Nothing is more exciting than purchasing your first home in the beautiful sunshine state of Florida. What isn’t there to love? There are beaches, entertainment, and beautiful weather to enjoy each and every single day.
Buying a home for the first time can be intimidating, especially because a home is a huge investment. When purchasing a home, it is essential to know that you have many different loan options available for you.
For example, you can use a conventional loan or an FHA loan. If you want to learn more about the difference between an FHA loan and a conventional loan, then you came to the right place. This brief guide will cover what an FHA loan in Florida is and who you can reach out to for more information. If you had a short sale or a foreclosure in your past 1 year, you need to contact a qualified loan officer so he or she can guide you in the right direction.
What is an FHA loan?
An FHA loan in Florida is a government-backed loan. The Federal Housing Administration issues these loans, and they have less-restrictive qualifications. This loan is outstanding for those with a lower credit score or who want to put down a smaller amount of money on a home.
What Is a Conventional Loan?
Conventional loans do not have the same federal backing as an FHA loan does. To qualify, you will need to have a higher down payment and a higher credit score with a conventional loan. Conventional loan lenders also look more into an applicant’s debt-to-income ratio.
Conventional loans are also known as conforming loans. Conforming loans “conform” to the standards set out by Fannie Mae and Freddie Mac, who are government-created entities that buy mortgages from lenders. Fannie Mae and Freddie Mac then turn these mortgages them into “mortgage-backed” securities.
Importance of Credit Scores
Most lenders look at your FICO score or use a Vantage Score, which are two credit scoring models. Your credit score can range from poor to excellent, depending on the number that you have.
If your score is between 300 to 579, your credit score rating is considered to be poor. A credit score of 800 and above receive an excellent rating. Any number in between gets a fair rating.
If you want to buy a home, you will need to ensure that your credit score is where it needs to be. There are several different factors taken into consideration when building your score number.
Credit building factors:
- Types of credit you have
- Length of your credit history
- How you use your credit
- Do you make on-time payments
- Your new credit accounts
The credit score number for a conventional loan differs from an FHA loan. It is best to make sure that you keep your accounts in good standing to ensure that you have a high enough score to qualify for a mortgage.
Conventional Loan Credit Score
The credit score requirements for a conventional loan depend on the lender that you choose. In general, most conventional lenders want to see that you have a score of at least 620 to qualify.
The credit score requirement for traditional loans is higher than an FHA loan because of the risks the lender takes on. As mentioned earlier, conventional loans do not have government backing, so they depend on you to not default on your loan.
Conventional Loan Down Payment
Many people assume that they need to put down 20% of their home loan before getting a conventional loan, but that is not true. Some lenders will allow you to put down less than 20% in exchange for private mortgage insurance.
This private mortgage insurance, also known as PMI, protects the lender if you default on your home loan. A smaller down payment equates to more of a risk that the lender has to take on.
These lenders will require you to have the PMI if you put down less than 20%. You will pay for this private mortgage insurance each month in addition to your monthly mortgage payment.
Conventional Loan Interest Rates
Many different high-level factors affect the mortgage interest rate on conventional loans. One of those factors is the status of the federal reserve.
Other high-level factors:
- Investor demands
- The current state of the economy
Though these factors are crucial and they affect the interest rate of your loan, there are a few factors that you can control. For example, you can control your credit score, your down payment amount, and the amount that you borrow. Your credit score may fluctuate randomly, but you are mainly responsible for ensuring that your accounts are in good standing and that you make your payments on time.
Your loan-to-value ratio, LTV, refers to the loan amount you took out compared to the value of your property. If you borrow more than you need to, you may have to pay more a month on your mortgage.
It is important to note that lenders prefer to qualify candidates with higher credit scores. A high credit score tells the lender that you are responsible for your finances and can handle a mortgage.
Conventional Loan Limits
It is important to note that even if you qualify for a conventional loan, there is only so much that you can borrow. In Florida, the conventional loan limit is around $823,000.
Your lender should let you know what you qualify for based on your income and other factors they consider. If you need a loan larger than the $823,000 limit, you will need to apply for a jumbo loan.
A jumbo loan is a non-conforming loan, meaning that Freddie Mac or Fannie Mae does not back them. These jumbo loans have stricter requirements because they are higher in price, thus resulting in more risk for the lender.
Conventional Loan PMI
As mentioned earlier, if you do not put down 20% on your conventional home loan, you will need to pay for PMI. You can either pay a monthly premium each month or opt to pay for the insurance upfront. Most people prefer to pay a monthly payment to help offset the cost of their premium.
There is an option for you to split the premium upfront with the seller of the home you want to purchase. The seller will need to agree to these terms, but it is still a possibility. You and the seller will agree that the seller will pay an upfront amount while you pay the remainder monthly.
Lastly, if you want, there is an option to have your lender purchase the PMI insurance. If you decide to go this route, you cannot cancel the lender-paid private mortgage insurance.
It is also important to note that you will pay a higher interest rate when paying directly to your lender if you go this route. Your rate is higher because the lender agreed to take on an additional expense for your convenience.
Should I Get a Conventional Loan?
