FHA loans in California

Why California buyers use FHA

California prices make the down payment the hardest part of buying. On a $700,000 home, 20% down is $140,000. FHA brings that to $24,500, and it is more forgiving of a thin credit history, a higher debt-to-income ratio or a past credit problem. For many first-time buyers in the San Fernando Valley and Ventura County, it is the loan that makes the numbers work.

Benefits of FHA financing

• Low down payment. 3.5% down, and the whole amount can be a gift from a family member.
• Easier to qualify. FHA accepts lower credit scores and higher debt-to-income ratios than most conventional loans.
• Room for past credit problems. Buyers can qualify again sooner after a bankruptcy, foreclosure or short sale than on many conventional loans.
• Competitive rates. Because the loan is government insured, FHA rates are often at or below conventional rates for borrowers with average credit.
• Assumable. A future buyer can take over your FHA loan, rate included, with lender approval, which can help when you sell.
• One to four units. Live in one unit and let rent from the others help you qualify.

FHA vs conventional

With a credit score in the mid-700s and 5% or more down, a conventional loan often costs less, because its mortgage insurance drops off and is priced on your credit. Below about 680, or with a higher debt-to-income ratio, FHA usually wins on payment and approval odds. We price both for your scenario so you can see the monthly difference and the mortgage insurance side by side.

What you need to qualify

• Down payment: 3.5% with a 580 score or higher. The money can be a gift from family.
• Credit: 580 and up for 3.5% down. Two years after a bankruptcy and three after a foreclosure, in most cases.
• Income: two years of steady work history, verified with pay stubs, W-2s and tax returns.
• Debt-to-income: FHA allows higher ratios than conventional, often into the mid-40s and sometimes above with strong compensating factors.
• The home: your primary residence, one to four units, appraised to FHA property standards.

FHA document checklist

Having these ready speeds up an FHA pre-approval:

• Employment: two years of employer names and addresses, your last 30 days of pay stubs and two years of W-2s. Self-employed borrowers add two years of tax returns.
• Savings and assets: two months of bank statements for every account, plus statements for retirement or investment accounts you plan to use, and a gift letter for any gifted funds.
• Personal information: a photo ID, your Social Security number, two years of addresses, and any divorce, bankruptcy or child support paperwork that applies.
• The property: the purchase contract once you are in escrow, or your current mortgage statement and homeowners insurance for a refinance.

FHA loan limits in California

FHA limits are set county by county. High-cost counties such as Los Angeles, Ventura, Santa Clara and Alameda have some of the highest FHA limits in the country, while the Central Valley sits lower. Above your county’s limit you would look at a conventional or jumbo loan instead. Tell us the county and we will confirm this year’s figure.

The cost of mortgage insurance

FHA charges an upfront premium of 1.75% of the loan, which is normally added to the balance, plus an annual premium of about 0.55% paid monthly. On a $675,000 loan that annual premium is roughly $309 a month. It is the price of the low down payment, and many borrowers refinance into a conventional loan once they have 20% equity to remove it.

FHA Streamline refinance

If you already have an FHA loan, a Streamline refinance can lower the rate with very little paperwork. There is usually no appraisal and no income verification, as long as the new loan gives you a clear benefit, such as a lower combined rate and mortgage insurance payment. Paid on time for the last year is the main requirement.

• Seasoning: at least 210 days since closing and six monthly payments made on the current FHA loan.
• A real purpose: the refinance must lower your combined rate and mortgage insurance, or move you from an adjustable rate to a fixed one.
• No cash out: a Streamline cannot be used to take equity out. For cash, look at a HELOC or a cash-out refinance.
• Balance limits: closing costs generally cannot be added to the new loan balance; they are paid in cash or covered by a lender credit.
• Underwater is fine: because there is usually no appraisal, you can often Streamline even if the home is worth less than you owe.