Thousands of California residents buy houses every year. However, most cannot afford to pay cash for those properties, so they take out home loans instead. The most popular loan product on the market is a conventional loan, which is not always accessible to all prospective homebuyers as a financing option. This is especially true for marginalized borrowers, who may face significant hurdles such as low credit scores and little to no savings when attempting to purchase their first property.
If you have a less-than-perfect credit score or limited income, conventional loans could be beyond your means for home financing. Fortunately, there is a type of loan that is more accessible and can help you achieve your dreams of homeownership. If you cannot meet the qualifications needed for conventional loans, then your best option is an FHA loan.
What Are FHA Loans?
California FHA loans have less stringent eligibility criteria than conventional mortgages. These loans are backed by the Federal Housing Administration (FHA), a branch of the US Department of Housing and Urban Development (HUD). Through this initiative, mortgage lenders can relax some of their standards for loan qualification. With the government’s backing, lenders face less risk, enabling more borrowers to purchase homes with FHA loans.
Federally-backed mortgage products, including FHA mortgages, have been an essential way to close the homeownership gap for marginalized communities. About 30% of all FHA products go to BIPOC individuals, which is much higher than for conventional mortgages; in the last three years, a quarter of a million Black homeowners have achieved their dreams thanks to HUD.
The HUD has also been an essential ally in supporting LGBTQ+ individuals, amending the Fair Housing Act so that lenders cannot discriminate on a person based on their actual or perceived gender or sexual orientation. Their advocacy spans all the way back to 2012, before gay marriage was legalized nationwide, when they insisted that FHA lenders cannot use gender identity or sexual orientation as a reason for mortgage denial.
An FHA loan is ideal for a borrower with credit score limits, fewer funds for a down payment, or more outstanding debts. If you cannot afford the purchase price of a home because of the stricter requirements of a conventional loan, then California FHA loans are the solution.
Benefits of Federal Housing Administration Loans in California
Why pursue an FHA loan rather than a conventional loan? The answer depends on your financial situation. Conventional loans are more challenging to qualify for, but you can still purchase a home if you meet the requirements for FHA loans. Here are some of the benefits of the FHA loan program in California.
Lower Credit Score Requirements
Lower credit scores are very impactful in terms of personal finances. Your credit score tells lenders and creditors how reliable you are at paying back debts such as car loans, student loans, and credit cards.
The minimum credit score requirements for most conventional loans are slightly higher than for FHA loans. That means if the borrower’s credit score is not high enough for a traditional mortgage, they could still qualify for an FHA loan.
These more relaxed requirements are part of the reason that FHA loans are so popular with borrowers of color, who face systemic barriers to accessing credit and developing their scores. As an example, conservative estimates claim that about 15% of Black and Hispanic consumers are credit invisible, compared to just 9% of White and Asian American consumers. Other estimates put this as high as 28% for Black Americans and 26% of Hispanic Americans. Having no credit history can make it impossible to apply for loans, and it takes time to build up your credit, so lower score thresholds can enable borrowers of color to access financing faster.
LGBTQ+ individuals are also twice as likely as their peers to report poor credit, which could shut them out of conventional financing options. This is even more common for transgender people who have changed their name or gender marker; old information, including their deadname and former gender marker, can cause discrepancies in their credit reports. As such, they may benefit greatly from more relaxed requirements, especially if they have good savings.
Small Down Payment Options
It can be difficult to save up for a larger down payment. Conventional lenders often recommend that prospective borrowers save up to 20% of the home’s purchase price when applying for a home loan, as this would eliminate private mortgage insurance. Repeat borrowers for conventional loans have a minimum 5% investment.
If you struggle to reach that threshold, you may need a lower minimum down payment for your loan. FHA loans require lower down payments to reduce the upfront costs of buying a house. This comes in handy when you consider the addition of closing costs and other fees.
Competitive Interest Rates
The mortgage rate on your loan determines how expensive it is to borrow that money. Higher rates mean higher monthly payments and a greater total loan cost. An FHA-approved lender like Pride Lending can offer lower interest rates, which help reduce your monthly payments and the overall cost of owning your home.