Everyone’s situation differs, but if you want to aim for a conventional loan, you will need to ensure that you have a credit score of at least 620. You will also need to make sure you have at least 20% to put down on your home, or you will pay for PMI. An applicant with a low debt to income ratio will most likely receive consideration from a conventional loan lender.
FHA Loan Credit Score
One of the FHA loan requirements is to have a credit score of at least 500. Many FHA lenders require applicants to have at least a score of 580 to qualify.
If you have a score below 580 but above 500, you will need to put down 10% to get the FHA loan. An applicant with a score of 580 will only need to put down 3.5% to get the loan.
FHA Loan Down Payment
As stated earlier, if you apply with a score below 580 but above 500, you will most likely need to put down 10% on your loan. If you have a credit score above 580, you can put down as little as 3.5% on your home loan.
To put this into perspective, let’s say you found a home for $250,000. With a credit score of 580 or above, you can expect to put down $8,750. If your score ranges between 500 to 579, you will need to put down $25,000 on that $250,000 home.
FHA Interest Rates
If you are a first-time homebuyer, you will like the competitive rates that FHA loans offer. FHA rates are historically lower because they are government-backed loans which decrease the risk for your chosen FHA lender.
Like a conventional loan, the interest rate on your FHA loan depends on your credit score, income, and the amount you borrow. Your lender will also consider your down payment when generating your interest rate.
FHA Loan Limit
The Federal Housing Administration sets the limits on FHA loans each year. These limits depend on your home’s location. The average FHA limit in Florida is around $365,000.
You can always check out the loan limit information on the FHA Mortgage Limits website set by the U.S. Department of Housing and Urban Development. Unlike the conventional loan, you cannot request a jumbo loan from the Federal Housing Administration if you want an amount larger than the FHA loan limit.
FHA Mortgage Insurance
There is a mortgage insurance premium that you will need to pay for your FHA loan. You pay your FHA Mortgage insurance throughout the life of your loan.
If you want to reduce your mortgage insurance repayment time, you will need to put down at least 10%. If you pay 10% or more on your down payment, you can expect to pay off your mortgage insurance after eleven years. Your mortgage insurance premium is usually around 1% of your mortgage.
Should I Get an FHA Loan?
If you do not have a high credit score and want to buy a house, you will opt for an FHA loan. If you have a higher debt to income ratio and you don’t have enough money for a down payment, the FHA loan is perfect for you.
FHA Loan Benefits
As you may already know, at this point, getting an FHA loan comes with many great benefits. Not only do you get to purchase a home with a lower credit score, but you also get only to put down 3.5% of the home loan.
There are other fantastic benefits for an FHA loan, such as having the opportunity for sellers to help with closing costs. If the seller agrees, they can pay up to 6% of your closing costs.
Recent Job Changes Allowed
If you recently changed your job, your FHA lender won’t give you any grief. Conventional loan lenders like to see candidates who have years of consecutive work experience.
FHA lenders also want to see that you have a consistent flow of work to ensure that you can pay for your mortgage. If you do need to change jobs, there is no need to worry.
Your FHA lender will verify your income. It is important to note that your lender may reduce your offer if your income is less with your new job.
If you have a friend or a family member that wants to help you purchase your home, you can use their gift money. If someone gifts you cash for your down payment, you can use 100% of it for your down payment. You will need to make sure you have a down-payment gift letter from whoever gave you that money.
The gift letter must contain the donor’s name, their relationship to you, and the address of your new home.
Other information needed on the letter:
- The donor’s bank account information
- The date the donor gave you the money
- A statement saying the money is a gift
- Printed name and signature of the donor
- The exact amount of the gift
It is imperative that you have a statement that explains that the money received is a gift. Your lender wants to see that the money received does not need to be paid back. If your lender needs more information, they will let you know during your home buying process.
Conventional loans also accept gift money, but there are a few extra steps. For example, the money received must be from someone close to you. This can be a child, grandparent, aunt, uncle, in-law, cousins, or your partner. If you received gift money from your employer or a charitable organization, you could use that for your FHA down payment.
Other FHA Requirements
In addition to your credit score and your down payment, you must meet a few other requirements for your FHA loan. For example, you will also need a social security number and your personal tax returns. If you are self-employed, you will need to make sure that you have a current income statement and a business balance sheet.
Other requirements you will need:
- Current check stubs
- W-2 forms for the past two years
- Checking and savings account information
- Gross monthly salary
- Address to your places of residency for the past two years
- Names and locations of current and previous employers
When in the process of buying your home, you will need to pay for an appraisal of the property. You will also need to pay for your credit reports.
FHA Property Requirements
In addition to the qualifications that you must meet as a borrower, there are specific requirements that your home must meet. For example, the loan is only used for a primary residence. This means that you must move into the property within 60 days of closing on your loan.
The property you purchase must be a single-family home that is either detached or a part of a condo or townhouse. You can buy a multi-family property with up to four units with an FHA loan, but you must live in one of the units.
The property you want to buy cannot be an investment property. If you do purchase a multi-family property, you must live in one of the units. You can rent out the other four units if you want, but your primary residence must be at that multi-family property.
Unless you have a 203(k) loan, your home must pass an appraisal from the FHA. This appraisal will ensure that your home meets the property requirements set out by the FHA.
You cannot use your FHA loan for a flip and fix project. The property’s title must be in your name or the name of a living trust.