With a growing number of young and first-time homebuyers, AAFMAA Mortgage Services LLC (AMS) anticipates an uptick in FHA loans that make buying a home more affordable for them.

While FHA loans are available through AMS, they are backed by the Federal Housing Administration (FHA). With FHA backing and its mission to promote affordable housing, the guidelines are more lenient than those of conventional loan programs and even VA Home Loans. Borrowers often can qualify with lower credit scores and low down payments.

FHA loans are only for primary residences, but they aren’t just for first-time homebuyers — you can be approved regardless of whether you currently own a home, or have previously owned a home. And unlike many low-down-payment conventional loan programs, there are no low- to moderate-income restrictions.

FHA Loan Advantages

Probably the biggest advantage of an FHA loan is being able to put 3.5% down if your credit score is 580 or higher. It’s also helpful for many buyers that their down payment can include gifts or grant money as long as you can document the source of the income.

With an FHA loan, you'll need a debt-to-income ratio (DTI) of 43% or less, although this requirement varies based on credit score. You also can use a co-borrower’s income to get approved, even if the person won’t live in the home.

Plus, with changes in 2021 to FHA guidelines, more borrowers with student loan debt may be able to qualify. The change removed the requirement that FHA mortgage lenders calculate a borrower’s monthly student loan payment as 1% of their outstanding student loan balance for loans that are not fully amortizing or are not in repayment. The new requirement for that calculation is now 0.5%, which should lower the overall DTI for many borrowers.

Some Caveats

An FHA appraisal is required regardless of your down payment amount for an FHA loan, and the appraisal guidelines are more stringent than guidelines for conventional loans. If the home appraises for less than the sales price, then the FHA will not insure it. At that point, you’d have three options:

• The seller can reduce the asking price to reflect the market value.
• You can make up the difference with your own funds or another form of financing. In this case, you’ll be paying more for the home than it is currently worth.
• You can walk away if the seller refuses to reduce the price of the home, and you cannot or don’t want to come up with the difference.

FHA loans are also subject to loan limits (how much you can borrow). The 2022 maximum FHA loan limit for most parts of the U.S. is $420,680 for a single-family home. Buyers in high-cost areas of the country may be able to borrow up to $970,800 for a single-family home. Limits are higher for multifamily homes and special exception areas, including Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Finally, while you won’t pay private mortgage insurance (PMI) or a VA funding fee with an FHA loan, however, you will pay a lump-sum, upfront mortgage insurance premium (UFMIP) charge equal to 1.75% of your loan amount and an annual mortgage insurance premium (MIP) – ranging between 0.45% to 1.05% of the loan amount, divided by 12 – as part of your monthly mortgage payment.

Types of FHA Loans

In addition to loans for purchasing a home, the FHA offers loan programs to meet the needs of homeowners. These programs are generally easier to qualify for than conventional financing and are available only through FHA-approved lenders like AMS.

These include:

• FHA cash-out refinance – Borrowers with a qualifying credit score may be able to borrow up to 80% of their home's value.
• No cash-out refinance – Borrowers with a qualifying credit score may be able to borrow up to 90% of their home’s value to refinance their existing mortgage balance to lower the payment or change the term. No cash-out is allowed.
• Streamline refinance – Borrowers with a current FHA loan may be eligible for a streamline refinance, which allows you to skip income documentation and the appraisal. There is no cash-out available with this product.

We’re Here to Help

Whether you’re just thinking about buying, ready to start home-shopping in earnest, or thinking about refinancing, an AMS Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of low-rate and low-cost mortgages designed to meet your needs.

Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-218-6926!