FHA Loans California
What are California FHA home loans?
Federal Housing Administration (FHA) mortgages are a special type of mortgage that is insured by the government, and comes with a variety of advantages. California FHA loans are only granted to qualified buyers, and allow for more flexible credit requirements in applications. There is also less equity required of applicants for FHA mortgages approval. Furthermore, FHA mortgages come with the advantage of requiring a very low down payment, sometimes even as low as 3.5% of the purchase price. If an FHA mortgage is something you’re interested in, don’t hesitate to contact us so that we can help you determine if an FHA mortgage is the best option for you.
FHA loans in California are a competitive loan for today’s mortgage borrowers, the option for a loan down payment (3.5%) and more relaxed lending standards allow borrowers to get a loan that they might not have received previously. FHA loans are insured by the government under the Federal Housing Administration, which is the agency within the U.S. Department of HUD. HUD receives the mortgage insurance premiums from the FHA loans and they protect FHA lenders in California from a loss if the borrower defaults on a loan.
What are the California FHA Loan Requirements?
Just as with any loan, there are requirements. To get approved for an FHA loan, California residents must meet the following criteria:
Minimum credit scores
For credit score requirements with FHA home loans, California lenders apply what’s called an overlay. This is an adjustment on the credit score requirement that each lender does at their discretion.
Generally, a minimum credit score of 580 is required for an FHA loan. California borrowers who meet this criterion can benefit from a reduced down payment of just 3.5% on their property purchase. Otherwise, a 10% down payment applies.
Some lenders, however, apply the overlay to this requirement and can go down to below 580 for certain borrowers. Again, however, this is highly situational, so it’s best to consult with your loan officer if you have a credit score below this number.
Debt-to-income ratio requirements
The minimum debt-to-ratio that can qualify you for an FHA loan is 43% on average, with some lenders going as high as 50%. Note that this ratio covers all your debt, including student loans and credit card debt.
In fact, the debt of your husband or wife is also included in the calculation of your ratio, even if they’re not explicitly listed as a borrower on your FHA loan. California loans normally don’t do this, so make sure that you are guided accordingly when applying for an FHA mortgage.
Minimum income level
One of the great things about an FHA loan is that it doesn’t have as strict income requirements as other loan products. This enables a homeowner to qualify for financing they otherwise might not have access to.
Property requirements
There are also strict criteria governing which properties you can purchase with an FHA loan. California buyers, for example, can also use it for residential housing. This is limited to single houses, condos, and townhomes, excluding commercial properties and land.
The property you’re applying the FHA loan to also needs to be your primary residence, regardless of whether you want to buy a new house or refinance an existing one.
One exception is if you use an FHA loan to buy a multi-unit property, in which case other people can be living in the units provided you live in one of them. This is a great way to refinance a rental home using an FHA loan.
Previous bankruptcies and foreclosures
Generally, you shouldn’t have had a foreclosure in the last three years and bankruptcy during the previous two years to apply for an FHA loan. California lenders, however, can waive this in certain circumstances.
For example, if your home was foreclosed due to extenuating circumstances (and you can prove it), the waiting time can be drastically reduced. Also, a Chapter 13 bankruptcy might still make you eligible for an FHA loan, even if you’re in the middle of it. But, of course, this is on a case-to-case basis.
Tax return requirements
For employees, you need to present your W-2 forms and paychecks from the previous two months. For business owners or employees who have side businesses, you must show your tax returns for the last two years.
Where to Apply for FHA Loans in California?
Contrary to what most people think, the Federal Housing Administration doesn’t offer FHA loans directly. Instead, you can apply for an FHA loan via accredited lenders.
The FHA merely guarantees these loans – meaning that should the borrower default, the FHA will cover the lender for their losses. This ” protection ” allows lenders to offer the many benefits associated with FHA loans.
Fortunately, almost every major lender in California is accredited by the FHA to give out these loans. With that being said, though, some lenders are better than others, depending on your situation.
For example, lenders often differ on their credit score requirements. Some stick with the FHA minimum of 580, while others can go as high as 600. Thus, if your credit score is on the lower side, it’s wise to shop around for FHA lenders that will accommodate you.
Another important distinction is the mortgage rates that you’ll get because this varies with lenders as well. However, you really can’t know the rate until the lender has given you a personalized quote, so it might take more effort to compare different lenders.
On average, though, you can expect this to be in the 3% – 4% range. For instance, at the time of this writing, the average APR for a 30-year fixed FHA loan is 4.48%.
What Are the Next Steps When You’re Ready to Apply?
Once you’ve shortlisted your lenders of choice, it’s time to submit a loan application to each. Fortunately, many lenders allow you to apply online and finish the process via the phone with a loan officer.
As expected, you’ll need to provide basic details like your name, social security number, and a government-approved ID. You’ll also be asked about the property you want to purchase, namely the price and down payment.
You’ll also need to show your income and debts with supporting documents as part of the process. Examples may include your tax returns, W2 form (for employees), financial statements, and other documents that prove your income.
After you’ve turned in your application, the lender should give you a Loan Estimate (LE). This document lists all details pertinent to the loan, such as interest rates, closing costs, and payment schedules.
Giving out Loan Estimates is a fundamental responsibility of a lender since it establishes transparency between parties. The LE is also valuable for you to compare rates between lenders. For instance, you can easily compare the mortgage payments on a 30-year FHA loan versus a 15-year one to see which option fits you best.
As a rule, lenders don’t strictly require an appraisal, but it’s still a good idea. Apart from discovering issues with the property early on, an assessment can determine if the house is even qualified for an FHA loan.
Overall, the average time it takes to complete an FHA loan application is between 30 to 45 days.
Why people get FHA loans
- Loan Down payments
- Lower Credit scores
- Less stringent and more flexible underwriting guidelines
The lowest down payment on an FHA loan is 3.5% and you need a minimum of a 580 credit score to qualify for it. Conventional loans with 3% down have much higher credit standards and lower loan balances. A limited down payment for a loan amount up to $636,150 is a great opportunity for a borrower to buy a home.
Some underwriting guidelines that show the flexibility included the following:
- Down payment. The down payment can come from the borrower’s own funds OR can come in the form of a gift from a family member, grant from a state or local government assistance programs.
- Closing Costs – FHA allows sellers, builder and lenders to pay for some of the borrowers closing costs. These rates are typically a little higher so the lender can pay for the closing costs. Make sure you look at both options (lender paid or borrower paid closing costs)
- Annual premiums for FHA loans
- 15-year loan, down payment (or equity) of less than 10 percent: 0.7 percent
- 15-year loan, down payment (or equity of 10 percent or more): 0.45 percent
- 30-year loan, down payment (or equity) of less than 5 percent: 1.35 percent (Currently reduced to .85 percent)
- 30-year loan, down payment (or equity) of 5 percent or more: 1.3 percent (Currently reduced to .80 percent)