10 Hidden FHA Loan Tips & Tricks

Certified Mortgage Advisor
NMLS 1701021
March 21, 2021

FHA tips and tricks

So they were talking about 10 FHA tips and tricks. So FHA loans are fantastic loan options that are really flexible, especially if you have a lower credit score or a lot of debt. But there's also a lot of tips that most even loan officers don't know. So we're going to walk through those today.

1. Credit score brackets

So when you get your interest rates, primarily based on your credit score and credit scores and interest rates, don't correlate to some one-to-one, right? It's not that if you have a 640, you have a better interest rate than a 639 necessarily just cause at one point, only because we switched into a new bracket of credit. So let's walk through some of these important ones.

FHA's minimum credit score

So it's important to remember that FHA has a minimum credit score of 500. So if you have a 500 score to a 579, you need 10% down on an FHA loan.

Required 3.5% down

Now, the moment that we hit 580 is when we can do 3.5% as a minimum down payment on an FHA loan.

Why 620 is the artificial minimum for lenders?

Now, if we have a 620, this can often be an artificial minimum for lenders. And with this convenience, this is just an overlay to basically FHA makes their generic rules and then lenders can set stricter rules on top of that, depending on the loans that they want. And since 620 is the minimum for conventional loans, a lot of lenders just say 620 is going to be our minimum for FHA as well. And they go ahead and just bring a, or they raise that credit score minimum up.

So if you see a lender and they're saying, Hey, our minimum score for FHA is 620. Just know you can shop with other lenders to be able to find somebody who can do lower than that.

640 Rates get much better

At 640, this is one of the most important brackets to hit. If we can get to a 640, we can get a much better credit score than if we even have a 639. That one is different at some point again, it's not the one difference in point in your credit score point. Actually, we went into a new bracket and that lowers our interest rate. Rates tend to get so much better when we hit into that 640 range.

So when I'm talking with a client and they're at like a 634, normally what I say is let's see what we can do to raise those extra points, to get you to a 640, because the difference between just a couple points and your credit score can literally save you thousands of dollars in interest on that loan.

680 Conventional might be a better option

Then when we hit 680, this is where we start looking at saying conventional might be a better loan option. So conventional loans have a minimum of 620. But anywhere between 620 and 679, it seems like FHA actually tends to be a better option, even though it has higher mortgage insurance.

It's usually because conventional loans tend to prefer higher credit scores and larger down payments. So they can penalize those lower credit score brackets. So when we get to 680, normally is when I started talking with clients about, Hey, let's compare the cost difference between FHA and conventional short term, medium term to see which is going to be the better option for them.

2. DPA from family

The second one is down payment assistance from family. So most people are familiar with a down payment assistance program. Normally this is given through a local. County program. All right. But you can actually get down payment assistance from your family. And I'll explain this here in a second.

Just keep in mind this isn't for everybody. Most people can't get a loan from their family and this either because relationally, it's not always great to get a loan from Aunt Janet. That creates some weird conflict and riffs. I know, I certainly probably wouldn't want to do that.

And then also there's financial access, right? We don't all come from families that have the ability to. Lend us money or Linda's money in a way that's going to have a good effect on the relationship in the future. But this is an option that a lot of people don't know about.

Secured and unsecured

So it's going to be secured or unsecured against the home. This basically means that the person giving the loan can choose to basically have a lien on the property as well. So if you sold it, they could get their money back legally, if they wanted to in the event that something happened like that.

Included in your DTI

Also, this has to be included in your debts income. So this means that let's see, the loan is for $300 per month. If so, then that needs to be included in your debt-to-income ratio. That can limit how much you can afford. So it could afford this $300 a month lowers the max loan amount that you can get. So if you are using this, you're getting a loan from a family member. Make sure you talk to your lender about this so they can include whatever that monthly payment is going to be in there.

It's probably not going to be that high, probably not going to be $300 per month. It depends on the terms that you set up with whoever's giving you that money.

Cannot exceed 100% LTV

Also, it cannot exceed a hundred percent of the loan-to-value ratio. So this basically means if you're doing three and a half percent down on an FHA loan your family member, can't give you 5% in addition. Like they can't give you the 3.5% and then all the way up to 5%. They can't give you a loan for greater than what the down payment amount is going to be.

So effectively, what we're saying here is you can get a loan for the down payment, but for closing costs, do you need a gift? You can't get a loan for the closing cost. It's a little tricky there.

Family member can borrow

Also, a family member can borrow this. This is a little strange because normally we can't go get an FHA loan and borrow money ourselves for the down payment or closing costs, but a family member can. So, Aunt Janet could go take out a loan wherever she wants to get it from and then loan that money to us.

So that's an option, they can borrow it if they want to or can come out of their own funds to really up to however you want to structure that.

