Introduction
FHA loans are a type of mortgage insured by the Federal Housing Administration (FHA) loan. They are popular among first-time homebuyers and those with lower credit scores or less cash for a down payment.
Some key benefits of FHA loans include:
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Low down payments – Only 3.5% is required for qualified buyers compared to 5-20% on conventional loans. This makes homeownership more accessible.
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Lenient credit requirements – FHA has more flexible credit standards than conventional loans. Minimum 580 score required in most cases.
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Low monthly mortgage insurance – FHA loans require mortgage insurance no matter the down payment size. But rates are lower than with conventional loans.
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Limited cash reserves – FHA loan doesn’t require as much in liquid assets after closing compared to conventional loans.
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Gift funds allowed – The down payment can come from family gifts, employer grants, non-profits, etc.
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Assumable financing – FHA loan can potentially be assumed by a new buyer if the home is sold. This can make the property more marketable.
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Variety of property types – FHA insures financing for single family homes, 2-4 unit properties, condos and more. Conventional loans are more restrictive.
Overall, FHA loan provide a great opportunity for borrowers who might not otherwise qualify for a mortgage to purchase a home. The tradeoffs are higher monthly MI and required upfront mortgage insurance premium. But FHA loan many, the benefits outweigh the costs.
FHA Loan Limits in North Carolina
The Federal Housing Administration (FHA) sets limits on the dollar amount it will insure for home loans in different areas. These limits vary based on the cost of living and housing prices in each county.
In North Carolina, FHA loan limits for 2023 range from $331,760 to $726,525 depending on the county.
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Low Cost Areas – Counties like Davidson, Duplin, and Randolph fall into the low cost category. The FHA loan limit for a single family home in these counties is $331,760.
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Medium Cost Areas – Counties such as Buncombe, Durham, Forsyth and Wake are considered medium cost areas by the FHA. The maximum FHA loan amount for a single family home in these counties is $420,680.
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High Cost Areas – Areas with the highest housing costs like Dare, Currituck, and Brunswick counties have a higher FHA loan limit. For a single family home in these high cost counties, the FHA loan limit is $726,525.
So in summary, FHA loan limits in NC range from $331,760 to $726,525 based on the specific county and its designation as a low, medium or high cost area by the FHA. These county loan limits are set by the FHA annually and represent the maximum loan amount the FHA will insure for homes in that county.
Down Payment Requirements
The minimum down payment for an FHA loan in North Carolina is 3.5% of the purchase price. This makes FHA loans more accessible for first-time homebuyers or those with limited funds for a down payment compared to conventional loans which often require 20% down.
With an FHA loan, if you purchase a $200,000 home, your minimum down payment would be $7,000. While you can put down more if you have the funds available, this lower requirement opens homeownership to more borrowers.
It’s important to note the 3.5% down payment goes towards your upfront mortgage insurance premium as well as closing costs. You’ll need to factor those costs in when determining your total funds needed at closing.
The low down payment requirements of FHA loans remove one of the biggest barriers to homeownership. By only requiring 3.5% down, it’s easier to save up enough for a down payment versus 20% that’s often needed with a conventional loan.
An FHA loan gives borrowers the opportunity to buy with less money upfront while still getting into a fixed-rate mortgage. While you pay mortgage insurance with an FHA loan, the tradeoff of buying sooner with less money down may be worth it for many homebuyers.
Credit Score Requirements
To qualify for an FHA loan in North Carolina, you’ll need a minimum credit score of 580. Borrowers with credit scores between 500-579 may still qualify, but will need to make a down payment of at least 10%.
The FHA examines your entire credit report, not just your credit scores, when determining your eligibility. They look for:
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Your payment history – Have you paid bills on time in the past? Late payments will lower your score.
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Credit utilization – This measures how much of your available credit you are using. Utilization above 30% will start to lower your scores.
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Length of credit history – In general, a longer credit history with responsible use will help your score.
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Types of credit used – The FHA likes to see experience managing different types of credit like credit cards, auto loans, mortgages etc.
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Recent credit inquiries – Too many new credit applications can lower your score temporarily.
In addition to the minimum 580 credit score, your credit report will be reviewed for significant negative items that may disqualify you. This includes bankruptcies, foreclosures, loan modifications, short sales, and public records like tax liens or legal judgments.
Boosting your credit score before applying for an FHA loan can help you get approved and receive a lower interest rate. Recommended tips:
- Pay all bills on time going forward
- Pay down balances below 30% of the credit limit
- Avoid new credit inquiries if possible
- Clear up any errors or discrepancies on your credit reports
Meeting the credit score requirements is key for securing an FHA loan approval in North Carolina. Work on improving your credit well in advance of applying.
Debt-to-Income Ratios
The Federal Housing Administration (FHA) has strict requirements regarding debt-to-income (DTI) ratios for borrowers applying for an FHA loan in North Carolina. The maximum DTI allowed by the FHA is 43%. This means your total monthly debt payments cannot exceed 43% of your total monthly gross income.
