FHA Loans Explained! This is Your Key to Affordable Homeownership

Written By Emma Johnson

Ever found yourself tangled in the web of home loan jargon, especially regarding FHA loans? Trust me, you’re not alone. Understanding the ins and outs of FHA loans sometimes feels like deciphering hieroglyphics.

But fear not! In this article, we’re diving deep into FHA loans, breaking down every intricate detail so you can confidently breeze through the process, including how to apply for them. So, grab a cup of coffee, get comfy, and let’s unravel the mystery of FHA loans together!

Read More: Realtor Fee Newyork: How Much Money do Real Estate Agents Make in New York?

1. What are FHA loans?

what is FHA Loan. Definition of FHA loan

1.1 What do FHA loans offer

Long story short, FHA loans provide a helping hand to individuals with lower credit scores or those unable to qualify for traditional loans.

Insured by the Federal Housing Administration (FHA) and facilitated by approved mortgage lenders, these loans offer relaxed credit scores and down payment requirements. Borrowers can secure FHA loans with down payments as low as 3.5%, even with credit scores as low as 500. 

Funding sources for down payments include savings, financial gifts, or down payment assistance grants. Sellers can contribute up to 6% of the purchase price towards the buyer’s closing costs, and FHA loans are assumable, allowing the home buyer to take over the seller’s existing loan. 

The FHA guarantee reduces risk for banks, potentially resulting in competitive mortgage rates lower than conventional loans. Loan limits apply based on creditworthiness and location, and borrowers must pay mortgage insurance premiums consisting of upfront and annual payments.

Also read: Home Equity Loan in Delaware

Sources 2, 3, 4, 5

1.2 What type of properties are allowed to be bought using FHA loans

Let’s break down the types of homes that qualify for FHA loans in simple terms. Whether you’re eyeing a cozy single-family home or dreaming of a condo by the beach, FHA loans have covered you. Here’s what you need to know:

What type of properties are allowed to be bought using FHA loans

FHA loans can be utilized to buy a home that you plan to live in as your primary residence. However, it’s important to ensure that the property meets the FHA’s standards for structural integrity, safety, and suitability for living.

Sources 6, 7, 8

1.3 Benefits of FHA Loans

Let’s understand the various benefits of FHA loans.

  • FHA loans allow gift funds for down payment from family, friends, employers, unions, or government programs, with no repayment expected.
  • Sellers can contribute up to 6% of the sales price towards the buyer’s closing costs, reducing out-of-pocket expenses.
  • FHA has more lenient debt-to-income ratio requirements, typically 43% or lower, allowing for more flexibility in qualifying.
  • Non-occupant co-borrowers are accepted, enabling individuals to assist others in purchasing a home.
  • No income limits with FHA loans, offering approval chances regardless of income level.
  • Credit unions are among FHA lenders, providing personalized service, potentially lower rates and fees, and a focus on member needs.
  • Closing cost assistance may be available through seller-funded credits or lender credits.
  • FHA loans offer shorter waiting periods after bankruptcy (2 years) and foreclosure (3 years) compared to conventional loans (4 years and 7 years respectively).

Flexible Repayment Terms:

  • FHA offers two repayment options: 30-year fixed-rate mortgage or reverse mortgage.
  • Provides flexibility for borrowers to choose a suitable repayment plan.

Higher Seller Contribution:

  • Negotiate with the seller to cover most closing costs.
  • Option to negotiate lower interest rates to reduce out-of-pocket expenses for the buyer.

