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California FHA Home Loan

The benefits of a California FHA home loan are numerous, and in this article, I’ll give you all the inside information you need to get the best possible terms on your next transaction. You’ll learn about California FHA home loan requirements, loan programs, loan limits, and more.

What You’ll Learn In This FHA Home Loan Article

  • What is an FHA Loan?: Knowing the essentials of an FHA home loan will help provide a better experience and ultimately save you money. We cover all the necessary FHA home loan items you need to know and explain why they’re essential to you.
  • FHA Loan Programs: Did you know there is more than one FHA home loan program? In this section, I break down the various California FHA home loan programs homebuyers and current homeowners have access to.
  • FHA Loan Requirements: Not every property and situation qualifies for an FHA loan. Here we’ll discuss what a California FHA loan can be used for and how to best utilize its features to save you money on your next transaction.
  • California FHA Loan Limits: There are limits to your loan amount with FHA. The limits in California are higher than in some other states due to our higher home values, which is a nice bonus.
  • FHA For First-Time Homebuyers: The good news is that FHA home loans for first-time homebuyers are generally easier to qualify for than conventional programs. Some underwriting guidelines impact first-time homebuyers you should be aware of before you complete an FHA loan application.
  • FHA Loan For Bad Credit: If you have a low credit score, then the FHA home loan program might be for you. A California FHA home loan for bad credit borrowers is a great way to secure a great rate on your next home loan transaction.
  • California FHA Loan Rates: Check out current California FHA home loan rates. For a free quote on your specific loan scenario, please get in touch with Loan Officer Kevin O’Connor at 1-800-550-5538.
  • FHA Mortgage Insurance Removal: Here’s a quick review of your options for getting FHA mortgage insurance removed.

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What is an FHA Loan?

An FHA home loan is a specific type of residential mortgage that a borrower can use to either purchase a home or refinance a current mortgage attached to a home they already own. The federal government backs FHA home loans, and FHA mortgage rates differ from other programs, including Conventional and Jumbo loans.

An FHA home loan has an “Upfront Mortgage Insurance Premium,” and the monthly payment has “Mortgage Insurance.” Below is a basic overview of FHA home loan Upfront Mortgage Insurance Premium and FHA Mortgage Insurance, and later in the article, I will go into more detail.

  • Upfront Mortgage Insurance Premium (UFMIP): FHA charges a fee on all FHA home loans. You either pay the fee at closing (along with other closing costs), or it’s built into your FHA home loan rate.
  • Mortgage Insurance: The FHA home loan Mortgage Insurance (MI) fee is added to your monthly payment. This fee is an insurance policy in case you default on the loan.

The Federal Housing Administration (FHA) is the agency that oversees the FHA home loan program. The government agency is also responsible for “guaranteeing” FHA home loans which is the distinct feature that separates it from other home lending programs available in California.

If the borrower defaults on an FHA loan, the Federal Housing Administration will reimburse the mortgage lender for the losses associated with the default.

The FHA does not lend money directly to consumers; only banks and lenders provide funding under the FHA loan program. Banks and lenders that provide FHA loans avoid taking on the higher risk due to the FHA insuring the loan against default.

This allows home loan lenders to take more of a chance on borrowers who otherwise might not be able to get a home loan. The FHA loan program has been a big part of the California housing market for decades.

Historical FHA Home Loan Facts

  • The Federal Housing Authority (FHA) originated out of the economic hardships of the Depression.
  • The National Housing Act of 1934 (part of the New Deal) was the foundation of the Federal Housing Authority.
  • FHA has insured over 47 million homes since 1934
  • After World War II, FHA helped finance housing for returning veterans and their families.
  • In 1965 Congress passed the Department of Housing and Urban Development Act which made HUD a Cabinet-level government agency.
  • FHA has nearly 8 million single-family mortgages in its portfolio (as of 2019).

Source: hud.gov

What can an FHA home loan be used for?

The program can be used for purchasing or refinancing residential property nationwide. A borrower can do a cash-out refinance, a refinance to lower their interest rate, or a refinance to reduce the loan term from a 30-year fixed to a 15-year fixed.

