FHA Home Loans

Below is our comprehensive guide to understanding FHA home loans in California.

The benefits of an FHA home loan in California are numerous and we’re here to give you all the inside information you need to get the best possible terms on your next FHA transaction. You’ll learn about California FHA home loan requirements, loan programs, loan limits, mortgage rates, and more.

Table of Contents

• What Is An FHA Home Loan?
• FHA Home Loan Requirements
• 2021 FHA Home Loan Programs
• California FHA Home Loan Limits
• FHA Mortgage Rates In California
• FHA Mortgage Insurance Explained

What Is An FHA Home Loan?

An FHA home loan is a specific type of residential mortgage that a borrower can use to either purchase a home or refinance a mortgage attached to a home they already own. FHA home loans in California are backed by the federal government and FHA mortgage rates differ from other programs including Conventional and Jumbo loans. The Federal Housing Administration (FHA) is the agency that oversees the FHA home loan program in California.

The government agency is also responsible for “guaranteeing” FHA home loans. That is a distinct feature that separates it from other home lending programs available in California. If the borrower defaults on an FHA loan, the Federal Housing Administration will reimburse the mortgage lender for the losses associated with the default. The FHA does not lend money directly to consumers; only banks and lenders provide funding under the FHA loan program.

What Can A FHA Home Loan Be Used For?

The program can be used for purchasing or refinancing residential property in California and nationwide. A borrower can do a cash-out refinance, a refinance to lower their interest rate or a refinance to reduce the loan term from a 30 year fixed to a 15 year fixed. It can be used to improve the property as well. This means you can use the home repair program to buy a home in California and receive extra money to help improve the home. The program can also be used for refinances as well (more about that below.)

FHA Home Loan Requirements

Below is an easy-to-read breakdown of the FHA home loan requirements in 2021.

FHA Credit Score Requirements

FHA does not have a general credit score requirement like conforming loans, however nearly all lenders in California have what’s called an “overlay” when it comes to credit scores and getting approved for an FHA loan.

What is a lender overlay?

An “overlay” is an additional requirement the lender adds to the basic FHA loan requirements. Not only do California lenders have overlays, but lenders in each state have them as well. Remember; the FHA does not make the loan – lenders do. That being said, when it comes to down payments, the program does have some basic credit score requirements

What Are The Minimum Credit Score Requirements?

To be able to put 3.5% down on a purchase, a borrower must have a 580 or higher credit score. If the credit score is 579 or below then the borrower must put down 10%. This is a standard requirement in California and nationwide.

What Are The Lender Overlay Requirements?

Most California lenders will go down to a 580 credit score, and some lenders in California will go below a 580 credit score on a case by case basis. If you are considering the program to buy a home in California (or refinance a current loan) and you believe you have a credit score below 580 you’ll want to discuss this with the Loan Officer directly when you request a quote. And a general rule of thumb; being open with your Loan Officer allows for better advice, it could save you money and provide for a much smoother process.

Employed or Self Employed

If you are a W-2 employee then you’ll want to gather your most recent two years of W2s and your two most recent paystubs. If you have rental property; or if you have a side business, then you’ll want to gather the last two years of tax returns.

If you are self-employed you’ll want to gather the last two years of your most recent tax returns. More documents you might need are shown below.

Income Requirements

One of the great features of doing an FHA home loan is the flexible income requirements associated with the program. The benefit of this is that it allows a homebuyer or a homeowner to qualify for a mortgage they normally would not qualify for under traditional programs. There is technically no minimum or maximum income requirement. It's all about the debt-to-income ratio.

FHA Debt-To-Income Ratio Requirements

The “back end” debt-to-income ratio for FHA is 43% however you can obtain approvals for limits as high as 50%. What does “back-end” mean? That means your total debts (mortgage, cars, credit cards, student loans, etc.) compared to your total gross income (W2) or your business net income (self-employed). If you have a low credit score, a debt-to-income ratio below 40%, the FHA program is ideal.

Your Spouse's Debts

With FHA home loans you have to include your spouse’s debts on the application; even if the spouse is not a listed borrower on the application. That is different from conforming programs where if your spouse is not on the application then the debts attached to the spouse are not considered when calculating debt-to-income ratios.

Impounds Are Required With FHA

What are impounds? When your mortgage payment is “impounded” that means your property tax payments and your homeowner’s insurance payments are included with your mortgage payment. Although it is a requirement it’s actually a nice thing to have so that you don’t have to pay a lump sum for your property taxes or your property insurance when they are due. When the mortgage payment is impounded, the mortgage company will collect an amount each month from you so that they can make the lump sum payment when it’s due.

Previous Foreclosure

If you previously owned a home and were foreclosed upon you’ll have to wait at least three years from the foreclosure date unless there were extenuating circumstances that you can prove. If that is the case the waiting period is less than three years.

Previous Bankruptcy

If you previously filed Bankruptcy you’ll have to wait two years (if it was a Chapter 7 Bankruptcy) before obtaining an FHA loan. If you filed a Chapter 13 Bankruptcy there is no waiting period after the Bankruptcy has been settled. And if you are currently in the middle of a Chapter 13 Bankruptcy you still may be able to do an FHA loan. Not all lenders in California allow this; many have an overlay when it comes to Bankruptcy.

FHA Property Requirements

Here is a simple breakdown of the FHA property requirements.