Flexible Underwriting Guidelines
Underwriting refers to the process of a lender evaluating the borrower’s credentials. For a conventional mortgage, underwriting may be automated to weed out everyone who does not match the eligibility requirements. FHA lenders are far more flexible with their underwriting guidelines to help more buyers afford homes with FHA loans. This flexibility allows for more exceptions with some general FHA loan requirements.
Assumable Mortgages
An assumable mortgage is a home loan that a new owner takes over from the previous owner. Most conventional loans do not allow for this option. However, if the current owner of the home you want has an FHA loan, you can simply inherit that loan, along with the property. You still have to go through the FHA loan application process, but the upfront costs are significantly reduced, and you can take advantage of the previous owner’s better interest rate.
FHA Loan Requirements
California FHA loan requirements may differ from lender to lender, but these are generally the requirements needed to qualify for an FHA loan:
Minimum Credit Score
Lower credit scores do not disqualify everyone from being able to afford a house. FHA loans have more flexible credit requirements with the understanding that a low score is not always indicative of a risky borrower. While the typical credit score minimum for an FHA loan is 580, exceptions are often made based on other criteria, even if your score is as low as 500.
Down Payment Amount
With a lower down payment requirement of just 3.5% for those with a score of 580 or more, the upfront cost of buying a house is significantly reduced. Buyers with a score between 500 and 579 will need to provide 10% upfront.
Given that the average home sales price in California is $784,989 and continues to rise precipitously every year, even a well-qualified borrower will need to put down about $27,500 on their home. This can feel impossible, especially for marginalized individuals who already make less than their peers; for example, LGBTQ+ workers make 89 cents on the dollar to that of their cishet peers, and the pay disparity is even higher for people of color. The average Black woman makes just 66% of what a White man does, and pay disparities begin as early as 16 years old for people of color.
Thankfully, Pride Lending is here to help you find funding that allows you to pay this significant investment. We’ll connect you to local, state, and national down payment assistance programs that offer grants and second loans for your needs.
One such example in California is the MyHome Assistance Program from the California Housing Finance Agency, which provides deferred-payment second liens up to the lesser of 3.5% of the purchase price or appraised value. This would entirely cover the down payment for a borrower with a 580 score or better, and you can always add your own funds to help secure a better interest rate and lower your monthly mortgage payment.
Debt-To-Income Ratio (DTI)
Your debt-to-income ratio is calculated by dividing your total monthly debts by your gross monthly income and multiplying that by 100. This gives you a percentage. Often, the maximum DTI for an FHA loan is 43%. Some private lenders will consider borrowers with a DTI as high as 57% if they have funds saved for a sizable down payment or strong credit score.
Given that BIPOC individuals and LGBTQ people are more likely to have significant debt payments because of discrimination or lack of family support, these more generous thresholds can prove an essential part of getting access to funding. For example, Black scholars have the highest student debt burden, and LGBTQ+ individuals are more likely to report that debt payments are their most significant financial stressor. High DTI thresholds can enable them to access financing that would otherwise be impossible.
Property Standards
FHA loans are only approved if the properties meet specific standards. Most of those standards are related to the safety of the house and its livability. However, homes purchased with FHA loans must also serve as primary residences for the borrowers, so they cannot be investment properties or vacation homes. This is all determined with an FHA appraisal and inspection.
Mortgage Insurance Premiums (MIP)
Since FHA loans are a little riskier for lenders, they usually require mortgage insurance. This can come as an upfront mortgage insurance premium and monthly mortgage insurance payments when you close on the house. Mortgage insurance protects lenders from borrowers who are at greater risk of default.
Your upfront mortgage insurance premium is 1.75% of the loan amount, while the ongoing MIP depends on how much you put down. Those who put down less than 10% will pay 0.55% of the total amount annually, and they will have MIP for the entire term of their loan, while those who put down 10% or more will have an 0.5% annual premium that will drop off after 11 years. You can also refinance into a conventional mortgage after you’ve built up 20% equity, eliminating private mortgage insurance entirely.