It can be used to improve the property as well. This means you can use the home repair program to buy a home and receive extra money to help improve the home.

The program can also be used for refinances as well (more about the program later on in the article).

California FHA Loan Programs

Here are the three main FHA home loan programs.

Regular FHA home Loan Program: This loan program can be used for purchases and refinances, and the standard rates and guidelines apply.

FHA Home Repair Program: The FHA 203(k) program (home repair) is a great way to purchase a property that needs work and some extra money to make renovations. The unique program allows you to receive up to an additional $35,000 to make these repairs.

Since you are borrowing more than the home is worth, there is a minimum credit score you need to qualify for the FHA 203(k) loan, which is 640. This loan can also be used for refinances as well.

FHA Streamline Home Loan Refinance: The FHA Streamline program is fantastic, and if you have an FHA loan and plan on refinancing into one, this loan program is definitely for you.

Here is some additional information about the FHA Streamline Refinance Program requirements.

  • You must currently have an FHA loan attached to your home
  • It must be at least 201 days since you last closed your current FHA mortgage
  • Interest rates must be lower
  • You must be current on your mortgage payments
  • You need a 620 or higher credit score

Here Are The Main Highlights

  • No Credit Check
  • No Income Verification
  • No home Appraisal
  • No LTV limitations since you don’t
    need an appraisal
  • Lower your interest rate

As you can see, this is a great program and is only available to those with an FHA loan.

California FHA Loan Requirements

Here are the details about current California FHA home loan requirements in 2023.

FHA Mortgage Insurance Is Required On All FHA Home Loans

“Mortgage Insurance” (aka MI) was previously mentioned in this article, and now I’m going to go into detail about what exactly is FHA Mortgage Insurance. Simply put, it’s an insurance policy you pay each month that covers a lender’s losses if you default on your FHA loan.

How Do They The Figure Out The Cost Of MI?

There is a formula they use to figure out your monthly FHA MI cost:

LTV>15 yearsLTV<= 15 years
>95%0.85%>90%0.70%
<=95%0.80%<=90% 0.45%

This is the standard formula. So for a $200,000 loan amount, 30-year fixed term, and an LTV of 95% or less, your monthly MI cost is $133.34 per month (200,000 x 0.80% = 1,600/12 (for 12 months) = $133.34 per month).

And What Is UFMIP?

UFMIP stands for Up Front Mortgage Insurance Premium. This is the amount you pay on the origination of the new FHA home loan to FHA. It’s part of the Mortgage Insurance program mentioned above.

The UFMIP is usually rolled into the loan, or sometimes the interest rate is increased to cover the upfront cost of UFMIP – very rarely would someone pay out of pocket to cover the cost of the UFMIP. This is for all FHA home loans.

FHA Credit Score Requirements

FHA does not have a general credit score requirement like conforming loans however, nearly all lenders have what’s called an “overlay” when it comes to credit scores and obtaining an approval for an FHA home loan.

Before we get into that, in certain instances, there are FHA credit score requirements when it comes to the amount you need for a down payment or if you’re doing an FHA streamline refinance (more on these topics later in the article).

Back to what a lender “overlay” is: An “overlay” is an additional requirement the lender adds to the basic FHA loan requirements. Not only do lenders have overlays, but lenders in each state have them as well.

Remember, the FHA does not make the loan – lenders do. That being said, when it comes to down payments, the program does have some basic credit score requirements.

What Are The Minimum Credit Score Requirements?

To be able to put 3.5% down on a purchase, a borrower must have a 580 or higher credit score. If the credit score is 579 or below, the borrower must put down 10%. This is a standard requirement.

What Are The Lender Overlay Requirements?

Most lenders will go down to a 580 credit score, and some lenders will go below a 580 credit score on a case-by-case basis. 

If you are considering the program to buy a home (or refinance a current loan) and you believe you have a credit score below 580, you’ll want to discuss this with the Loan Officer directly when you request a quote.

And a general rule of thumb; being open with your Loan Officer allows for better advice; it could save you money and provide for a much smoother process.

