Home buyers in Tennessee and across the country have no shortage of home loan programs to consider. One of the most popular is the Federal Housing Administration program, FHA for short.
As is the case with most home loan programs, there are pros and cons to the FHA program.
Here's what you need to know about FHA loans in Tennessee, as well as five groups that should consider using the mortgage program.
What are FHA loans?
FHA loans are a type of mortgage loan insured and offered by the United States Department of Housing and Urban Development.
The program is intended to promote and encourage homeownership for Americans with lower credit scores and smaller down payments than may be required for other mortgage programs.
FHA loan requirements in Tennessee
The FHA mortgage program is sponsored nationally on a federal level, though individual states may have slightly different requirements.
In Tennessee, you'll typically need:
A down payment of 3.5%: You can always put down more if you want.
A credit score of at least 580: Those with credit scores of above 500 can still qualify, but a larger down payment may be required.
A debt-to-income ratio below 43%: Certain lenders may approve you with a DTI ratio up to 50%.
You'll also need to have a home appraisal completed and agree to utilize your new home as a primary residence for a minimum of twelve months.
Under the terms of the program, you'll have your pick between a fixed 15- or 30-year interest rate, meaning that your monthly payments will remain fixed for the entirety of your loan's term.
Related: First-Time Home Buying 101 Guide
FHA mortgage insurance premiums
Unfortunately, the FHA program doesn't just give you all of this extra financial flexibility for nothing. Since FHA buyers tend to be higher risk borrowers, program participants will encounter two different mortgage insurance fees:
An upfront mortgage insurance premium: 1.75% of the loan amount
An ongoing annual mortgage insurance premium: Your annual MIP could range between 0.15% and 0.75% of your loan amount.
FHA loans will no longer require PMI payments once you've paid back 22% of your loan balance.
FHA loan limits
Tennessee FHA loan limits that are established at the county level. These loan limits are established individually for four different types of properties:
Single-family homes
Duplex
Tri-plex
Four-plex
2023 loan limits in TN have established the limits for the majority of counties across the state between $472,030 and $1,089,300 for single family homes. More expensive areas, like Nashville, Murfreesboro, and surrounding suburbs will have higher loan limits for buyers looking to live in the area.
Not sure if an FHA loan is right for your Tennessee home purchase? We'll be happy to connect you with the perfect mortgage lender at no cost!
4 groups that should consider FHA mortgages
Just because FHA mortgages are available to hundreds of thousands of potential home buyers doesn't mean that they are right for everyone. In fact, in our experience, Tennessee FHA loans tend to work for five unique groups in particular:
First-time home buyers
Repeat buyers with limited savings
Those with lots of student loan debt
Buyers without extensive credit histories
1. First time home buyers
FHA loans are most often used by first time home buyers, both in Tennessee and across the country. And it is easy to see why!
If you've never bought a home and don't have a ton of cash to throw towards a down payment, then an FHA loan could be your best option. Just remember that you'll need to be prepared for those costly mortgage insurance premiums.
2. Repeat buyers with limited savings
Repeat buyers may also be a good fit for a Tennessee FHA loan if they have limited cash savings. Usually, when home buyers sell their home and look for a new one, they'll use some or all the proceeds from their last home to fund a new down payment.
But if you sold your last home at a loss, this may not be possible for you.
3. Those with lots of student loan debt
Student loan borrowers may also benefit from the FHA programs. Those with lots of college debt are more likely to have subpar debt-to-income ratios, which may disqualify them from taking a Conventional mortgage.
These borrowers that are otherwise prepared for homeownership may still pursue it through the FHA program.
Obviously, you'll want to make sure that you can comfortably afford the ongoing expenses that will result.
4. Buyers without extensive credit histories
Some buyers, me included, get a little later start in building a credit history. And while I still had enough time to build a long enough credit history before I bought a home, others aren't so lucky.
These buyers represent a great fit for the FHA program, as they won't be disqualified.
Tennessee's top FHA lenders
As we've alluded to, there is no shortage of FHA participating lenders in Tennessee. Among our favorites in 2023 include:
While lenders generally have to abide by the guidelines set by the Department of Housing and Urban Development, they are able to establish different minimum credit requirements to qualify for home financing.
Each of the lenders on this list has their own credit score requirement but will be close to the typical 580 credit requirement.
What to consider in picking an FHA lender
Whether any or all of these lenders are right for you depends upon what you're looking for. For example, are you looking for:
203k loans
Streamline refinancing
1. 203k loans
Some FHA lenders offer 203k loans, a variety of the traditional program, where borrowers can secure financing to not only buy their home, but also to renovate or remodel the home as well.
2. Streamline refinancing
Some FHA lenders also offer streamline refinancing, which allows homeowners to refinance their mortgages while also eliminating certain expenses such as home appraisals, and potentially even lower their PMI expenses.
Applying for a TN FHA loan
If you decide to pursue the FHA program, you'll need to follow a number of steps to complete the application (and ultimately the loan disbursement and closing process).
Once you select a lender to work with, whether it is one listed above or a local lender, you'll need to prepare to hand over lots of financial paperwork and account information as part of the mortgage approval process. This is not unlike the information you'll need to provide when applying for a Conventional mortgage.
You'll likely need most or all of the following documentation as a starting point:
Your social security number
A minimum two-year track record of stable income and employment
Employment verification and W-2 history
A number of recent paystubs
Housing information about your current home or rental
Financial statements for accounts you are using to fund a down payment
FHA loans in Tennessee do not carry a cash reserve requirement, meaning that you don't need to have a lot of cash savings in the bank.
After you submit all of your documentation, a loan officer will verify that your application is complete, before passing it on to an underwriter who will evaluate the risks involved with financing your home.
Typically, the entire process can be completed in about a month.
Are FHA loans are worth it?
We like and recommend FHA loans for these five groups, despite the high mortgage insurance fees. Here is why.
Imagine that you buy a home for $300,000. With a Conventional mortgage, you'd generally need to put down a minimum of $30,000 as a down payment (10% of the home's purchase price).
But with an FHA loan, you'll only need a 3.5% down payment, equal to $10,500 (as opposed to $30,000).
So even with the upfront 1.75% mortgage premium, which is assessed on your loan amount, rather than the home's purchase price, you'll be able to get in your home for under $16,000, rather than $30,000, plus closing costs.
Making the minimum down payment
But FHA loans are only worth it for those that plan on making the minimum 3.5% down payment. Here's why.
Buyers that make larger down payments will not materially save money on the mortgage insurance premiums they'll have to pay.
If you finance a $300,000 home purchase with an FHA loan, for instance, the normal 3.5% down payment will leave you with an upfront premium expense of $5,066. If you decide to put 7% down instead, your premium will still be nearly $4,900.
You would save less than $200.
Plus, doing so will leave you with less cash flow, making you more susceptible to any financial emergencies that may arise.
Conclusion
FHA loans can be of great assistance to buyers across Tennessee. This does not mean that they are perfect for everyone, though.
If you fall into one of the five groups we mentioned here, though, the chances are good that the program can make your home buying journey easier!
Would you consider taking an FHA mortgage? Tell me why or why not in the comments below!
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