What is a Federal Housing Administration (FHA) Loan?
An FHA mortgage is a loan that’s insured by the Federal Housing Authority (FHA). FHA loans are an especially appealing option for first time home buyers (FTHB), as they offer a down payment as low as 3.5% if you have a credit score above 579. If your credit score is above 500 but below 580, you are eligible for an FHA loan with a 10% down payment and a higher interest rate.
While FHA loans offer an affordable option for home ownership, they come with an extra cost. Borrowers are required to pay mortgage insurance (PMI), which is usually an extra 1% in interest.
FHA loans were created in 1934 as a way to stimulate the housing market through new construction, and by providing loans to those who otherwise wouldn’t be able to afford or qualify for a traditional mortgage. The FHA gives qualified lenders the ability to issues loans they wouldn’t feel comfortable underwriting on their own by accepting liability for default, and using mortgage insurance to mitigate that risk.
Key FHA Loan Benefits
FHA and FHA 203k Loans have several unique benefits:
- Homes can be purchased for as little as 3.5% down
- Mortgage insurance allows borrows with lower credit to qualify
- Down payments can be gifted by family members
- FHA 203k loans let borrowers purchase a home in need of renovation, and allow them to finance the improvements
FHA Loan Requirements in Rhode Island
FHA loans have specific down payment requirements:
- In order to qualify for an FHA loan with a 3.5% down payment, you need a minimum FICO score of 580.
- In order to qualify for an FHA loan with a 10% down payment, you need a minimum FICO credit score of 500.
These are the two most important qualifications, but in order to fully qualify for an FHA loan in Rhode Island, you must meet the following requirements:
- Must have 2 years of continuous employment history (W-2 preferred)
- Must have a valid Social Security number, be of legal age to sign for a mortgage in your state, and have legal residency in the US.
- Borrowers have to pay at least 3.5% down. The funds can be gifted by a family member
- FHA loans are only available for a primary residence. 2-4 unit buildings are allowed, as long as you live in one of the units
- Your mortgage must be an appraisal by an FHA approved appraiser
- Borrower’s debt to income must be less than 43%. In some instances lenders can allows up to 50%, if they can justify how you’re qualified to cover the mortgage.
- Usually borrowers must be at least two years out of bankruptcy (Chapter 13, Chapter 7, etc). Exceptions can be made if the bankruptcy was beyond your control.
- Usually borrowers must be at least 3 years out of foreclosure. Exceptions can be made if there were unusual circumstances, and you’ve repaired your credit.
- The property must pass an FHA inspection. The goal of an FHA inspection is to prove that the property is ready to be occupied. If the property fails an FHA inspection, the seller needs to make the required repairs, or you need to deposit funds in escrow to pay for repairs at closing. You can also do an FHA 203k renovation loan for a property that won’t pass an inspection, as long as it passes upon completion of renovations.
FHA Loan Limits In Rhode Island
If you’re buying a home in Rhode Island, you need to be aware of the FHA loan limits. Whether you’re buying a single family, duplex, triplex, or quadplex, you need to know the maximum that the federal housing authority will lend to you.
The chart below shows the maximum FHA loan you can receive for various property types in Rhode Island:
FHA Loan Limits for Cities in Rhode Island
FHA Loan vs Conventional Loan: What’s the difference?
If you’re thinking about buying a home, you’re probably wondering which loan is the best fit for your needs. Both conventional loans and FHA loans have their pros and cons, and it’s important to understand them both so you can make the best decision.
A conventional loan usually requires more than 10 percent down, but doesn’t require mortgage insurance, or an FHA inspection, which makes it easier to close on a property, and provides an affordable interest rate.
An FHA loan offers a lower down payment, and you can qualify with a drastically lower credit score. However, the additional mortgage insurance can be expensive, and limit your disposable income.
If you have enough cash for a downpayment, a conventional loan can be a great way to lock in a low interest rate on attractive terms. If you’re looking to become a first time home owner without much capital, and you’re willing to pay a premium on interest, an FHA loan is a great fit.
What are Private Mortgage Insurance (PMI) Rates In Rhode Island?
