How To Qualify For FHA Loan in Santa Cruz California (Santa Cruz County)

How To Qualify For FHA Loan in Santa Cruz California (Santa Cruz County)

Looking for an FHA Loan in Santa Cruz California?

FHA loans have been a flexible mortgage program that’s been around since the 1930’s and is protected by the Federal Housing Administration (FHA). Popular with first-time home-buyers, FHA mortgages require lower minimum credit scores and down payments than many commonplace loans.

How Does an FHA Loan Work?

Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a credit score of 580 or higher. The borrower’s credit score can be between 500 – 579 if a 10% down payment is made. It’s crucial to remember though, that the lower the credit score, the higher the interest borrowers will pay. Something also worth noting is that the FHA loan limits affect your FHA mortgage insurance – its just part of the FHA loan requirements.

The FHA program was created in response to the increase of foreclosures and defaults that happened in 1930s; to provide lending companies with sufficient insurance; and to help stimulate the housing market by making mortgages more accessible and attainable for people with less than stellar credit or a low down payment due to FHA mortgage limits in Santa Cruz, California. Essentially, the federal government insures loans for FHA-approved mortgage lenders in order to reduce their risk of loss if a borrower defaults on their home loan payments.

Because of that insurance, lenders can, and do, offer FHA mortgages at beneficial mortgage loan interest rates and with less stringent and more flexible qualification requirements. The FHA is an agency within the U.S. Department of Housing and Urban Development.


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Benefits of FHA Loans: Low Down Payments and Less Strict Credit Score Requirements

Typically an FHA loan in Santa Cruz is one of the easiest types of mortgage loans to get approved for because it requires a low down payment and you can have less-than-perfect credit. For FHA loans, down payment of 3.5 percent is required for maximum financing. Borrowers with credit scores as low as 500 can qualify for an FHA loan.

Consumers who cannot afford a 20 percent down payment, have a lower credit score, or can’t get approved for private mortgage insurance should look into whether an FHA loan is the popular option for their personal circumstances.

Another advantage of an FHA loan is that it’s an assumable home loan which means if you want to sell your property, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.

FHA Allows a 3.5% Down-Payment

For today’s home buyers, there are only a few mortgage options which allow for down-payments of five percent or less for residents of Santa Cruz County. The FHA is one of them.

With an FHA mortgage, you can make a down-payment as small as 3.5%. This benefits home buyers who don’t have a lot of money saved up for down-payment; and, home buyers who would rather save money for moving costs, emergency funds, or other needs.

FHA Allows 100% Gift Funds

The FHA is aggressive with respect to gifts for down-payment. Very few loan programs will make it possible for your entire down-payment for a home to come from a gift. The FHA will.

Via the FHA, your entire 3.5% down-payment can be a gift from parents or another family member, an employer, an approved charitable group, or a government home-buyer program. If you’re using a down-payment gift, though, you’ll need to follow the process.

The FHA Hybrid provides for an initial fixed interest rate for a period of three or five years, and then adjusts annually after the initial fixed time frame. The 3/1 and 5/1 FHA Hybrid products enable up to a 1% annual interest rate adjustment after the initial fixed interest rate period, and a 5% interest rate cap over the life of the loan. The new payment after an adjustment will be calculated on the current principal balance at the time of the adjustment. This insures that the payment adjustment will be very little even on a worst case rate change.

About Santa Cruz California

Indigenous people have been living in the Santa Cruz region for at least 12,000 years. Prior to the arrival of Spanish soldiers, missionaries and colonists in the late 18th century, the area was home to the Awaswas nation of Ohlone people, who lived in a territory stretching slightly north of Davenport to Rio Del Mar. The Awaswas tribe was made up of no more than one thousand people and their language is now extinct. The only remnants of their spoken language are three local place names: Aptos, Soquel and Zayante; and the name of a native shellfish – abalone. At the time of colonization, the Indigenous people belonged to the Uypi tribe of the Awaswas-speaking dialectical group. They called the area Aulinta.

