An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for monthly mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Less rigorous lending standards and lower down-payment requirements make FHA loans popular with mortgage borrowers.
- Low Down Payments
- Low Closing Costs
- Easy Credit Qualifying
As of 2018, these loans allow the borrower to borrow up to 96.5% of the value of the home; the 3.5% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time homebuyers.
The FHA recently announced that the new FHA single family loan limit for Michigan will be $294,515. That brings the purchase price with the minimum down payment to $305,197.
First, a borrower must have a steady history of employment or at least a 2 year history with the same employer. This is important because the FHA requires a borrower’s front-end ratio – which is the summation of the monthly mortgage payment, HOA fees, property taxes, mortgage insurance, and homeowner’s insurance – be less than 31% of total gross income. However, it is possible to be approved with a 40% ratio.
Additionally, a borrower’s back-end ratio – which is the summation of the monthly mortgage payment and all other monthly consumer debts – is required to be less than 43% of total gross income. However, it is possible to be approved with a ratio as high as 50%.