Sources 9, 10, 11

 1.4 Conventional Loan rates vs FHA loan rates in Delaware

Conventional LoanFHA Loan
Minimum credit scoreGenerally 620; can vary depending on lender580; If you make a 10% or more down payment you score can be as low as 500
Minimum down payment3% for fixed loans; 5% for adjustable loans; can go up to 20% depending on the circumstances3.5% if your credit score is 580+; 10% if your credit score is 500 to 579
Loan term8 to 30 years15 to 30 years
Mortgage insuranceNo insurance if making a down payment of 20% and above or after the loan is paid down to 78% LTV (loan to value)Compulsory
Mortgage insurance premium (MIP)Private Mortgage Insurance (PMI) of 0.20 to 2% of loan amount per year if putting less than 20% downUpfront: 1.75% of the loan + annual: 0.15% to 0.75%; if the down payment is less than 10% then you have to pay an annual MIP for the life of the loan; if the down payment is more than 10%, then you have ot pay an annual MIP for 11 years
Down payment giftsSome lenders may allow all or part of the down payment to be a gift.100% of the down payment can be a gift
Conventional Fixed-Rate Loans in Delaware
TermRateARPMonthly paymentPoints
The rates and monthly payments displayed are calculated based on a loan amount of $464,000 and a down payment of at least 25%.
Federal Housing Administration (FHA) Loans
TermRateARPMonthly paymentPoints
The rates and monthly payments displayed are calculated based on a loan amount of $270,019 and a down payment of at least 3.5%.

Sources 12, 13, 14, 15, 16

1.5 Loan limits for FHA loans in Delaware

The conforming loan limit (CLL) is the maximum amount a homebuyer can borrow with a conventional mortgage eligible for purchase by Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (FHFA) adjusts the CLL annually based on the national average home price.

CLL varies by location and property type, with higher limits in areas with above-average costs of living. In high-cost areas and states like Alaska and Hawaii, the CLL for single-unit properties can be up to $1,149,825.

Below are the current minimum and maximum conforming loan limits categorized by property type:

Property typeMinimum conforming loan limitMaximum conforming loan limit

The maximum loan amount for FHA loans varies by county and fluctuates annually in response to changes in property values.

Countywise data - FHA loan limits

The loan limit can reach as high as $1,072,600 for a four-family home.

Sources 17, 18, 19, 20, 21

These are the essential Delaware FHA loan requirements for the current year. To qualify for an FHA loan, all of these criteria must be met. If you’re unsure whether you meet these standards or have questions, an FHA lender can provide assistance.

  1. Down payment of 3.5%, or 10% if your credit score is below 580.
  2. 2-year employment history, with exceptions allowed.
  3. Fully document your income for the past two years.
  4. Minimum FICO score requirement of 500, with down payment varying accordingly.
  5. Mortgage Insurance Premium (MIP) is mandatory for every FHA loan.
  6. Maximum debt-to-income ratio of 43%, with exceptions up to 56%.
  7. The property must serve as your primary residence.
  8. No bankruptcies or foreclosures in the past two years.

Let’s break down what’s up with FHA loans in Delaware for 2024.

First off, if you’re getting into an FHA loan, you’re looking at putting down 3.5% of the deal since January 1, 2009. This chunk of change has to go straight to your down payment—no sneaky moves using it for closing costs or pre-paid items, got it?

Now, when it comes to the maximum loan-to-value (LTV) ratio, you’re looking at 96.50% for a purchase with an FHA loan in Delaware. But wait, there’s more! If you’re doing an FHA refinance for a rate and term change, you can bump that up to a max of 97.75%. 

But here’s the deal: if you’re already rocking an FHA loan and want to switch things up with a Streamline Refinance for a new rate and term, you’re in luck—no need for an appraisal. But hey, you can’t snag any cash out of the deal, alright? 

If you’re considering a cash-out refinance, your LTV cannot exceed 85%. And hey, if your credit score is below 580, you’re looking at a 10% down payment on purchase transactions, with a max LTV of 90% on Delaware FHA Loans.

