage loans throughout your lifetime. However, it's worth noting that while you don't need to be a first-time homebuyer to qualify, typically, you can only have one FHA loan at a time. This policy prevents prospective borrowers from using the program to purchase investment properties.
What Types Of Homes Qualify For FHA Loans?
FHA Ownership Requirements
FHA property eligibility is not granted if the resale date is within 90 days of the seller's acquisition.
FHA Home Types
The eligible properties include single-family residences (SFRs), dwellings with two to four units, planned unit developments (PUDs), townhomes, and condominiums.
FHA HOAs Compliant
Not all HOAs qualify for FHA loans. Confirm the HOA is FHA compliant before submitting a purchase offer.
FHA Property Condition Requirements.
While it's easier to qualify for FHA loans than Conventional loans, finding a home can be more complicated.
The reason is that the property the FHA borrower is purchasing must meet certain conditions. An FHA mortgage won't be approved if the home needs significant repairs.
Make sure you and your real estate agent look for defects while touring the home before making an offer. There's no reason to make an offer on a home that an FHA appraiser will not approve. You will not recoup the cost of the inspection and the appraisal.
Here is a list of the most common repairs that FHA appraisers require for final loan approval.
- Broken Or Cracked Windows
The appraiser will require damaged windows to be replaced - Cracked Concrete
Depending on the severity and location of the cracked concrete, the home may not qualify for FHA without repair. Cracked driveways are easier to repair than cracked foundations. Many sellers will not make major repairs so the home will need to be sold to a Conventional or cash buyer. - Condition Of The Roof
Homes with fewer than two years remaining on the roof must be repaired or replaced. - Chipped Paint
All chipping paint must be scraped, repainted, and all scraped paint chips removed from the property.
FHA Income Limits In Utah
There are no income limits to qualify for an FHA-insured mortgage. To qualify, you must:
- Provide proof of income for at least two years.
- Have a credit history, typically demonstrated through a FICO credit score. If you don't have a credit score, your lender must get a non-traditional merged credit report (NTMCR) or use on-time utility bills, rent payments, car insurance to establish creditworthiness.
- No delinquent federal debt or judgments related to taxes or other issues. Additionally, you cannot have any associated debt if you have past FHA-insured mortgages.
- Disclose any cash gifts you receive that help with the down payment. friends and family members, charities, your employer or union, or government agencies. A gift letter must be signed and dated by the individual gifting the down payment to the buyer.
- Purchase an owner occupied property.
- You can not have two or more FHA mortgages at one time. As with most things there are exceptions to the rule. You may qualify for a second FHA mortgage loan if you're relocating, going through a divorce, or if your family size has increased and you've outgrown your previous house.
Pros & Cons Of FHA Loans In Utah
Pros:
- FHA loans are available to borrowers with lower credit scores than conventional mortgages.
- FHA loans typically require lower down payments compared to many conventional loans.
- Borrowers can use gifts to pay the down payment with an FHA loan.
- FHA loans are backed by the Federal Housing Administration, which provides added security for lenders.
- FHA home loans have lower interest rates than conventional mortgage loans.
Cons:
- FHA borrowers are required to purchase FHA mortgage insurance and pay ongoing monthly premiums for 11 years or the life of the loan.
- FHA loans cannot be used to purchase non-owner-occupied investment properties or second homes.
- FHA loans have stricter property condition qualification requirements than conventional loans.
FHA Mortgage Insurance
What Is Upfront Mortgage Insurance (UFMIP)?
FHA borrowers must pay a one-time Upfront Mortgage Insurance Premium (UFMIP) and an annual FHA mortgage insurance premium (MIP) pain in monthly installments. In most FHA loan programs, the UFMIP is mandatory and can be financed into borrowers' mortgages.
The UFMIP cost is 1.75% of the loan amount. If borrowers add the UFMIP to the mortgage, they must include the entire amount.
For example, here's the cash you'll need to purchase a home worth $600,000 with an FHA-insured mortgage loan. You'll need $21,000 (3.5%) for the down payment plus $10,132.5 (1.75%) at closing.
To elaborate, if the home costs $600,000 and you're putting down 3.5%, which is $21,000, you'll also pay 1.75% UFMIP on the remaining $579,000, which amounts to $10,132.5. You will need to have a minimum of $31,132.5 ($21,000 + $10,132.5) in cash at closing.
This doesn't include typical home buyer closing costs.
What Is Mortgage Insurance Premium (MIP)?
An FHA loan requires the borrower to pay annual mortgage insurance premiums (MIP) in addition to the UFMIP. The MIP is distinct from the UFMIP, serving as a recurring payment for having an FHA loan.
The MIP is paid monthly as part of the mortgage payment, and the amount can vary between 0.45% to 1.05% of the loan amount. The actual annual mortgage insurance premium amount depends on the borrower's down payment amount and loan term.
Borrowers that put a minimum of 3.5% down for a home purchase will pay MIP for the life of the loan. However, if the borrower makes a down payment of 10% or more, they can cancel their mortgage insurance after 11 years.
Can FHA Closing Costs Be Rolled Into The Loan?
Yes, borrowers can include closing costs in their loan amount and pay them off alongside the principal. This type of loan is referred to as a "no-closing-cost loan."
However, this option has a drawback as borrowers will have to pay interest on the closing costs, which can make it more expensive in the long term.
What Is An FHA 203(K) Renovation Loan?
An FHA 203(k) loan provides the option to purchase or refinance a property that requires work, allowing the borrower to roll the renovation costs into the mortgage.
This unique loan program allows borrowers to finance repairs into their mortgage, paying off renovations over the life of the loan.
Limited FHA 203(k)
A limited 203(k) loan (also known as Streamline) is a great option for homes requiring only moderate repairs or upgrades and is in move-in ready condition.
Pro Tip: Borrowers can obtain up to $35,000 for cosmetic repairs.
It's essential to remember that major structural changes are not allowed with a limited 203(k) loan. However, if the kitchen or appliances are outdated or if you'd like to update the flooring, a limited 203(k) loan is a great option.
Standard FHA 203(k)
The FHA uses two methods to determine the property's value and chooses the lesser value of the two.
The first method is to combine the cost of renovations with the property's initial value.
Suppose the house was initially appraised at $500,000, and the loan limit in your area is $619,850. In this scenario, the cost of repairs cannot exceed $119,850.
The other way FHA determines value is to multiply the property's after-repair value (ARV) by 110%, which cannot exceed the FHA loan limit.
Utah FHA Loan Application
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This post was all about FHA loans in Utah. Now you have the information to decide if FHA is the best loan option for you or if a conventional mortgage is better.