Residential Property Only: The FHA loan program only allows for residential property; land, commercial and industrial property are not allowed under the FHA residential loan guidelines.

Primary Residence: If you are buying a home in California or refinancing a home you currently own and you want to obtain an FHA loan the home needs to be your primary residence. It can not be a non-owner occupied property. But guess what; there is a way to buy a home with renters with an FHA loan – more on how to do this below.

Down Payment or Equity: The FHA loan program requires at least a 3.5% down payment or 96.5% equity if your credit score is 580 or higher. If your credit score is 579 or below then a 10% down payment is required when buying a home in California or 90% equity when refinancing a home in California.

Appraisal Requirements: If you are buying a home in California you’ll have to do an appraisal as part of the approval process. If you currently have an FHA home loan and want to refinance you may not have to do an appraisal (more on that below). Appraisals should be scheduled AFTER a home inspection during escrow, so that issues that can stall or derail and FHA loan are fixed before the appraiser visits the property.

Types Of Property Allowed

As mentioned above FHA loans can only be used for owner-occupied residential properties. That includes the following types of properties; Single Family Residences, Condominiums, Townhomes, manufactured homes and 2-4 unit properties (provided you live in one of the units). And remember I previously mentioned that you can buy a home with renters with an FHA loan? Well, this is how you do it: buy a multi-unit property and live in one of the units.

So if you buy a 3-unit property, live in one of the units, and have two rental units. Because you live there, the FHA still considers this an owner-occupied property and so it’s eligible for FHA financing. This a great feature for homeowners in California where multi-unit properties exist in large numbers.

Loan Amounts

We offer more information on this here, however the current FHA home loan limit in California is $356,362 in most counties and in some “high-cost” counties it’s $822,375. LA and Orange Counties have this limit. Riverside, Kern and Ventura Counties have slightly lower limits.

FHA Home Loan Programs

Here are the three main FHA home loan programs.

Regular FHA home Loan Program:

This loan program can be used for both purchases and refinances and the traditional rates and guidelines apply.

FHA Home Repair Program:

The FHA 203(k) program (home repair) is a great way to purchase a property that needs work, and get extra money to make renovations. The unique program allows for you to receive up to an additional $35,000 to make these repairs. Since you are borrowing more than the home is worth there is a minimum credit score you need to qualify for the FHA 203(k) loan and that is 640. This loan can be also be used for refinances as well.

FHA Streamline Home Loan Refinance:

The FHA Streamline program is fantastic.

Features of this Loan:

• You must currently have an FHA loan attached to your home
• It must be at least 201 days since you last closed your current FHA mortgage
• Interest rates must be lower than your existing loan
• You must be current on your mortgage payments
• You need a 620 or higher credit score
• Closing costs can not be added into the new loan amount. Negotiate with your lender about reducing the closing costs as much as you can. These are simpler for lenders, so they should be flexible. See a table of typical Streamline closing costs here.

Here Are The Main Highlights

• No Credit Check
• No Income Verification
• No home Appraisal
• No LTV limitations since you don’t need an appraisal
• Lower your interest rate

As you can see, this is a great program and it’s only available to those who currently have an FHA loan.

Everyone should look into Down Payment Assistance.

It is free money that does not necessarily need to be paid back.

California FHA Home Loan Limits

FHA home loan limit in California is $356,362 and in high-cost areas, it is $822,375. Each amount is a hard number and there is no way around this. If your loan amount is above this then you won’t be able to do an FHA loan.

LOAN LIMITS IN DEPTH.

So if you’re buying a home and you want an FHA mortgage make sure you either buy a home that fits the program or have enough money to put down to ensure the amount you’re borrowing is at or below the limit. FHA rates are not impacted by the loan limits.

And What Is UFMIP

UFMIP stands for Up Front Mortgage Insurance Premium.

This is the amount you pay on the origination of the new FHA home loan to FHA. It’s part of the Mortgage Insurance program mentioned above. The UFMIP is usually rolled into the loan or sometimes the interest rate is increased to cover the up front cost of UFMIP – very rarely would someone pay out of pocket to cover the cost of the UFMIP. This is for all FHA loans in California as well as every other state.

UFMIP does not count towards your loan limit, nor does it count against your Loan-To-Value ratio limit as well. This a great feature especially when buying a new home.

Getting Rid of FHA Mortgage Insurance

If you obtained your FHA loan on or after June 3, 2013, here are your possible options for removing MI. If your original LTV was higher than 90% then you will have to pay the MI amount for the entire life of the loan. To get rid of it, you’ll have to either refinance the loan or sell the property to pay off the loan. If your LTV was 90% or less you’ll have to pay mortgage insurance the entire term or 11 years (whichever is less).

Generally speaking, most people have to refinance to get rid of FHA Mortgage Insurance even those that originally had at least 10% equity. The reason is you probably don’t want to stay in an FHA loan for 11 years, other opportunities should open up for better terms in less than 11 years.

FHA Mortgage Rates In California

For over 22 years my team and I have delivered low FHA mortgage rates in California along with fast closings and industry-leading customer service. Our FHA loan programs can be used for both refinance and purchase transactions. Our client-first approach to the FHA loan process means we’ll listen first then find solutions to meet your home loan needs. Contact me today for a no-cost/no-obligation quote and see what makes us different.

FHA Mortgage Insurance.

Simply put; it’s an insurance policy you pay each month that covers a lender’s losses in the event you default on your FHA loan. Read more about MI here.