For FHA Loans with FHA Case Numbers Assigned on or after June 3, 2013
TermOriginal Down PaymentDuration
15 years or lessLess than 10%Life of loan
15 years or less10% or higher11 years
Over 15 yearsLess than 10%Life of loan
Over 15 years10% or higher11 years
For FHA Loans with FHA Case Numbers Assigned Prior to June 3, 2013
TermOriginal Down PaymentDuration
15 years or less22% or higherNo annual MIP
15 years or lessLess than 22%Cancelled at 78% LTV
Over 15 years22% or higher5 years
Over 15 yearsLess than 22%Cancelled at 78%  LTV (5 years minimum)

Sources 22, 23, 24, 25

1.7 Do FHA loans require Mortgage Insurance?

FHA loans definitely have some perks, like being more forgiving with credit scores, asking for a low down payment, and often coming with competitive interest rates and reasonable closing costs. But, like anything, there’s a catch: mortgage insurance premiums, or MIP.

Okay, what’s MIP? It’s basically an extra fee that FHA loan borrowers pay to protect lenders if things go south. You know, like if a borrower can’t keep up with their mortgage payments. These premiums kick in if you make a down payment of less than 20 percent. And guess what? For most FHA borrowers, you’ll be shelling out these premiums for the entire duration of your 30- or 15-year loan term.

Now, here’s the deal with FHA loans: they’re not really looking out for you, the borrower, when it comes to MIP. Nope, they’re more about giving lenders a safety net, especially when they’re dealing with borrowers who might not have the best credit scores or can only manage a small down payment. But hey, on the bright side, FHA loans open doors for folks who might not qualify for traditional mortgages.

Oh, and here’s a fun fact: unlike private mortgage insurance, which you can sometimes say goodbye to once you’ve built up enough equity, FHA mortgage insurance sticks with you for the long haul—no matter how much you’ve put down. If you went with less than 10% down, you’ll be paying MIP until the end of time. Well, not really, but until you pay off the loan or refinance. If you managed a 10% down payment or more, you can wave goodbye to MIP after 11 years of payments.

Sources 26, 27, 28, 29

1.8 FHA loan lenders in Delaware

Lender nameLT ratingMinimum FHA credit score
Rocket Mortgage5 stars580
Flagstar Mortgage5 stars580
PenFed Mortgage3 stars620
Guild Mortgage3 stars540
Churchill Mortgage3 stars620

Here are some other popular lenders in Delaware, but you may have to check whether they provide FHA loans.

Pike Creek Mortgage Services
Meridian Bank
Tidewater Mortgage Services Inc
Evolve Bank & Trust
Nation One Mortgage
Guild Mortgage Company
Fairway Independent Mortgage Corp
Cardinal Financial
CrossCountry Mortgage, Inc
Keystone Funding Inc

Sources 30, 31, 32

2. How to qualify for FHA loans in Delaware:

To qualify for an FHA loan, you need to meet specific requirements like:

2.1 Check and Submit Credit scores

If you have a credit score, ranging from 500 to 850, then you are eligible for FHA loans in Delaware. If you have a credit score less than 500, do not worry, you can do a few things to increase your creditworthiness. But for that you need to understand what are the factors affect the credit score?

It could be:

  • The types of credit you possess, such as credit cards, loans, etc.
  • The outstanding balance on your credit cards.
  • The extent of new and recent credit inquiries or accounts opened.
  • Credit utilization, which refers to the proportion of your available credit that you’re currently using.
  • Your payment history, including whether you pay your bills on time.

Read on to learn about how to increase your credit score.

2.2 Down payment requirement

Your down payment is a crucial part of buying a home, representing a percentage of the purchase price that you contribute upfront. When it comes to Delaware FHA loans, the minimum down payment required is directly tied to your credit score.

FHA Loans Credit Score Requirements

For FHA loans in Delaware, if your credit score is 580 or higher, the minimum down payment is 3.5%. However, if your credit score falls between 500 and 579, you’ll need to make a 10% down payment.

Rocket Mortgage, requires a minimum credit score of 580 for FHA loans. It’s worth noting that a mortgage calculator can be a handy tool for estimating your monthly payments, taking into account your chosen down payment amount.