The first European land exploration of Alta California, the Spanish Portolá expedition led by Gaspar de Portolá, passed through the area on its way north, still searching for the “port of Monterey” described by Sebastian Vizcaino in 1602. The party forded the river (probably near where the Soquel Avenue bridge now stands) and camped nearby on October 17, 1769. Franciscan missionary Juan Crespí, traveling with the expedition, noted in his diary that, “This river was named San Lorenzo.” (for Saint Lawrence).

Next morning, the expedition set out again, and Crespi noted that, “Five hundred steps after we started we crossed a good arroyo of running water which descends from some high hills where it rises. It was named “El Arroyo de la Santisima Cruz, which translates literally as “The Stream of the Most Holy Cross”.

In 1791, Father Fermín Lasuén continued the use of Crespi’s name when he declared the establishment of La Misión de la Exaltación de la Santa Cruz (also known as Mission Santa Cruz) for the conversion of the Awaswas of Chatu-Mu and surrounding Ohlone villages. Santa Cruz was the twelfth mission to be founded in California. The creek, however, later lost the name, and is known today as Laurel Creek because it parallels Laurel Street. It is the main feeder of Neary Lagoon.

In 1797, Governor Diego de Borica, by order of the Viceroy of New Spain, Miguel de la Grúa Talamanca y Branciforte, marqués de Branciforte, established the Villa de Branciforte, a town named in honor of the Viceroy. One of only three civilian towns established in California during the Spanish colonial period (the other two became Los Angeles and San Jose), the Villa was located across the San Lorenzo River, less than a mile from the Mission. Its original main street is now North Branciforte Avenue. Villa de Branciforte later lost its civic status, and in 1905 the area was annexed into the City of Santa Cruz.

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Who Are FHA Loans For?

FHA loans are offered to low-income individuals who have credit scores as low as 500. Individuals with a credit score between 500-579 can obtain an FHA loan with a down payment of 10%; individuals with a credit score higher than 580 can get an FHA loan with as little as 3.5% down. The Federal Housing Administration does not lend the borrower the money to take on a home loan or to buy the house. Rather, the borrower pays a monthly or annual mortgage insurance premium to the FHA to insure the loan which the lending institution issues to him or her. In case of default, the lender’s financial risk is minimized since the FHA would step in to cover the payments.

Having no credit history is not a problem with an FHA loan for Santa Cruz County. Instead of your credit report, the lender may look at other payment-history records, such as utility and rent payments.

Even people who have gone through bankruptcy and foreclosure may still qualify for an FHA loan. However, the lower the credit score and the lower the down payment, the higher the interest rate.


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Kinds Of FHA Home Loans

In addition to its popular FHA loan, the FHA also insures other loan programs offered by private loan providers. Here’s a take a look at each of them.

  • FHA 203( k) loans – These FHA loans assist property buyers buy a house– and remodel it– all with a single mortgage. Property owners can also use the program to re-finance their existing home mortgage and add the cost of redesigning tasks into the brand-new loan. FHA 203( k) loans been available in 2 types:
    • The restricted 203( k) has a much easier application procedure, and the repairs or improvements should total $35,000 or less.
    • The standard 203( k) requires extra paperwork and applies to improvements costing more than $5,000, however the total value of the residential or commercial property must still fall within the FHA home mortgage limitation for the area.
  • Home Equity Conversion Mortgage, or HECM – A HECM is a popular kind of reverse home mortgage and is likewise insured by the FHA. A HECM allows older homeowners (aged 62 and up) with considerable equity or those who own their houses outright to withdraw a part of their home’s equity. The amount that will be offered for withdrawal differs by customer and depends on the age of the youngest customer or eligible non-borrowing spouse, current rate of interest and the lesser of the home’s assessed value or the HECM FHA mortgage limit or sales price.
  • FHA Energy Efficient Mortgage (EEM) program – Energy efficient mortgages backed by the FHA permit property buyers to acquire homes that are currently energy effective, such as EnergyStar-certified structures. Or they can be used to purchase and redesign older homes with energy-efficient, or “green,” updates and roll the costs of the upgrades into the loan without a larger deposit.
  • FHA Section 245( a) loan – Also called the Graduated Payment Mortgage, this program is tailored at debtors whose earnings will increase gradually. You start out with smaller month-to-month payments that gradually increase. 5 specific plans are available: three plans that allow 5 years of increasing payments at 2.5 percent, 5 percent and 7.5 percent each year. 2 other strategies set payment boosts over 10 years at 2 percent and 3 percent yearly.