3. Repair Escrow

Repair escrows are interesting little-known helpful things about FHA loans. So basically what ends up happening, you get any loan, there's an appraisal that needs to happen. and FHA appraisal can be a little bit more strict than other loans, like a conventional loan, especially when it comes to some of these little nitpicky things like chipping or peeling paint, or maybe no handrails on a staircase, something like that.

Appraiser required repairs completed after closing

So basically the repair escrow allows you to take appraiser-required repairs and complete them after closing. Normally things like that have to be fixed before you close on the loan, and this can delay the loan process. If there's something in the middle, that's keeping those repairs happening.

$5k max for weather related or other extenuating circumstances

So there's a $5,000 max here and it's for weather-related or other extenuating circumstances. So just as an example, my brother's a realtor. He was working with a buyer who ran into a situation where the home, he was buying the appraiser flagged it for chipping paint on the exterior. And it was like raining non-stop all week. They needed to close within the next 10 days, and so they did a repair escrow to basically allow that to be completed after closing. So it was an inspection that has to check the repairs were completed, but they could close with the chipping peeling paint, then have it fixed after closing. So it can help you shorten that timeline. If you're running into some of those issues there it's a little bit of a headache to go through, but it is an option that you have available if you need it.

4. FHA $100 down HUD REO Program

FHA is a hundred dollars down a REO program. So this is only for real estate owned properties by HUD. And you can find these on the HUD home store, here's the link: https://www.hudhomestore.gov/Home/Index.aspx, but basically there's no gimmicks to this program instead of having a 3.5%. A down payment. HUD basically says, "we have all these foreclosures. If you're looking to live in this home and it's on our website we'll let you do this for a hundred dollars down". Now, not all lenders will do this program, but a majority will, you might have to shop around and find one that can be helpful. They can be really tough to find because not all homeless are available in that capacity. So you'll find a list of those homes on the HUD home store.

5. Good neighbor next door

Now, another program offered by HUD is the good neighbor next door program. This is even more difficult to find homes that qualify for this even more so than a hundred dollars down. There are usually only a few in each state.

$100 and 50% discount on home

Sometimes when I look there's like none in the state or there might be one or two, so it can be really difficult to find these, but basically this allows you to do a hundred dollars down, and this is the huge part, it's a 50% discount on the home. So if the home was $300,000, it would normally be listed for, if you qualify for the good neighbor next door program, you can get it for literally $150,000. It's wild and a hundred dollars down, which is just incredible.

The restrictions

So basically the restrictions here are one. You have to be able to find a home that exists like that. Again, there's only maybe one to a couple in each state. You have to live there for three-plus years, and it's only for law enforcement officers, Pre-K to 12 teachers, firefighters, and EMTs. Now, normally when I talk about this program, people tend to ask what about nurses or doctors did they qualify right now, that's not really in the guidelines. These are gonna be the ones that mainly qualify underwriters, don't tend to look at things outside.

6. Disability/ SS incomes

For disability and Social Security incomes. A lot of people ask, "Hey, I'm disabled or retired. Can I get alone?" the answer is 100% yes. You don't have to be employed unnecessarily to get a loan. You just need to show consistent income.

Easy to quality

Normally lenders see this through having consistent employment that normally shows us consistent income. However, if you're retired or on disability, then this changes because you most likely don't have employment or maybe employment is only a portion of the income that you have coming in. So I actually really like when loans have this type of income, fixed income. Cause it's really easy to underwrite to really easy to see what somebody qualifies for with right. Because a lot of people work hourly or they might work with overtime or bonuses and it can get a little bit tricky to figure out what somebody's monthly income is, but fixed income is fixed. It's always the same. So it's a really easy to qualify with,

DTI can be an issue

The big issue that a lot of people have with a disability or social security income, any type of fixed income is their debt-to-income can be an issue because usually when we're on a fixed income, it tends to be on the lower end. So if we only make $2,000 a month from social security, then it's difficult for us to take on a large housing payment with only $2,000 per month.

Gross up (usually 25% allowed)

Now a benefit is we can actually gross up this income. Since most fixed income is tax-free grossing up, allows the lender to look at what would be the gross if it was taxed. If we actually make, let's say $2,000 a month in Social Security income, we can actually multiply that to 1.25%. That would give us a qualifying monthly income of $2,500 per month. So that's what we could use for our affordability.

7. DACA is now allowed

DACA is now allowed. So on January 19th FHA basically said, "Hey, we're going to get extremely. DACA is now allowed". It used to be only for conventional loans, and FHA was always never given a clear answer there. It was skirting around the question. When people ask, can we use DACA with FHA and they finally said, it's effective. So DACA recipients can now use FHA loans and the same rules apply to DACA recipients as everyone else.

That's credit requirements, income requirements, employment requirements, all of that is going to be the same for everybody. Getting those loans.