Keep in mind that while cash down payments are allowed for FHA loans, they can also be supplemented with gift assistance. However, it’s crucial to document these gifts thoroughly to ensure they’re genuine gifts and not disguised loans.

2.3 Debit-to-income ratio requirements

Debit-to-income ratio Definition

Your Debt-to-Income ratio, or DTI, is a critical factor in determining your eligibility for a loan. It’s calculated by dividing your total monthly debt payments by your monthly gross income (your income before taxes), expressed as a percentage. 

Here’s how you can calculate your DTI: simply divide your monthly debts, like student loans and car payments, by your monthly gross income. For instance, if your monthly debts amount to $2,500 and your monthly income is $10,000, your DTI would be 25%.

Having a lower DTI is generally beneficial, indicating a healthier financial situation. However, if you have a higher credit score, you may qualify for a loan even with a higher DTI. According to FHA guidelines, your monthly mortgage payment should not exceed 31% of your monthly gross income.

Additionally, your DTI should ideally stay below 43% of your monthly gross income, especially if your loan is undergoing manual underwriting. Nevertheless, having a higher credit score might enable you to qualify for a loan with a higher DTI.

2.4 Mortgage Insurance

For all FHA loans, you’re required to pay a mortgage insurance premium (MIP), similar to private mortgage insurance (PMI) for conventional loans. This insurance safeguards your lender against losses in case you default on your loan.

Now, here’s the deal with how long you have to keep paying mortgage insurance for an FHA loan: in most cases, you’ll be paying it for the entire life of the loan. However, there’s a small exception. If you made a down payment of at least 10%, you’ll only have to pay MIP for the first 11 years.

Initially, FHA loan mortgage insurance is charged as an upfront mortgage insurance premium, typically amounting to 1.75% of your loan amount. Additionally, FHA borrowers also pay an annual mortgage insurance premium, determined by factors like the length of your mortgage, your loan-to-value (LTV) ratio, total mortgage amount, and the size of your down payment. These annual MIP payments usually range from about 0.15% to 0.75% of the loan amount.

2.5 FHA home appraisal

The home you’re eyeing must be appraised by an FHA-approved appraiser. A thorough inspection is necessary, and it must confirm whether the property meets the minimum standards set by FHA. 

2.6 Occupancy

You’re required to move into the property within 60 days of closing.

2.7 Employment

You don’t qualify for an FHA loan based solely on a specific income threshold, but rather by proving a stable employment history. To qualify for an FHA loan, you must have a minimum of two years of employment with verifiable, steady, and consistent income. 

To verify your income, you’ll need to provide documentation such as pay stubs, W-2s, federal tax returns, and bank statements to your lender. Your lender may request additional forms of verification to assure an accurate assessment of your income.

2.8 The loan must be for a principal residential property

FHA loans are only for primary residences. This means they cannot be utilized for rental properties, real estate investment ventures, or vacation homes. Additionally, FHA loans are not applicable for business properties.

Read More: Mastering The Maze: Can a Buyer’s Realtor Represent 2 Buyers on the Same Property?

Sources 33, 34, 35

3. How to apply for an FHA loan

3.1 Steps to apply for FHA loans:

Here’s a breakdown of the FHA loan process:

Breakdown of the FHA loan process

Follow these steps and you can quickly kickstart your FHA mortgage journey.

Sources 36, 37, 38

3.2 Other Government-backed mortgage loans like FHA

A government-backed loan, also referred to as a government-backed mortgage, is a type of loan secured by a government agency, aimed at facilitating affordable homeownership. These loans are extended by mortgage lenders with the backing of a government entity, which mitigates risk for the lender and provides benefits to borrowers. Government-backed loans typically come with favorable terms, making them accessible to a wider range of homebuyers.

There are several types of government-backed loans available:

The Department of Veterans Affairs (VA) provides loan programs to aid servicemembers, veterans, and their families in purchasing homes. VA loans offer advantages such as no down payment requirement, no private mortgage insurance (PMI), and limited closing costs. Additionally, veterans may receive assistance during temporary financial hardships. 

