Easy Home Buyer Guide To FHA loans in Utah

Learn what it takes to get approved for FHA loans in Utah. Understand the pros and cons of buying a home with an FHA loan. 

The FHA approval process can be confusing, even for experienced homebuyers. If you're anything like me, you'll do plenty of research before deciding if an FHA loan is the right mortgage option for you.

Lucky for you, this article answers the most common FHA questions buyers ask me as their discount real estate broker.

You will learn who qualifies for an FHA loan, if you can purchase investment properties with an FHA loan, and common repair issues that will kill an FHA real estate transaction. 

After reading this article, you will know where to apply for FHA loans in Utah, how much down payment you'll need to close, and how to finance repair cost into your FHA home loan.

An FHA mortgage - a loan that's backed by the Federal Housing Administration (FHA).

The  Federal Housing Administration (FHA) is a division of the U.S. Department of Housing and Urban Development (HUD) which provides a layer of security for these mortgages. 

FHA does not directly lend money to homebuyers. Instead, they insure FHA-backed mortgages offered by private lenders, credit unions, or banks.

Thanks to the federal government's backing, lenders face a reduced risk in the event of borrower default.

This translates to greater chances of mortgage approval for individuals with lower credit scores or less cash for a downpayment than required for conventional mortgages.

An FHA mortgage could be the key that unlocks the door to your dream home.

FICO scores below 580 don't qualify for the minimum down payment of 3.5% of the purchase price. Home buyers with a credit score between 500-579 will need 10% down payment.

The payment-to-income (PTI), also known as the front-end debt ratio, refers to the percentage of your gross monthly income dedicated to making your monthly mortgage payments.

The DTI (debt-to-income ratio) calculates the percentage of your pre-tax monthly income allocated towards ALL your debt payments each month. 

One of the major benefits of FHA mortgages are the relaxed approval requirements, making it easier than conventional loans for borrowers to qualify.  FHA mortgages provide home buyers with less than perfect credit scores the ability to purchase an owner occupied home. 

Furthermore, FHA mortgage loans offer low interest rates to help homeowners manage their monthly housing payments more affordably.

To put it simply, the answer is yes and no. 

Utah FHA loan requirements dictate that the property you purchase must be your primary residence. 

However, some homebuyers opt to purchase a multifamily property with up to four units using an FHA loan for investment purposes. The owner can live in one unit while renting out the other units to tenants and generate rental income.

Search Housing and Urban Development (HUD) for FHA loan limits in all Utah Counties.

Yes purchasing a Utah home with an FHA mortgage loan is more difficult.

Before accepting a real estate purchase contract (REPC) the listing agent will explain the added risk of working with an FHA home buyer verses a conventional home buyer to the seller.  

Sellers may be hesitant to work with FHA borrowers since they typically have less than perfect credit scores, less disposable money, and additional appraiser property condition requirements all of which increase the chances of the transaction failing. 

If there are multiple offers and one offer is a conventional mortgage and the other offer is an FHA loan the seller will likely accept the offer from the conventional loan borrower unless the FHA borrower removes some contingencies or offers significantly higher purchase price.

No you do not need to be a first time home buyer to qualify for an FHA loan.

You can qualify for FHA mortgage loans throughout your lifetime. However, it's worth noting that while you don't need to be a first-time homebuyer to qualify, typically, you can only have one FHA loan at a time. This policy prevents prospective borrowers from using the program to purchase investment properties.

Ownership Requirements
FHA eligibility for properties is not granted if the resale date is within 90 days of the seller's acquisition. 

Home Type
The types of properties that are eligible include single family residences (SFRs), dwellings with two to four units, planned unit developments (PUDs), townhomes, and condominiums.

HOAs
Not all HOAs qualify for FHA loans. Make sure you confirm the HOA is FHA compliant before submitting a purchase offer. 

Condition of the home. 
While it's easier to qualify for FHA loans than Conventional loans, finding a home can be more complicated. 

The reason being is the property the FHA borrower is purchasing must meet certain condition requirements.  An FHA mortgage won't be approved if the home is in need of significant repairs. 

Make sure you and your real estate agent look for defects while touring the home before making an offer.  There's no reason to make an offer on a home that will not be approved by an FHA appraiser.  You will not recoup the cost of the inspection and the appraisal.  

Here is a list of the most common repairs that FHA appraisers require for final loan approval.

• Broken or cracked windows 
  The appraiser will require damaged windows be replaced>
• Cracked concrete
  Depending on the severity and location of the cracked concrete the home may not qualify for FHA without repair.  Cracked driveways are easier to repair than cracked foundations.  Many sellers will not make major repairs so the home will need to be sold to a Conventional or cash buyer.
• Condition of the roof 
  Homes with fewer than two years of life remaining on the roof will need to be repaired or replaced.
• Chipped Paint
  All chipping paint must be scraped, repainted, and all scraped paints chips removed from the property.

