As a Seattle-area mortgage company, we do our best to educate local home buyers about their different mortgage options. To continue that tradition, we’ve created a Washington FHA loan fact sheet for borrowers.
Washington FHA Loans: A Fact Sheet
An FHA-insured mortgage loan is a popular financing option for many home buyers in Washington. This program offers a relatively low down payment option, flexible qualification criteria, and other benefits.
But it might only be suitable for some financing situations. To make an informed borrowing decision, you must understand what FHA loans are, how they work, and what pros and cons they bring into the picture.
Here’s what borrowers should know about the FHA loan in WA State.
History and Purpose of the FHA Loan Program
The Federal Housing Administration (FHA) and its home loan program were created in 1934 with the passage of the National Housing Act. The U.S. Congress passed this legislation to increase homeownership affordability during the Great Depression.
But even today, 90 years after its inception, the Washington FHA loan program still benefits home buyers in Washington and elsewhere across the country.
The program’s primary purpose is the same today as in the 1930s. It’s designed to expand mortgage credit access to home buyers with moderate income by reducing risk for lenders through mortgage insurance.
Today, the FHA loan program falls under the Department of Housing and Urban Development (HUD). So, HUD establishes all of the guidelines for this program. You could think of HUD as the parent organization and the FHA as a sub-agency of that department.
How FHA Loans Work
When a traditional mortgage loan is used, two primary parties are involved: the borrower and the lender. But when it comes to Washington FHA home loans, an additional participant comes into the mix. And that’s the federal government.
When applying for an FHA loan in the state of Washington, you’ll apply to a mortgage lender in the private sector. In this way, FHA loans are similar to most other mortgage products.
But there’s one key difference that sets this program apart. Unlike a traditional or conventional mortgage product, FHA loans receive insurance protection through the federal government. This insurance protects mortgage lenders from financial losses relating to borrower default.
This is an important distinction that bears repeating.
Regarding FHA loans in Washington, the government-provided insurance protects the mortgage lender—not the borrower. The borrower pays a mortgage insurance premium to help fund the program (and more on that later). But the actual insurance shields the lender and not the borrower.
Even so, home buyers in Washington can benefit significantly from this government-provided mortgage insurance. As it states on the Department of Housing and Urban Development website:
“FHA mortgage insurance protects lenders against losses. If a property owner defaults on their mortgage, we’ll pay a claim to the lender for the unpaid principal balance. Because lenders take on less risk, they can offer more mortgages to home buyers.”
Understanding Mortgage Insurance Premiums
Home buyers in Washington who use FHA loans must pay mortgage insurance premiums, typically for as long as they keep the loan. That’s one of the distinguishing factors for this program and one of the downsides.
The Federal Housing Administration uses the funds generated through these insurance premiums to pay claims to mortgage lenders. In other words, borrowers help fund the program while lenders receive protection from it.
Washington FHA loans come with two types of mortgage insurance premiums:
- Upfront premium. An upfront mortgage insurance premium amounts to 1.75% of the base loan amount. This one-time fee can be paid at closing or rolled into the loan and paid off over time.
- Annual premium. There’s also a yearly mortgage insurance premium (MIP) that can vary based on the length of the loan and other factors. For most borrowers in Washington who use an FHA loan, the annual MIP equals 0.55% and must be paid for as long as the borrower keeps the loan.
The monthly payments for an FHA loan typically consist of four components:
- The principal amount borrowed
- Interest charged on the loan
- Taxes paid by the homeowner
- The insurance premium mentioned above
Regular home loans sometimes require mortgage insurance as well. If a home buyer makes a small down payment resulting in a loan-to-value ratio above 80%, they’ll probably have to pay for private mortgage insurance (PMI). That’s why some choose to put down 20% or more.
But with a Washington FHA loan, all borrowers have to pay for mortgage insurance.
Requirements for an FHA Loan in Washington
Home buyers in Washington often have an easier time qualifying for FHA loans when compared to conventional mortgage financing. We’ve covered the primary reason for this already.
Mortgage lenders who offer FHA loans in Washington receive an additional layer of protection from the federal government. This allows them to ease their qualification criteria for borrowers.
Despite this benefit, some specific FHA loan requirements exist in Washington State. These include the following:
- A down payment of at least 3.5%
- A credit score of 580 or higher to qualify for the 3.5% down payment
- A debt-to-income ratio no higher than 43% (unless there are compensating factors)
- Stable income that’s sufficient to cover the monthly mortgage payments
Most of these requirements are pretty straightforward. But the debt-to-income ratio requires a bit more explanation. As the name suggests, this ratio compares your total recurring debts to the amount you earn each month (pre-taxes).
The official FHA handbook states that this ratio should be at most 43% for most borrowers. But it explains that a higher ratio “may be acceptable only if significant compensating factors … are documented and recorded.”
For instance, if you have successfully managed similar-sized mortgage payments in the past, it could be considered a compensating factor. A good credit history and the ability to save money are also considered compensating factors for an FHA loan in Washington.
Types of Borrowers Who Use FHA Loans
Some people mistakenly believe that FHA loans are limited to first-time buyers only. Anyone who meets the minimum eligibility criteria outlined above can apply for a Washington FHA loan. And this includes repeat buyers who have owned homes in the past.
This program appeals to first-time buyers, in particular, because of the low down payment requirement. First-time buyers in Washington don’t have the profits from a previous home sale toward their next down payment. So, they often seek mortgage programs with a low investment requirement.
Borrowers with credit-related problems in the past often rely on FHA loans as well. Generally speaking, the credit score criteria for FHA loans tend to be more “forgiving” when compared to traditional mortgage financing.
Please contact us if you have questions about this program or want to apply for a Washington FHA loan!