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FHA Loan Limits for 2022

For 2019, the floor limit for FHA loans in the majority of the country is $314,827, up from $294,515 in 2018. For high-cost areas, the ceiling is $726,525, up from $679,650 a year earlier. These limitations are described as “ceilings” and “floors” that FHA will insure. FHA updates limit quantities each year in reaction to altering home rates.

FHA is required by law to adjust its quantities based upon the loan limits set by the Federal Housing Finance Agency, or FHFA, for standard mortgages guaranteed or owned by Fannie Mae and Freddie Mac. Ceiling and floor limits vary according to the expense of living in a particular area, and can be different from one county to the next. Locations with a higher expense of living will have higher limitations, and vice versa. Unique exceptions are produced real estate in Alaska, Hawaii, Guam and the Virgin Islands, where home building and construction is more costly.

FHA Loan Relief

Loan servicers can provide some flexibility on FHA loan requirements to those who have actually suffered a major monetary hardship or are struggling to make their payments.

That relief might be in the form of a temporary duration of forbearance, a loan adjustment that would decrease the rates of interest, extend the payback period, or delay part of the loan balance at no interest.

The FHA Hybrid Adjustable Rate

FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are low, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan. In 2006 FHA received approval to allow hybrid ARMs, in which the interest is fixed for the first 3 or 5 years, and is then adjusted annually according to market conditions and indices.

How do you Qualify for an FHA Loan in Santa Cruz CA?

The FHA makes it relatively easy to qualify for a mortgage. Again, the government guarantees the loan, so mortgage companies are more willing to approve home loans. However, lenders can (and do) set standards that may be stricter than FHA requirements. If you’re having trouble with one FHA approved lender near Santa Cruz CA, you might have better luck with another.

Note: you never know until you put in an application. Even if you think you won’t qualify after reading this page, talk with an FHA approved lender in Santa Cruz to find out for sure.

Income limits: there are none. You’ll need enough to show that you can repay the home loan but these loans are geared towards lower income borrowers. If you’re lucky enough to have a high income, you aren’t disqualified like you might be with certain first-time home buyer programs.

FHA Closing Costs

While FHA defines which closing costs are allowable as charges to the borrower, the specific costs and amounts that are deemed reasonable and customary are determined by each local FHA office.

FHA Debt Ratios

In order to prevent home-buyers from getting into a home they cannot afford, FHA requirements have been set in place requiring borrowers and/or their spouse to qualify according to set debt to income ratios.

FHA Credit Issues

An FHA loan applicant’s past credit performance that proves good credit history and a solid track record of timely payments will likely be eligible for the mortgage.

How to Find FHA Lenders

Customers get their home loans from FHA-approved lenders in Santa Cruz instead of the FHA itself, which just guarantees the loans. FHA-approved lending institutions can have different rates and costs, even for the same loan.

FHA loans are available through lots of sources– from the greatest banks and credit unions to neighborhood banks and independent mortgage lending institutions. Costs, services and underwriting requirements vary among lenders or mortgage brokers, so it’s important to shop around.

Learn more about how to discover low FHA mortgage lender.


(Or call 213-474-7389 to ask a local lender anything!)