8. Gift of commission

Number eight is you can get a gift of commission. So this again is one that's going to be not applicable to everyone. So this is mainly for, if you have a family member who's licensed agent, they can give part or all of their commission to your down payment or closing costs.

So this is helpful. If you have a friend and they're saying, Hey, we'd love to help you out. We'd love to help you buy the home, or maybe represent the seller to whatever that looks like. And they say, Hey, we want to give you a gift from the commission. That's perfectly fine. If you're an agent yourself, if you're a licensed agent, you can use your own personal commission towards your down payment.

Most of the time you're going to be running into a commission of somewhere around 3% gross. So you probably have other fees to a broker, whomever, you need to pay those two, but you can use that 3% or 2% or whatever to your down payment or closing costs. So if it's. You only need to come up with another half percent for that 3.5% total down payment.

9. Bridge

Now this last one here is the most powerful strategy to keep in mind with FHA. And this is what I like to call the bridge strategy. So to me, an FHA loan should not be long-term. We should not be carrying a loan for 30 years, ideally an FHA loan. We should be holding onto it as short of a time as possible.

I like to think of it as a bridge to get us into cheaper debt because anytime we have debt, the whole purpose of us refinancing is to get cheaper debt, right? Because money can sometimes become cheaper over time because rates lower costs change, and we want to refinance into lower-cost debt. If we're going to be holding. For decades at a time.

Usually, there are things that we can work on. We had to get an FHA loan now because of certain reasons. But there are things we can work on to get into a cheaper loan, like a conventional loan.

Example of FHA bridging to Conventional

So let's run through a quick example here. So let's say right now we have a 584 credit score. So right off the bat, we can't qualify conventional because conventional has a minimum of 620. So we're saying. We still want to buy a home, even though we have a five 80 credit score working on this is going to take us too long, to be able to qualify conventional. We're gonna have to be renting for another couple of years.

We're gonna miss out on, we're not gonna collect any equity. We're not gonna collect any appreciation. And we don't want to have to keep renting and living under our landlord's rules about what we can and can't do. So we still wanna buy. So we use an FHA loan because an FHA loan is bad, it's not a bad loan at all.

It's just one that is best used. If we maybe have it for a shorter time period than stretching it out over 30 years. So we have a 584 score and because of that lower score, we're going to have a higher rate and we have to pay two types of mortgage insurance. So FHA has her upfront mortgage insurance and the monthly mortgage insurance. And those are going to stay on for the life of the loan unless we put 10% down and then it's going to fall off after 11 years.

So even 11 years' worth of mortgage insurance is a lot compared to conventional that will fall off. Normally when we hit about 20% equity in the home, so we know that right now, our credit score is low because we have a lot of debt.

What we would do is we would say, Hey, this is where we're at right now. We're going to get this loan, but then we're going to create an exit strategy. I know that right now, what I need to do is I need to work on paying off debt. So then with maybe two years time, three years, time, five years time I can refinance into a conventional loan.

We've been working on paying down debt fast forward two years. Now we have a 735 score. We can refinance into a conventional loan, get a lower rate and lower mortgage insurance, and possibly remove the mortgage insurance depending on appreciation of the equity that we've put in as well. Possibly any renovations that we've done to the home to get us up to that 20% equity so we can completely remove mortgage insurance altogether.

Don't be afraid to ask questions to your loan officer

So it's a good question to ask when you do get that FHA loan, or if you're going down the road to say, oh, wow are we in an FHA loan, to begin with, why do I need to get an FHA loan to start with, that's going to lead us down into our plan of saying I know over the next X amount of years, this is what I need to do to refinance into a conventional and talk to your loan officer about this saying, Hey, can you explain why we need to go FHA? If that's the only one to qualify for? And then what are the things that we need to do to be able to refinance to conventional? And about how long do you think that would take for us to get there?

10. Ask your lender

Ask your lender. What can I do to qualify better? Now don't pass this over because especially if you're already qualified, you might be thinking I already qualified who cares.

But loan officers are used to most of the time taking an application, qualifying somebody for a specific loan program, telling them the maximum loan that they can get qualified for, giving them quotes and that's it. But often there's a bigger discussion in here that we can have about what can I do to qualify just a little bit better Because sometimes it just means maybe we need to pay down a specific card and that's going to increase our credit score by 20 points that put us in a new bracket that lowers our interest rate, or that lets us qualify conventional or there are certain things that we can do to pay off other types of debt or structure the loan differently. So we can qualify for a different type of loan, or save money with the current loan that we have.

So just asking that question, what can I do with my credit, with my income, with my employment, with the money I have in my bank account to qualify just a little bit better, just to save a little bit more money. Is that something that is possible for me?

That's gonna set you up for a much better plan and strategy moving forward.

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