Employed or Self Employed

If you are a W-2 employee, you’ll want to gather your most recent two years of W2s and your two most recent pay stubs. If you have rental property; or a side business, you’ll want to gather the last two years of tax returns. If you are self-employed you’ll want to gather the last two years of your most recent tax returns.

FHA Home Loan Income Requirements

For W-2 employees, you will be required to provide your W-2 for the two most recent years. For Self-Employed borrowers, the FHA home loan income requirements are a bit different. You must provide two years of tax returns (personal and business).

One of the great features of doing an FHA home loan is the flexible income requirements associated with the program. The benefit of this is that it allows a homebuyer or a homeowner to qualify for a home loan they normally would not qualify for under traditional programs.

FHA Debt-To-Income Ratio Requirements

The “back end” debt-to-income ratio for FHA is 43%; however, you can obtain approvals for limits as high as 50%. What does “back-end” mean? That means your total debts (mortgage, cars, credit cards, student loans, etc.) are compared to your total gross income (W2) or your business net income (self-employed).

The FHA program is ideal if you have a low credit score and a debt-to-income ratio above 40%.

Your Spouses Debts

With FHA home loans, you have to include your spouse’s debts on the application, even if the spouse is not a listed borrower on the application. That is different from conforming programs where if your spouse is not on the application, then the debts attached to the spouse are not considered when calculating debt-to-income ratios.

Impounds Are Required With An FHA Home Loan

What are impounds? When your mortgage payment is “impounded, ” your property tax payments and homeowner’s insurance payments are included with your mortgage payment.

Although it is a requirement, it’s actually a nice thing to have so that you don’t have to pay a lump sum for your property taxes or your property insurance when they are due.

When the mortgage payment is impounded, the mortgage company will collect an amount each month from you so that they can make the lump sum payment when it’s due.

Previous Foreclosure

If you previously owned a home and were foreclosed upon, you’ll have to wait at least three years from the foreclosure date unless there are extenuating circumstances that you can prove. If that is the case, the waiting period is less than three years.

FHA Home Loan And A Previous Bankruptcy

If you previously filed for Bankruptcy, you’ll have to wait two years (if it was a Chapter 7 Bankruptcy) before obtaining an FHA loan. If you filed a Chapter 13 Bankruptcy, there is no waiting period after the Bankruptcy has been settled. And if you are currently in the middle of a Chapter 13 Bankruptcy, you still may be able to do an FHA loan.

Not all home loan lenders allow this; many have an overlay regarding Bankruptcy.

FHA Property Requirements

Here is a simple breakdown of the FHA property requirements.

  • Residential Property Only: The FHA loan program only allows for residential property; land, commercial and industrial property are not allowed under the FHA residential loan guidelines.
  • Primary Residence: If you are buying a home or refinancing a home you currently own and want to obtain an FHA loan, the home needs to be your primary residence. It can not be a non-owner occupied property. But guess what; there is a way to buy a home with renters with an FHA loan – more on how to do this below.
  • Down Payment or Equity: The FHA loan program requires at least a 3.5% down payment or 96.5% equity if your credit score is 580 or higher. If your credit score is 579 or below, a 10% down payment is required when buying a home or 90% equity when refinancing a home.
  • Appraisal Requirements: If you are buying a home you’ll have to do an appraisal as part of the approval process. If you currently have an FHA home loan and want to refinance you may not have to do an appraisal (more on that below).

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Types Of Property Allowed

As mentioned above FHA loans can only be used for owner-occupied residential properties. That includes the following types of properties; Single Family Residences, Condominiums, Townhomes, and 2-4 unit properties (provided you live in one of the units).

And remember I previously mentioned that you could buy a home with renters? Well, this is how you do it; buy a multi-unit property and live in one of the units.

So if you buy a three-unit property, live in one of the units, and have two rental units. Because you live there, FHA still considers this an owner-occupied property, so it’s eligible for FHA financing. This is a great feature for homeowners in California where multi-unit properties exist in large numbers.

This California family got an FHA home loan

California FHA Loan Limits

Here are the current and previous years’ California FHA home loan limit amounts.