However, VA loans may have higher interest rates and require a funding fee, typically between one and three percent of the loan amount. Many veterans and current servicemembers can obtain a Certificate of Eligibility (COE) from the VA online to determine their eligibility for VA loans.

Private lenders process and service VA-guaranteed loans, with applicants undergoing standard underwriting procedures. Spousal status doesn’t affect eligibility, as the VA treats all spouses equally.

Read More: Navigating Realtor Fees in Georgia: A seller’s Guide to Saving Big on Commissions

Delaware USDA Rural Housing loans offer significant benefits such as 100% financing, low fixed interest rates, and the ability to include closing costs in the loan if the property appraises for more than the purchase price.

While commonly associated with rural areas, many suburban locations in Delaware, like Smyrna, also qualify. To qualify, applicants must meet income and credit score requirements and demonstrate the ability to afford housing expenses. 

The loan process resembles that of FHA or conventional mortgages, with your lender overseeing the transaction from application to final approval. Prospective buyers can check property eligibility on the USDA website.

It’s important to note changes in eligible areas, with Middletown and Smyrna losing eligibility in recent updates. Understanding these guidelines is crucial for Delaware residents considering USDA Rural Housing loans.

Sources 39, 40, 41

4. Why choose Delaware as a place to stay and apply for the loan

4.1 Why Delaware can be a good place to buy property 

Choosing Delaware as your new home state offers numerous benefits that make it an ideal place to buy or build a home. Here are seven compelling reasons why Delaware is the perfect place to call home:

Enjoy easy access to urban areas, essential services, and major transportation routes like I-95, ensuring a hassle-free daily life.

Benefit from tax-free shopping in Delaware, allowing you to save more when purchasing goods or treating yourself to something special.

Experience the beauty of Delaware’s beaches and state parks, offering endless opportunities for outdoor activities and relaxation just a short drive away.

Delaware boasts lower property taxes compared to neighboring states, helping homeowners save money and manage monthly expenses effectively.

Delaware’s education system provides a quality education and prepares students for success, contributing to a strong community and stable property values.

Immerse yourself in Delaware’s vibrant cultural scene with museums, art galleries, festivals, and events that offer enriching experiences year-round.

Delaware boasts a thriving economy driven by key industries such as pharmaceuticals, healthcare, financial services, and technology. Home to renowned companies like DuPont, AstraZeneca, and JPMorgan Chase, the state’s workforce is known for its expertise and proficiency across diverse sectors. 

With a household income surpassing the national median by 5.4%, Delaware offers lucrative job opportunities, making it an excellent starting point for anyone seeking employment.

Investing in a home in Delaware offers the potential for property value appreciation, making it a smart financial decision for the long term.

Delaware provides an attractive and welcoming environment for homeowners, offering a high quality of life, diverse recreational opportunities, and a strong sense of community. Whether you’re a first-time buyer or looking to settle down, Delaware has everything you need to make your dream home a reality.

Read More: Can a Real Estate Agent Represent Themselves as a Buyer

Sources 42, 43, 44

4.2 Why choose Delaware to apply for the FHA loan

Availing an FHA loan in Delaware is a smart choice for several reasons. The state offers a low unemployment rate, excellent schools, and scenic beauty, attracting a growing population since 2010.

While the cost of living may be higher than the national average, savvy borrowers utilize the FHA loan program to finance their homes.

With lower down payments and interest rates compared to conventional loans, FHA loans save borrowers money, making homeownership more accessible. 

Delaware’s average weekly wage exceeds the national average, and the total FHA loan value in the state as of April 2019 was approximately $60 million. With down payments as low as 3.5 percent, relaxed underwriting standards, and competitive mortgage rates, FHA loans are increasingly popular among Delaware homebuyers, especially as conventional loan rates rise.

