What is a Maryland FHA Loan?
A Maryland FHA loan is a government-insured home loan aimed at housing property purchasing in the state of Maryland. FHA loans are backed by either the Federal Housing Administration (FHA) or US Department of Housing and Urban Development (HUD), meaning lenders are guaranteed to have a portion of the loan payment covered by the government in the event that the borrower is unable to pay.
Since lenders find themselves at less of a risk than in the case of other loans, FHA loans feature lower requirements for eligibility and hence make great ways to finance purchasing a home for the first time (although FHA loans can provide other uses as well, such as funding renovations or refinancing a mortgage on an existing property). In addition to 3.5% down payments, borrowers for FHA loans have the option of not needing to provide the down payment themselves. Rather, this can be made by a friend or family member as a gift.
To help get a better idea of the costs of an FHA loan, check out our mortgage calculator.
FHA loans have lower requirements than other loans because lenders are guaranteed payment by the government in case of a default. In Maryland, borrowers can be required to make a down payment of 3.5% so long as their credit score is 580 or above. In some cases, borrowers with scores lower than these will still be eligible, provided they can afford a down payment of 10%. Similarly, it is typically expected that FHA loan applicants have a front-end DTI (mortgage debt-to-income ratio) of roughly 30%, and a back-end DTI (general debt-to-income ratio) of roughly 43%, though again there can be exceptions to such requirements in light of other factors (e.g., applicants with large cash reserves).
Specifications of the loan itself will also affect requirements. Depending on the amount and length of the loan, borrowers' monthly premiums will vary. For example, an FHA loan of $625,500 or greater whose loan-to-value ratio (LTV) is 95% or greater, will have an annual mortgage insurance premium (annual MIP) of 0.80%. In contrast, loans for less than $625,500 whose LTV is less than 95% will have annual MIP's of 1.05%.
Additionally, FHA will have some requirements that pertain to the property being purchased. Borrowers will be required to occupy the property as a permanent residence; properties will have to consist of four units or less; and an appraisal will have to be provided to show that the property meets adequate and reasonable health and safety standards.
As there are no standard rates among lenders, each loan will have a unique set of rates, determined by both the details of the loan and the borrower's financial history and status (check out our definitive guide to rebuilding your credit). However, with FHA loans, rates will typically be lower than with other kinds of loans, given the low risk they pose to lenders.