Last Updated on May 10, 2023 by Luke Feldbrugge
FHA loans for teachers are a good solution for first-time homebuyer educators, but only if you’re not perfect. If you are in perfect shape for the house hunt — your credit score, your budget, your savings and your energy level — then you probably don’t need an FHA loan. The FHA loan system is a national program built to help first-time homebuyers, and everyone, overcome some of the hurdles that stand between you and affording a home. If you are looking at the real estate market and the financial hoops you need to jump through, you might be ready to give up before you start. Before you do, may we suggest taking a look at these loan guarantees and take a deep breath. There is help out there.
What is an FHA Loan?
An FHA home loan is a loan insured by the Federal Housing Administration and given by an approved lender, so it’s not really a loan. It’s a loan guarantee. The approved private agency actually gives you the money, while the FHA agrees to stand behind it. So just like any home mortgage, you will be primarily working with a lender, broker or bank, but having the FHA guaranteeing your loan changes the dynamic quite a bit. It’s like having your parents co-sign the loan, but in this case the co-signer is the federal government (the folks who print the money).
Congress created the Federal Housing Administration in 1934 to stimulate the housing market after the Great Depression. The purpose of this program is to help Americans find and own a home, and it could do the same for you. For example, eligible applicants only need to pay a 3.5% down payment. That’s a sizable obstacle that you, as a new home owner, no longer have to overcome. There are other benefits listed below.
These loan guarantees are designed for low to moderate-income earners who also have low credit scores. The combination of a low down payment and relaxed credit requirements make the FHA loan guarantee ideal for teachers who are searching for affordable housing.
Pros and Cons for Teachers
Advantages of FHA Loans
Here are some of the advantages of FHA loans for teachers:
- Smaller Down Payments – FHA has a minimum down payment of 3.5% of the total home loan. Typical mortgages require up to 20%. Your down payment percentage may vary if you have a credit score below 580.
- Flexible Approval Requirements – The qualification criteria are not as strict as you find on conventional loans, and most teachers, principals, professors, and others in education can qualify.
- Lower Credit Scores – If you have a low credit score and cannot get a loan from conventional lenders, the FHA loan was designed with you in mind.
- Assumable – FHA loans are assumable. That makes them almost unique in the world of mortgages. An assumable loan lets you sign your current mortgage over to a potential buyer without all the paperwork and application process. Moreover, they can assume your loan at the interest rate you locked in when you bought it. That becomes a huge advantage for a seller in a real estate market where interest rates have gone up dramatically (like this year). Imagine telling your qualified buyers that they can assume your mortgage and get an annual interest rate of 3.3% while the rest of the world is paying 7%?
- Not Just for First Time Home Buyers — the FHA program is for everyone, not just first time homebuyers.
Disadvantages of FHA Loans
While all those advantages make the FHA loan for teachers worth considering, there are some costs you will want to keep in mind:
- Upfront Funding Fee – This fee costs you 2.25% of the total financed amount. It’s paid at closing, but it can be rolled into the mortgage and paid over time. This is also called the UFMIP, making it easy to confuse with the MIP they charge separately on an annual basis (see next point). This is a one-time fee. It’s called a funding fee because it helps the FHA run the loan program.
- Mortgage Insurance Premiums (MIP) – In addition to the UFMIP (above) you will also be paying an annual mortgage insurance premium for the life of the loan. The current rate for MIP is 0.85%. This too can be rolled into your monthly mortgage payments. If these two separate insurance fees are confusing, you are not alone. In the world of conventional loans, you pay private mortgage insurance each month, but only for the first few years. Here you get dinged twice, and one of the fees lasts forever (or until you pay off your loan).
This annual MIP doesn’t help the FHA fund its programs, it protects the mortgage lender in case you are unable to pay the loan back.
- Higher Interest Rates – The jury is out on whether you will pay higher interest rates on an FHA insured loan. Some say yes and some say no, but there is no consensus. The thing to remember is that your private lender, not the FHA, will make the final determination about the interest rate on your mortgage. As with a conventional loan, your rate will be based on your credit score and the size of your down payment.
FHA Home Loans vs. Conventional Home Loans
While there are some drawbacks to a FHA home loan guarantee, they are still better than a conventional mortgage loan in a number of ways.
- As we mentioned, educators need a credit score of at least 580 to get a mortgage with the FHA loan guarantee (and have the minimum down payment of 3.5%). With a conventional mortgage, you typically need a good credit score — 640 or better.