Private mortgage insurance is the Federal Housing Administration’s method of mitigating their risk for loans with low down payments. If an FHA loan defaults, the insurance premium from other loans will protect their loss.
FHA’s mortgage insurance comes in two forms, up front mortgage insurance that is paid when you close your loan, and annual mortgage insurance paid monthly.
The Upfront Mortgage Insurance Premium is almost always the same for most borrowers, at 1.75% of the loan amount.
Annual Mortgage Insurance Premium (MIP) varies based on your loan amount, the length of your mortgage, and the loan to value in your area.
The Mortgage Insurance Premiums in Rhode Island are:
FHA Loans Greater Than 15 Years
|Base Loan Amount||LTV||Annual MIP|
FHA Loans Less Than 15 Years
|Base Loan Amount||LTV||Annual MIP|
What is an FHA 203k loan?
If you’re looking to purchase a property that needs more improvement to pass an FHA inspection, or you want to remodel a home you’re buying, an FHA 203k rehab Loan could be a perfect fit. A 203k loan lets you purchase a home that can’t pass an FHA inspection, and needs substantial repairs.
The 203k rehab loan provides funds for the renovations, allowing you to purchase a fixer-upper, or to improve the existing home to your standards.
There are two kinds of FHA 203k loans:
- 1. FHA 203k light loans allow you to borrow up to $35,000 for renovations, without much oversight from the lender.
- 2. A Standard 203k loan allows you to borrow up to the normal FHA loan limits, but you must follow strict guidelines from your lender, provide detailed bids for all repairs, and only work with FHA approved contractors. You will also usually be required to pay your contractors in installments that must be approved by the lender.
What are 203k Loan Requirements in Rhode Island?
Qualifying homes for a FHA 203k loan include:
- Up to four family residences that have been completed for a least a year
- A home that’s been torn down, as long as some of the existing foundation is still in place.
- A property you want to move to a new location.
- Some condos are eligible, as long as they are completed, and less than 50% of the building is a primary residence for the owners.
The home will still have to qualify under the normal FHA guidelines, and pass a standard FHA inspection after all repairs are completed.
FHA 203k Loan Rates in Rhode Island
FHA loans usually offer lower rates than a conventional mortgage. However, this can be misleading, as both upfront and annual mortgage insurance drastically raise the effective rate.
When you’re shopping for lenders for your FHA 203k loan, make sure you specifically ask if they do 203k loans, and not just FHA. Some lenders will do FHA loans, but aren’t qualified to issue a 203k renovation loan.
It’s recommended that you compare rates from at least 3 different lenders, and ask them to disclose every fee they charge.
Rates are just one of the many ways that lenders can compete for your business. You also need to be mindful or points, origination fees, closing costs, and appraisal fees in order to compare lenders.
Applying for an FHA Loan in Rhode Island
Finding the right FHA lender in Rhode Island is an important step in buying your next home. Your lender will give you a pre approval and loan estimate, which will determine the size of the home you can afford.
There are several ways to find a great FHA lender to work with:
- 1. Ask your real estate agent who they recommend and have had success with.
- 2. If you have a good relationship with your current bank or credit union, ask them for a quote.
- 3. Ask friends and family, and see if they would recommend their lender
- 4. Compare FHA home loan rates online
Once you found a lender, be sure to interview them thoroughly. After all, you’ll be relying on your lender to close the loan that lets you buy your next home. It’s important that your lender is responsive, professional, and has experience navigating the FHA process.
Combining a Home Buyer Rebate with an FHA Loan
Many first time home buyers choose an FHA due to the reduced down payment, and keeping the most cash in their pocket is their top priority.
A Home Buyer Rebate is a perfect fit for any home buyer that’s looking for help coming up with their down payment.
A home buyer rebate is when your buyer’s agent rebates you a portion of the commission they receive from the seller back to you. You can use this rebate to cover your down payment, buy points on your mortgage, reduce your principal, and in some cases, take the rebate as cash at close.
If you’re looking to learn more about a home buyer rebate, you can get connected to a local, top rated Clever Partner Agent near you.
Need Additional Resources?
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