One thing everyone wants to do is own a home. It’s a symbol of security and status, something that makes us feel like we’ve “made it.” And in a more practical sense, a home is a long-term investment – an asset whose value can appreciate over time and pay big dividends in the future.
But whether you’re buying your first home or your fifth, finding the right mortgage program can be difficult. And realizing the dream of home ownership can be especially difficult for those with a lower income. That’s why many homeowners are looking at FHA loans in New York.
If you’re interested in securing such a loan for yourself, we’ve compiled this easy guide that will tell you everything you need to know about FHA loans and the New York requirements for getting one.
What is an FHA Loan?
As the name implies, an FHA loan is insured by the Federal Housing Administration, a branch of the United States federal government.
These loans are still issued by a private bank or lender, but because the government is backing the mortgage with the full taxing power of the US treasury, lenders who are partnered with the FHA are willing to make more substantial loans than they would otherwise.
In many cases, they will even issue loans to applicants who would normally be rejected outright.
FHA loans mostly appeal to buyers who have low credit scores, who want to make a low down payment, or who are purchasing a house for the first time.
What are the different types of FHA loans in New York?
It’s very important to educate yourself on the different kinds of home loans available in New York. Usually when people hear “FHA loan” they think of fixed-rate loans, but that’s only one of three different types of FHA mortgages available in NY:
- 5-year adjustable rate FHA loans are specifically designed for first-time home buyers with low to moderate incomes. This type of loan starts at a low interest rate (usually 1 percent lower than the fixed rate) which remains steady for five years. This gives the homeowner time to settle in and start making some money before making larger payments.
- Fixed-rate FHA loans are the most common form of FHA mortgage, and is usually preferred by college graduates, newlyweds, and other buyers who want a home but haven’t been able to save up money for the purchase.
This type of loan has an interest rate that does not change for the duration of the payback period (usually 30 years), which means that your payments will only be affected by minor deviations in insurance or property taxes.
- Condominium unit FHA loans are specifically designed for buyers who are purchasing a condominium unit instead of a traditional house. These are usually low or moderate income loan applicants who want to commit to something a little more manageable than a full house.
What advantages do homeowners have with an FHA loan in New York?
FHA loans are the most popular form of loan in the country and it’s not hard to see why when you look at the advantages.
Firstly, FHA loans require a much smaller down payment than conventional loans (3.5 percent of the mortgage instead of 20 percent.)
Secondly, the requirements for securing an FHA mortgage are much more lenient than the requirements for a conventional home loan, requiring lower credit scores, no minimum income, and a much higher debt-to-income ratio than traditional mortgages (usually your payment needs to be no more than 31% of your income, but in some cases an applicant can get approved with a D-I ratio as high as 50%.)
For these reasons, applicants who would normally be rejected outright for a conventional mortgage are often able to secure an FHA loan in New York.
In short, loans insured by the FHA are much less expensive upfront and much more accessible than most other forms of mortgages in New York. This is why these types of loans are often preferred by first-time homeowners, low income families, and younger prospective buyers.
What are the disadvantages for an FHA loan?
The advantages of FHA loans are certainly attractive, but it’s important to be aware of the three major disadvantages these types of mortgages come with as well.
Firstly, FHA loans require you to pay an upfront premium called a “funding fee” to protect the government’s investment. This fee is usually 1.7 percent of the total cost of the mortgage.
Secondly, FHA loans require you to pay for Private Mortgage Insurance (PMI) for the duration of the payback period, when conventional loans let you cancel said insurance after acquiring a certain amount of equity.
Thirdly, FHA loans usually have slightly higher interest rates than conventional New York mortgages, so that the banks can make their money back from the greatly reduced down payment.
What type of properties qualify for an FHA home loan?
Before you can take out an FHA mortgage on a property, it will have to be appraised. The full guidelines for what type of property qualifies are listed in a 21-page checklist in Chapter 3 of the Department of Housing and Urban Development’s Handbook 4150.2.
They will disqualify a home with cracks in the foundation or other structural concerns, loose handrails, holes or leaks in the roof or plumbing, low water pressure, no hot water, insufficient space, or a faulty HVAC system, among other concerns. This is actually a good thing, because you certainly don’t want to buy a house without those things!
To qualify for an FHA home loan, properties must also cost less than the maximum FHA lending limit for New York in 2018, which you can see described on a county-by-county basis here.
How important is credit when applying for an FHA loan in New York?
One of the biggest benefits of choosing an FHA mortgage over a conventional loan is the lower credit requirements. While traditional loans usually ask for a credit score of at least 700, FHA loans can be secured with credit as low as 620 in most cases (and technically the federal requirements are only 500!)
The FHA also allows up to two thirty-day late entries on your credit report and makes allowances for applicants with no credit report at all! In these cases, lenders will usually require a higher down payment (sometimes as high as 10 percent) but will allow you to submit “alternative forms of credit” like recent utility or phone bills as proof that you will pay off your mortgage.
What are the requirements for an FHA loan in New York?
Securing an FHA loan in New York typically requires:
– A minimum credit score of 620 or two forms of alternative credit.
– A property that has been appraised and meets the requirements of HUD Handbook 4150.2
– A property that is worth less than the lending limit (which varies greatly by county in New York)
– A debt-to-income ratio of 50 percent or less
However, private lenders are allowed to set their own requirements and may ask for higher or lower credit scores and debt-to-income ratios. You can use this tool to look for FHA loan lenders in your area and do your own research to find someone who works for you.
How do you receive an FHA loan in New York?
Though many buyers think that FHA loans are originated by the government, they actually come from private banks and moneylenders like any other home loan. Since FHA loans are the most popular type of loan in the country, your local lenders will most likely have a partnership in place.
From there, you’ll provide evidence that you meet the requirements to the bank’s underwriter, who will check your credit score, income, debt, and more just as they would for any other type of loan.
What are the FHA loan rates for New York?
Loan rates change on a daily basis because they’re based on economic indicators and the ever-fluctuating real estate market. Furthermore, different lenders across the state will offer different rates. So while we can’t give you an exact number for current FHA loan rates in New York, you should do your own research and “shop around” different lenders in your area to see who’s offering the best deal.
Do you have to be a first-time home buyer for an FHA loan in New York?
No. Any applicant who meets the minimum requirements for an FHA loan in New York (as described three sections above) can secure a mortgage regardless of how many homes they’ve owned before.
What is the maximum income limit for FHA loans?
There is no maximum income limit for FHA loans in New York or any other state. However, high income applicants who can afford a larger down payment will probably benefit more from the lower interest rates of a conventional loan.