California FHA Loan Limits
FHA loan limits set a maximum amount for borrowing based on each real estate market. For example, the FHA loan limit in urban counties is usually not the same as in rural areas because of the varying prices of homes. The FHA loan limits also change based on the type of home you buy, such as single or multi-family homes. Here are the loan limits for single-family homes across a few of California’s largest counties.
- Los Angeles County – $1,149,825
- San Diego County – $1,006,250
- Orange County – $1,149,825
- Riverside County – $644,000
- San Bernardino County – $644,000 [2]
The FHA Loan Process
The FHA loan process involves several key actions, from determining your eligibility to closing on your new home. Here are the steps you will follow to acquire your FHA mortgage.
- Assess the eligibility requirements – Evaluate your eligibility for an FHA mortgage by reviewing the requirements, including the minimum credit score, maximum debt-to-income ratio, and down payment criteria.
- Contact Pride Lending – Choosing the best lender for your needs will make it easier to get FHA loans. We’ll identify the best loan options for your needs during your initial loan consultation.
- Submit your details – Fill out our simple application and provide all the necessary documentation to get pre-approved, which will help you understand your purchasing limits. You’ll provide information like tax returns, pay stubs, bank statements, and a list of your debts.
- Get pre-approved and start shopping – Preapproval, while not strictly necessary, makes it much easier to stand out in a competitive market like California. Once we’ve determined your tentative loan amount, we’ll provide you with a preapproval letter you can give to your lender as you start searching for your dream home.
- Submit an offer – Once you’ve found the right place, you and your realtor will work together to submit an offer to the seller.
- Complete the Uniform Residential Loan Application – All FHA products use the same loan application, which includes many of the details you provided to us after your loan consultation. However, it also includes information regarding the property itself, which the lender will use to determine if it is a good investment.
- Offer acceptance – Congratulations! The seller has accepted your offer, and you’ll sign a sales contract. Now you and your realtor can schedule an inspection to determine whether everything is safe.
- Inspection – While this is not necessary as part of the FHA process itself, your lender will likely require it. An inspector will check that the home is safe and does not have any major issues. If anything is amiss, you and the seller will decide what needs to be fixed and who is responsible for paying for it.
- Conditions – Whether you’re happy with the inspection results or have some concerns, we’re here to help. Our team will review the sales contract and ensure that there are all the conditions necessary for a smooth sale.
- Begin underwriting – Now, we’ll send over everything to your lender. This begins the process of underwriting, which is handled by the mortgage company. They will review all the details of your application, the inspection, and the property details to make sure that everything is correct and your purchase represents and acceptable level of risk.
- Property appraisal – An FHA-approved professional will inspect the property to ensure it meets all the government standards for an FHA loan.
- Clear to close – “Clear to close” means that the mortgage company has approved your application and you’re all set to go. We will schedule the closing date with you, and the title company will send you information on how you can transfer your upfront expenses.
- Closing day – Once the closing date arrives, all documents will be signed, and the financing will be provided so you can buy your next California home with an FHA mortgage. As soon as the title is transferred, you are officially a homeowner.
Why Choose Pride Lending for Your California FHA Loan?
When you need FHA loan experts on your side, Pride Lending is the ideal solution. We provide service to everyone, no matter their identity, and are passionate about helping those who may feel marginalized by the mortgage industry. Our team is composed of allies and members of minority communities, which includes LBGTQ+ and BIPOC individuals; we’re here to help anyone who needs an advocate as they go through the home-buying process.
Our commitment to excellent customer service and streamlined application process makes determining your maximum loan amount for a primary residence easy.
Whether you have questions about your credit score, the monthly mortgage payments, down payment goals, or what it costs to have the mortgage insured, we are ready to provide the answers. Call our team today at 725-231-0192 to discuss your FHA loan amount.
