Home FHA Loans in NC: Requirements and Eligibility Explained

FHA loans are mortgage loans insured by the Federal Housing Administration (FHA). The FHA is part of the U.S. Department of Housing and Urban Development (HUD).

FHA loans were created in 1934 to help expand homeownership opportunities to a wider range of buyers. They allow people to buy a home with a low down payment and flexible credit requirements.

With an FHA loan, the down payment can be as low as 3.5% of the purchase price. The FHA insures the loan, so lenders can offer more favorable terms to buyers. If the borrower defaults, the lender will get compensated for losses by the FHA.

FHA loans have helped millions of buyers, especially first-time homebuyers, veterans, and moderate-income families to purchase homes. They remain a popular financing option today.

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The key features of FHA loans include:

• Low down payment requirements
• Lenient credit score requirements
• Fixed and adjustable rate mortgage options
• Ability to finance closing costs into loan

FHA loans can be used to purchase primary residences as well as investment properties. The FHA sets guidelines and requirements for its loan programs that lenders must follow.

FHA Loan Benefits

FHA loans offer several key benefits for homebuyers in North Carolina:

Low Down Payment

One of the biggest advantages of an FHA loan is the low down payment requirement. FHA loans only require a 3.5% down payment for qualified buyers. This makes it much easier for first-time homebuyers to afford the down payment compared to conventional loans which often require 20% down. With an FHA loan, buyers can get into a home with a much lower upfront cash investment.

Flexible Credit Requirements

In addition to low down payments, FHA loans also have more flexible credit standards than conventional mortgages. They are a good option for those with lower credit scores or some credit challenges in their history. The minimum FICO credit score for an FHA loan is just 580 compared to 620 or higher for many conventional loans. While guidelines still apply, the FHA is more lenient towards past issues such as foreclosure, bankruptcy, and collections if you have re-established good credit since those events.

FHA Loan Requirements

To qualify for an FHA loan in North Carolina, there are a few key requirements you’ll need to meet:

Minimum Credit Score

The minimum credit score for an FHA loan is 580. If your credit score is between 500-579, you may still qualify but will need a down payment of at least 10%. With a credit score of 580 or higher, you can qualify for 3.5% down.

Some lenders may have higher credit score requirements, so be sure to check with the lender. They will review factors like your payment history, amounts owed, length of credit history, types of credit, and new credit inquiries. Keep in mind that the higher your credit score, the better interest rate you can qualify for.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio compares your total monthly debts with your gross monthly income.

FHA loans require a maximum DTI of 43%. This includes your proposed mortgage payment, along with other debts like credit cards, student loans, auto loans, child support, and alimony. Staying under 43% shows lenders you can comfortably afford the new mortgage payment.

Lenders may approve DTIs up to 50% with certain compensating factors like significant cash reserves or other assets. But it’s best to aim for 43% or lower.

Cash Reserves

FHA does not require a specific amount of cash reserves. However, lenders typically want to see you have 2-6 months of mortgage payments available after closing. This provides a financial cushion in case of unexpected expenses or income disruption.

The more reserves you have, the better. Some lenders may require larger reserves for higher-risk applicants. It’s a good idea to have funds remaining even after your down payment and closing costs.

FHA Loan Limits in NC

The Federal Housing Administration (FHA) sets limits on the maximum loan amount that can be insured for FHA loans in different areas. This maximum loan limit varies by county and is typically higher in more expensive real estate markets.

In North Carolina, the current 2023 baseline conforming loan limit for most counties is $337,500 for a single-family home. However, some counties in NC are considered by the FHA to be “high cost” areas. In these high cost counties, the FHA loan limit is higher.

The current 2023 FHA loan limit for high cost counties in North Carolina is $513,000. This higher loan limit applies to the following counties:

• Brunswick County
• Buncombe County
• Burke County
• Cabarrus County
• Carteret County
• Catawba County
• Chatham County
• Currituck County
• Dare County
• Durham County
• Forsyth County
• Franklin County
• Gaston County
• Haywood County
• Henderson County
• Iredell County
• Jackson County
• Johnston County
• Lincoln County
• Macon County
• Madison County
• McDowell County
• Mecklenburg County
• Moore County
• New Hanover County
• Orange County
• Pender County
• Polk County
• Randolph County
• Rowan County
• Rutherford County
• Transylvania County
• Union County
• Wake County
• Watauga County
• Wilkes County

Homebuyers in these counties can qualify for FHA loans up to $513,000 due to the high home costs. This allows more buyers to utilize FHA financing to purchase homes. The higher FHA loan limits for designated high cost areas help increase affordable home ownership.

Down Payment Options

FHA loans allow for low down payments, making them popular with first-time homebuyers and those with limited funds for a down payment. Here are some key things to know about down payments for FHA loans in North Carolina:

Minimum Down Payment

• The minimum down payment for an FHA loan is 3.5% of the purchase price. So if you buy a $200,000 home, your minimum down payment would be $7,000.

Gifts

• The down payment can come from gifts from family members, employers, charitable organizations or government entities. Gifts do not need to be repaid. Make sure the gift is properly documented with a gift letter.