- Down payments for conventional loans range between 3% to 20%, depending on your credit score. The lower the credit score, the higher the down payment. Down payments on FHA loans for teachers are between 3.5% to 10%.
- Down payment assistance programs are available for FHA loans but not conventional loans. If someone gives you the money for a down payment as a gift, the FHA is good with that. With a conventional home loan, typically only part of your down payment can be a gift and you will need to provide documentation of the gift to your lender.
On the plus side, the duration of conventional mortgages can have a wide spread. You can get mortgages that last 10, 15, 20, or 30 years. FHA home loans offer only two options: 15 or 30 years. A conventional mortgage also has no loan limits. If you can afford it, the bank will give it to you.
How to Qualify
As with any government program, there are some hoops to jump through. With the FHA loan guarantee, you need to:
- Have Verifiable Income – To qualify for an FHA loan guarantee, you need verifiable income. That means your lender will need to see your tax returns or pay stubs. They will also want to verify that you have been working for at least the last two years, although it does not need to be for the same employer. If you have been a teacher in two different schools or districts, that is ok.
- Be Able to Afford Payments – A DTI (Debt-to-Income) ratio is something that often comes up when you are working on qualifying for a mortgage. In the case of an FHA guarantee, your mortgage payment should not be more than 35% of your total wages before taxes. In addition, your total debt should not be not more than 48% of your earnings. If your income isn’t going to cut it, you will need to work on paying off some debts.
- Save for Down Payment – While the FHA loan guarantee reduces your down payment dramatically, you will probably still need to add to your savings to make the 3.5% down payment. If your credit score is less than 580, your down payment will probably jump to 10%. There are also other closing costs at closing that you should discuss with your real estate agent or mortgage broker.
- Establish Your Credit History – Your private lender will check your credit history. If you do not pay your other debts on time, it will make it harder to get the loan. While the credit score minimum for the FHA home loan guarantee is 580, your lender might want something higher. If you have a low credit score, make sure that your preferred lender accepts that score. If you do not know your credit score, you can use online resources to look it up.
- Know Your Loan Limits – FHA loan guarantees have limits on the loan amount you can borrow. Most conventional loans don’t. The home price range for an FHA approved loan will vary county by county, but their loan limits range from $420,680 and $970,800.
- Get a Home Appraisal – Both the FHA and your private lender want to make sure the house you are buying is worth what you are paying for it. The FHA will send one of its approved appraisers to look at the home and evaluate the financial value of the property. An appraisal is different from an inspection. The inspection is for your safety and to make sure you don’t end up in a money pit. The inspector will dig, literally and figuratively, into the house and all its elements: plumbing, wiring, HVAC, structure and more.
Helping Teachers with Reduced Lender Fees
Homes for Heroes puts together a team of real estate professionals to help you find a home, sell a home or refinance your home. Our mortgage specialists are committed to helping community teachers, and other school employees in the education field. Our teams understand the ins and outs of FHA loans for teachers and will work with you – from initial searches all the way to closing. After you close, you will receive a Hero Rewards check, which averages about $3,000 for teachers, educators and our other qualifying hero groups.
To get started, sign up today and Homes for Heroes will connect you with local specialists in your area. Those specialists will be able to answer your questions, discuss whether the FHA home loan is right for you, and put you on the right path toward home ownership.
Blogger’s Footnote: The FHA Good Neighbor Next Door program isn’t technically a loan, but it is an initiative sponsored by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration. One of its goals is to make the home purchase more affordable for: Teachers and First Responders.
The houses available to Good Neighbor candidates are reduced in price by 50%. That’s a tremendous deal to get half off the purchase price for these homes.
So what’s the catch? The homes in the Good Neighbor Next Door program are in community revitalization areas as identified by HUD. That means they are in a targeted area where:
- The household income is lower than average.
- Homeownership is lower than the nearby areas.
- FHA mortgage foreclosure activity is higher than the surrounding community.
These neighborhoods need both economic and community development, and one way to do that is make foreclosed properties available to heroes at a deeply reduced list price of the home. If you get one of these homes, you will agree to live there for at least three years. Might be worth considering if you’re looking to purchase a home, as it’s another great way to save good money. And, in addition, you still qualify for the saving Homes for Heroes offers too! Sign up today to speak to member of our team about how we can help you get into a new home, and how we can save you some money in the process.