2023 FHA loan limits in California

  • $472,030 (baseline limit)
  • $1,089,300 (high-cost counties)

2022 FHA loan limits in California

  • $420,680 (baseline limit)
  • $970,800 (high-cost counties)

2021 FHA loan limits in California

  • $356,362 (baseline limit)
  • $822,375 (high-cost counties)

2020 FHA loan limits in California

  • $331,760 (baseline limit)
  • $765,600 (high-cost counties)

2019 FHA loan limits in California

  • $314,000 (baseline limit)
  • $726,525 (high-cost counties)

2018 FHA loan limits in California

  • $294,515 (baseline limit)
  • $679,650 (high-cost counties)

So if you’re buying a home and you want an FHA mortgage make sure you either buy a home that fits the FHA home loan limit or have enough money to put down to ensure the amount you’re borrowing is at or below the limit.

But What About The Up Front Mortgage Insurance Premium (UFMIP); How Does That Fit In?

Excellent question! UFMIP does not count toward your loan limit nor does it count against your Loan-To-Value ratio limit as well. This is a great feature, especially when buying a new home.

FHA For First-Time Homebuyers

There are a lot of great programs for first-time homebuyers and the FHA home loan first-time homebuyer program is one of the best.

It’s a perfect fit for clients with a small down payment and/or a credit score below 700. Easy approvals and an easy loan process make the FHA home loan for first-time homebuyers a great option to consider.

A few of the key underwriting guidelines you should remember are;

  • FHA Home Loan Gift Funds: You can receive a gift from a relative, friend, or even your employer for your downpayment. These funds must be documented, and the donor must sign the gift letter. The letter needs to clearly state that the funds donated are a gift, and do not need to be paid back.
  • Credit Score and Your Home Loan Rate: Current FHA home loan guidelines allow someone with a 700 credit score to get the same rate as someone with a 780 credit score. This is a big win for people with less-than-perfect credit.
  • FHA Home Loan Funding Fee: You must pay the FHA home loan funding fee (aka Up Front Mortgage Insurance Premium, or UFMIP). As previously mentioned, it’s either charged directly to you at closing or built into the home loan rate.

FHA Loan For Bad Credit

Just because your credit score is low doesn’t mean you can’t get approved for a new home loan. An FHA home loan for bad credit borrowers will allow someone with a low credit score to obtain financing.

And the good news is this; even though you have bad credit, you’ll have the same underwriting requirements as someone with good credit. And rates are the same unless your score is below 660. At 659 or lower, you might see a slightly higher rate however the move higher is not too significant.

An FHA loan for bad credit allows for a credit score as low as 580 and your downpayment requirements are still minimal!

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California FHA Loan Rates

For over 17 years my team and I have delivered low FHA home loan rates in California along with fast closings and industry-leading customer service.

Loan TermRateAPR
30yr Fixed RateCall For Quote
15yr Fixed RateCall For Quote
02/02/2023 assumptions

Our client-first approach to the FHA home loan process means we’ll listen first and find solutions to meet your home loan needs. Contact Loan Officer Kevin O’Connor today for a no-cost/no-obligation quote and see what makes us different. 1-800-550-5538.

FHA Mortgage Insurance Removal

If you obtained your FHA loan on or after June 3, 2013, here are your possible options for removing Mortgage Insurance(MI). If your original LTV was higher than 90%, you would have to pay the MI amount for the entire life of the loan.

To get rid of it you’ll have to either refinance the loan or sell the property to pay off the loan.

If your LTV was 90% or less you’ll have to pay mortgage insurance for the entire term or 11 years (whichever is less). Generally speaking, most people have to refinance to get rid of FHA Mortgage Insurance even those that originally had at least 10% equity.

The reason is you probably don’t want to stay on an FHA loan for 11 years, other opportunities should open up for better terms in less than 11 years.

Is an FHA Loan Right For You?

The answer is yes for first-time homebuyers with a low credit score and/or a small down payment. The benefits of an FHA loan are significant and the program has helped millions of Americans buy their first home.

The FHA loan program is also a good fit for those looking to refinance their current mortgage. The FHA Streamline refinance program is one of the best refinance programs in the industry. And if you are looking to renovate or remodel your home, the FHA 203k should be at the top of your list of programs to consider.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447