Grants

• There are some grant programs that provide down payment assistance, such as the NC Home Advantage Mortgage program. These programs provide a grant equal to 5% of the mortgage amount that goes towards your down payment and closing costs.

Seller Contributions

• The seller can contribute up to 6% of the home’s purchase price towards the buyer’s closing costs and prepaid items. This can help reduce the amount of cash needed at closing. The 6% limit includes both the seller contribution and any interested party contributions.

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Mortgage Insurance

FHA loans require mortgage insurance, also known as MIP (mortgage insurance premium). The mortgage insurance protects the lender in case the borrower defaults on the loan.

There are two types of MIP:

• Upfront MIP – This is a one-time fee usually financed into the loan amount and paid at closing. The upfront MIP is 1.75% of the base loan amount.

• Annual MIP – The annual MIP is an ongoing monthly premium added to the mortgage payment. The annual MIP is 0.85% of the base loan amount.

On a $200,000 loan amount, the upfront MIP would be $3,500 (1.75% of $200,000). The monthly annual MIP would be around $142 ($200,000 x 0.85% / 12 months).

The annual MIP payments last for the life of the loan or until the principal balance reaches 78% of the original purchase price. At that point, the annual MIP can be canceled with a streamline refinance or by request.

Borrowers with higher credit scores and lower loan-to-value ratios typically have lower annual MIP rates. The FHA publishes an annual MIP chart each year.

In summary, FHA mortgage insurance protects the lender while allowing buyers to purchase with low down payments. The premiums add to costs but enable more flexible options.

Credit Score Requirements

To qualify for an FHA loan in North Carolina, you’ll need a minimum credit score of 580 to qualify for the low down payment advantage. However, the higher your credit score, the better the loan terms you’ll be able to qualify for.

The FHA looks at your entire credit report, not just your credit score number. They want to see that you have a history of managing credit responsibly. Late payments, collections, judgments, or other major issues in your credit history can affect your eligibility even if you meet the minimum score.

Some key credit score considerations for FHA loans include:

• Minimum score of 580 to qualify
• Credit scores of 580-619 may require a higher down payment
• Credit scores above 620 qualify for the best rates/terms
• All credit report factors are reviewed, not just the score
• Length of credit history is considered
• Mix of credit types (mortgage, auto, credit cards, etc) ideal
• Recent late payments or collections can affect eligibility

Work on boosting your credit score and maintaining positive credit behaviors if your score is on the lower end. A credit score of 620 or higher will open up better FHA loan options. But even lower scores can qualify with strong compensating factors in other areas.

Debt-to-Income Ratio

The debt-to-income (DTI) ratio is a key factor lenders consider when approving borrowers for an FHA loan. The DTI ratio compares your total monthly debt payments to your gross monthly income.

FHA guidelines state that your maximum DTI ratio should be 43%. This means your total monthly debt payments, including your proposed mortgage payment, should not exceed 43% of your gross monthly income.

To calculate your DTI:

• Add up all of your monthly debt payments, including:
  • Proposed new mortgage payment
  • Credit card payments
  • Student loan payments
  • Auto loan payments
  • Child support
  • Alimony
  • Other debts
• Divide this total by your gross monthly income
• The resulting number is your DTI ratio

Keeping your DTI at 43% or lower will improve your chances of qualifying for an FHA loan. If your DTI is higher than 43%, you may need to pay down debts or increase your income to meet the requirements.

Work closely with your lender when applying for an FHA loan to accurately calculate your DTI ratio. Providing complete information about your income, debts, and assets will help ensure your DTI allows you to qualify.

Cash Reserves

To qualify for an FHA loan in North Carolina, you must have sufficient cash reserves available after closing. Cash reserves refer to your liquid assets minus any funds required for the down payment and closing costs.

FHA guidelines require at least 3.5% of the loan amount in cash reserves for qualified borrowers. However, many lenders prefer to see higher reserves.

The main sources of reserves include:

• Checking/savings accounts
• Money market accounts
• Certificates of deposit (CDs)
• Stocks/bonds
• Retirement accounts
• Gifts from relatives

Lenders want to see you have adequate savings to handle mortgage payments if you face financial hardship. Higher reserves also indicate you can responsibly manage your finances.

Work on building your reserves well in advance of applying for an FHA loan. Lenders will verify your assets by requesting recent bank statements and other documentation. Make sure you have enough in liquid reserves to meet FHA requirements before submitting your loan application.

Other Considerations

When applying for an FHA loan in North Carolina, there are a few other important factors to keep in mind beyond the basic requirements:

Home Inspection

The property you wish to purchase with an FHA loan must pass a home inspection from a FHA-approved inspector. The inspection looks for any structural or safety issues that need to be addressed. If issues are found, the seller typically has to fix them before closing.

Appraisal

An appraisal of the home needs to be completed to ensure the sales price is in line with the property’s fair market value. The appraisal is done by a FHA-approved appraiser. If the appraisal comes under the purchase price, the loan amount will be based on the appraised value.

Non-Occupant Co-Borrowers

Non-occupant co-borrowers are allowed on FHA loans in North Carolina. This means that a family member or someone else can co-sign the mortgage without living in the home. Their income can be used to qualify for a larger loan amount. The non-occupant co-borrower has equal legal responsibility for repaying the loan.