There are no income limits to qualify for an FHA-insured mortgage. To qualify, you must:

• Provide proof of income for at least two years.
• Have a credit history, typically demonstrated through a FICO credit score. If you don't have a credit score, your lender will need to get a non-traditional merged credit report (NTMCR) or use on time utility bills, rent payments, car insurance, to establish credit worthiness.
• Not have any delinquent federal debt or judgments, whether related to taxes or other issues. Additionally, if you have had past FHA-insured mortgages, you cannot have any associated debt.
• Disclose any cash gifts you receive that help with the down payment.  riends and  family members, charities, your employer or union, or government agencies.  A gift letter must be signed and dated by the individual gifting the down payment to the buyer.
• Purchase an owner occupied property.
• You can not have two or more FHA mortgages at one time. As with most things there are exceptions to the rule.  You may qualify for a second FHA mortgage loan if you're relocating, going through a divorce, or if your family size has increased and you've outgrown your previous house. 

Pros:

• FHA loans are available to borrowers with lower credit scores compared to conventional mortgages.
• FHA loans typically require lower down payments compared to many conventional loans.
• Borrowers can use gifts to pay for the down payment with an FHA loan.
• FHA loans are backed by the Federal Housing Administration, which provides added security for lenders.
• FHA home loans have lower interest rates than conventional mortgage loans.

Cons:

• FHA borrowers are required to purchase FHA mortgage insurance and pay ongoing monthly premiums for 11 years or the life of the loan.
• FHA loans cannot be used to purchase non-owner-occupied investment properties or second homes.
• FHA loans have stricter property qualification requirements than conventional loans.

FHA borrowers must pay a one-time Upfront Mortgage Insurance Premium (UFMIP) and an annual FHA mortgage insurance premium (MIP) that is paid in monthly installments. In most FHA loan programs, the UFMIP is mandatory and can be financed into the mortgage by borrowers.

The UFMIP cost is 1.75% of the loan amount. If borrowers choose to add the UFMIP into the mortgage, they must include the entire amount. 

For example, here's the cash you'll need available to purchase a home worth $600,000 with an FHA insured mortgage loan.  You'll need $21,000 (3.5%) for the down payment plus $10,132.5 (1.75%) at the time of closing. 

To elaborate, if the home's cost is $600,000 and you're putting down 3.5%, which is $21,000, you'll also pay 1.75% UFMIP on the remaining $579,000, which amounts to $10,132.5. You will need to have a minimum of $31,132.5 ($21,000 + $10,132.5) in cash at the time of closing.

This doesn't include typical home buyer closing cost.

An FHA loan requires the borrower to pay annual mortgage insurance premiums (MIP) in addition to the UFMIP. The MIP is distinct from the UFMIP, serving as a recurring payment for having an FHA loan. 

The MIP is paid monthly as part of the mortgage payment, and the amount can vary between 0.45% to 1.05% of the loan amount. The actual annual mortgage insurance premium amount depends on the borrower's down payment amount and loan term.

Borrowers that put the minimum 3.5% down for a home purchase will pay MIP for the life of the loan. However, if the borrower makes a down payment of 10% or more, they can cancel their mortgage insurance after 11 years.

Borrowers can include their closing costs in their loan amount and pay them off alongside the principal. This type of loan is referred to as a "no-closing-cost loan." 

However, there is a drawback to this option as borrowers will have to pay interest on the closing costs, which can make it more expensive in the long-term.

An FHA 203(k) loan provides the option to purchase or refinance a property that requires work, allowing the borrower to roll the renovation costs into the mortgage.

This unique loan program allows borrowers to finance repairs into their mortgage paying off renovations over the life of the loan.

Limited FHA 203(k)

A limited 203(k) loan (also known as Streamline), is a great option for homes that only require moderate repairs or upgrades and is move-in ready condition.

It's essential to keep in mind that major structural changes are not allowed with a limited 203(k) loan. However, if the kitchen or appliances are outdated or if you'd like to update the flooring, a limited 203(k) loan is a great option.

Standard FHA 203(k)

The FHA uses two methods to determine the property's value and chooses the lesser value of the two.

The first method is to combine the cost of renovations with the initial value of the property.

Suppose the house was initially appraised at $500,000, and the loan limit in your area is $619,850. In this scenario, the cost of repairs cannot exceed $119,850.

The other way FHA determines value is to multiply the property's after repair value (ARV) by 110%, which cannot exceed the FHA loan limit.

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