Debt payments included in the DTI calculation are:
- Monthly housing payment for the new home (principal, interest, taxes, insurance)
- Minimum required payments on credit cards and installment loans
- Alimony and child support obligations
- Monthly car payments
- Student loan payments
Some compensating factors that may allow exceptions for DTIs above 43% include:
- Excellent credit history
- Significant cash reserves (at least 3 months’ worth of mortgage payments)
- Additional income not reflected in gross income (like bonuses or rental income)
- Low proposed housing payment relative to income
Borrowers with DTIs above 43% will need to demonstrate strong compensating factors to have a chance at qualifying for an FHA loan. It’s recommended to get below 43% DTI if possible when applying for an FHA mortgage in North Carolina.
Mortgage Insurance
FHA loans require mortgage insurance in order to protect the lender in case the borrower defaults on the loan. This insurance is paid for by the borrower.
The mortgage insurance premium (MIP) consists of two parts:
Upfront Mortgage Insurance Premium
This is a one-time fee equal to 1.75% of the base loan amount. It is due at closing and typically financed into the loan. For example, on a $200,000 loan, the upfront MIP would be $3,500 (1.75% of $200,000).
Monthly Mortgage Insurance Premium
In addition to the upfront premium, FHA borrowers must also pay an annual mortgage insurance premium. The current annual mortgage insurance premium is 0.85% of the base loan amount.
On that same $200,000 loan, the monthly mortgage insurance premium would be $141.67 ($200,000 x 0.0085 / 12 months).
The monthly MIP must be paid for the life of the loan or until the borrower reaches 78% loan-to-value ratio through payments and home appreciation. At that point, the monthly MIP can be cancelled.
Homebuyer Education
First-time homebuyers are required to complete housing counseling before they can qualify for an FHA loan in North Carolina. The counseling covers topics like budgeting, credit, and the home buying process.
Borrowers can complete the counseling in person, online, or over the phone. Most counseling sessions last around 2 hours. Some HUD-approved counseling agencies may charge a small fee, while others offer classes for free.
The purpose of the counseling is to ensure first-time buyers are prepared for homeownership. The counselor will review the borrower’s finances to determine if they’re ready. They’ll also explain the mortgage process and responsibilities of being a homeowner.
After completing the class, the agency will provide a certificate that the borrower must give to their lender. The lender will need this certificate before they can approve the FHA loan.
All first-time homebuyers using an FHA loan in North Carolina must complete counseling, no exceptions. This requirement helps better prepare buyers so they can avoid issues like missed payments or foreclosure. It’s an important step to educate and protect new homeowners in the state.
Student Loan Debt
Student loans can significantly impact your debt-to-income ratio, which lenders examine closely when determining your eligibility for an FHA loan in North Carolina. However, there are strategies to mitigate the effects of student loans on your DTI.
The lender will include your monthly student loan payment when calculating your DTI. A high DTI makes it harder to qualify for a mortgage. If your DTI exceeds 43%, you may not meet the requirements for an FHA loan.
One option is to enroll in an income-driven repayment plan for your federal student loans. These plans base your monthly payment on your discretionary income, so you may be able to get a lower payment that won’t impact your DTI as much. Income-driven plans can potentially lead to loan forgiveness after 20-25 years of payments as well.
Refinancing or consolidating student loans are other ways to potentially lower your monthly payments and improve your DTI. Keep in mind refinancing federal loans into a private loan would make you ineligible for income-driven repayment plans and forgiveness programs.
Discuss your student loan situation with a loan officer when applying for an FHA mortgage in North Carolina. They can advise you on the best strategies to deal with student debt while meeting all requirements to qualify. Managing student loans wisely can help make homeownership attainable.
Non-Borrowing Spouses
One unique aspect of FHA loans is how they treat non-borrowing spouses. If you are married, your spouse’s credit history may be considered even if they are not going to be on the mortgage loan. This is because the FHA views marriage as making both spouses responsible for the home.
So if you have excellent credit but your spouse has poor credit, it could negatively impact your ability to qualify for an FHA loan. The lender has the right to factor in your spouse’s credit, debt, and income even if they are not on the application.
The FHA wants to look at the full financial picture of the household. But in general, the FHA believes that married couples share responsibility for financial obligations. So beware that your spouse’s credit can come into play even if you plan to apply for an FHA loan by yourself.
Alternatives to FHA Loans
FHA loans have some advantages, like allowing lower credit scores and down payments as low as 3.5%. However, they aren’t the only option for homebuyers who can’t afford a 20% down payment. Here are some alternatives to consider:
Conventional 97 Loan
Conventional 97 loans only require a 3% down payment. To qualify, you’ll need a minimum credit score of 620. With a lower down payment, you’ll have to pay private mortgage insurance (PMI).
Conventional 97 loans have lower mortgage insurance premiums than FHA loans. The PMI rates are also based on your loan-to-value ratio and credit score. So as you build equity and improve your credit, the PMI costs can decrease.
VA Loan
They offer 100% financing with no down payment required. To qualify, you must be an eligible veteran or service member.
VA loans don’t charge private mortgage insurance. And they have competitive interest rates compared to other loan types.
One limitation is that VA loans have strict eligibility and appraisal requirements. Not all properties may qualify.
USDA Loan
Department of Agriculture. They offer 100% financing for low-to-moderate income borrowers in rural and suburban areas.
Like VA loans, USDA loans don’t require a down payment or mortgage insurance. They have flexible credit score requirements starting at 640. Income limits do apply based on the property’s location.
Eligible property types include single family homes, townhouses, and condos.