Delaware offers several advantageous homebuyer assistance programs through the Delaware State Housing Authority (DSHA).

The Welcome Home program is tailored for first-time homebuyers with a minimum credit score requirement of 620.

Smart Start Home Loans provide conventional, FHA, VA, and USDA financing with discounted interest rates, appealing to buyers with various financial backgrounds. Income and sales price limits are in place, ensuring accessibility for eligible applicants.

For those needing down payment assistance, Delaware offers the Home Sweet Home Program, providing forgivable zero-interest loans of up to $12,000.

Similarly, the Delaware Diamonds Home Loan and First State Home Loan Program offer zero-interest loans of up to $10,000 and down payment assistance of up to 3 percent of the first mortgage loan amount, respectively.

These programs aim to support specific professions and first-time buyers, contributing to homeownership affordability.

Delaware offers a First-Time Homebuyer Tax Credit, providing up to 35 percent of annual mortgage interest, up to $2,000 annually. Eligibility criteria include being a first-time homebuyer or purchasing in a “Targeted Area,” aligning with specific income and purchase price limits. These programs collectively facilitate homeownership for diverse individuals and contribute to the state’s thriving real estate market.

Read More: Decoding Realtor Fees in New Jersey: An Essential Guide For Home Sellers

Sources 45, 46, 47

5. FAQs

5.1 Can I get the FHA loan if my credit score is below 620?

Ans) Yes. According to Ellie Mae, approximately 24% of applicants for FHA loans had credit scores falling between 600 and 649. However, it’s worth noting that credit scores below 620 are still eligible for the Delaware FHA Choice Loan.

Officially, the credit score minimums for FHA loans are as follows:

– 580 or higher for a down payment of 3.5%

– 500-579 for a down payment of 10%

5.2 Can I get an FHA loan with a high debt-to-income ratio?

Ans) No. FHA loans are tailored to accommodate higher debt-to-income (DTI) ratios, especially for first-time homebuyers who typically have higher DTI ratios due to their housing payments consuming a larger portion of their income. FHA permits a housing DTI of up to 46.9% and a total DTI of up to 56.9%. However, to be approved with these high ratios, the loan file must receive an Approve/Eligible response from the automated underwriting system. If the loan file receives a Refer/Eligible response, the allowable DTI ratios are significantly lower.

5.3 Can I buy a multifamily property using an FHA loan in Delaware?

Ans) Yes. With an FHA loan, you have the option to purchase a multifamily property with up to four units. The borrowing requirements remain mostly the same, including the stipulation that you must reside in one of the units yourself for at least 12 months. You may include rental income from the other units when calculating your debt-to-income (DTI) ratio. This flexibility means you could potentially qualify for a larger mortgage than you would with a single-family purchase.

In Kent and Sussex County, the FHA sets loan limits at affordable levels. However, it’s worth noting that maximum loan amounts for multifamily properties are slightly higher in New Castle County.

Number of unitsLow-cost FHA loan limit

5.4 Can I buy a non-residential property using the FHA loan in Delaware?

Ans) No. An FHA loan can only be applied for a residential property. Real estate investors, vacation home buyers, and those seeking rental properties should not consider FHA loans. Additionally, they cannot be used for business properties. Individuals purchasing primary residences can specifically use these loans to facilitate homeownership.

5.5 What is the conforming loan limit in Delaware?

Ans) The conforming loan limit is $7,66,550. Lenders generally provide conforming loans up to $750,000. The Federal Housing Finance Agency (FHFA) has increased the 2024 conforming loan limits for Fannie Mae and Freddie Mac to $766,550 in most of the U.S. This marks a significant rise from the 2020 conforming loan limit, which was set at $510,400.

Read More: Buying a Non-Conforming Property : The Complete Guide

Written By:

  • Emma is a residential and commercial agent in Delaware, known for her sharp negotiating skills & deep market knowledge. Off duty you will find her buried in novels and playing handball with her kids.

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