FHA Loans have been helping people become homeowners for almost 100 years. Since 1934, the Federal Housing Administration has offered these loans with lower down payment requirements and easier credit qualifications for applicants than conventional mortgage loans. Montana’s home costs tend to be higher on average (making loans harder to qualify for) so an FHA loan is a great choice for many first-time buyers. Our Bank of Bozeman team put together this quick guide to an FHA loan Montana-style to help you explore local options for home loans and see if this pathway to homeownership might be right for you.
If you have any questions for our Montana lenders, reach out to us today or give us a call at (406) 587-5626
What is an FHA Loan, and How Does It Work?
The definition of a Federal Housing Administration (FHA) loan is a home mortgage that’s insured by the government and issued by an FHA-approved bank or lending institution. These loans are generally designed for low-to-moderate-income families and are popular with first-time homebuyers But, depending on the situation, an FHA loan might be right for just about anyone.
During the Great Depression, the United States became a nation of renters—only one household in 10 owned their homes. FHA loans were created during that time to help with this painful national problem, lowering qualification requirements and helping front more of the down payment cost to bring more people back to home ownership.
The FHA guarantees or insures these loans, but FHA loans are issued by banks, not by the FHA. For that reason, they are sometimes referred to as FHA-insured loans. Because these loans are insured by the government, banks are willing to lend money to aspiring homebuyers who might have lower credit scores and less cash for a down payment. With an FHA loan, Montana borrowers can expect down payment requirements to vary from between 10% to just 3.5%. This means the bank covers between 90 and 96.5% of the total home cost. The down payment on an FHA loan can come from savings, a grant for down payment assistance, or a gift from a family member.
Qualifying for a Montana FHA Loan
FHA loans are designed to be much easier to qualify for than conventional loans. As of January 2023, the required down payment for an FHA loan is just 3.5% for bowerers with a credit score of 580 or above. Other types of loans require almost up to 20% for a down payment. That means the bank will finance up to 96.5% of a loan for qualified borrowers. For those with a credit score between 500 and 579, the down payment is still just 10%, and the bank will finance 90% of the full cost of the loan. This breakdown makes homeownership much more achievable and affordable for the average individual or couple.
When you apply for an FHA loan, Montana lenders will look at your work history and payment history for the past two to three years. Typically, you need to prove your ability to keep up with student loan payments, income tax payments, utilities, and other bills. When applying for this type of mortgage, Montana buyers will need to wait 2-3 years after experiencing bankruptcy or foreclosure.
Lenders will also consider your “front-end” and “back-end” ratios. This means your combined mortgage payment, mortgage insurance, property taxes, and HOA fees should be less than 31% of your income, and your mortgage payment (plus all other monthly debts) should be less than 43%.
FHA Loan Limits in Montana
As Bozeman mortgage lenders, Bank of Bozeman understands the needs of local buyers. These FHA loan limits will vary between different counties across Montana based on the cost of local housing. For the counties surrounding Bozeman, Big Sky, and Belgrade, these are the 2023 limits for an FHA loan Montana homebuyers can expect for single-family homes:
County: FHA Loan Limit
- Gallatin: $703,800
- Park: $539,350
- Madison: $472,030
- Beaverhead: $472,030
- Jefferson: $472,030
Source: U.S. Department of Housing and Urban Development
What are the Pros and Cons of an FHA Loan?
For folks who haven’t been able to get approved for financing with private lenders, FHA loans can be a great option. However, because the government considers borrowers with lower credit scores and less cash on hand to be higher risk, these loans may have the lowest interest rates. (An FHA loan’s interest is determined by federal rather than Montana interest rate.) With an FHA loan, Montana buyers will also need to purchase private mortgage insurance (PMI).
What’s the Difference between FHA and Conventional Loans?
FHA and conventional loans are both options for a home loan MT buyers should consider, but they have important differences. While FHA loans are guaranteed by the government, conventional loans are not insured or guaranteed by a federal agency. Because of this, conventional lending standards are usually stricter and require a larger down payment, so they may be harder to qualify for for the average, first-time home buyer. FHA loans allow co-signers and sellers closing cost contributions. They are also assumable, meaning a new buyer can purchase a home by taking over the seller’s mortgage loan.
How to Apply for an FHA Loan in Montana
To apply for an FHA loan, Montana homebuyers should first gather all the documents needed for lending, including a completed loan application, your most recent W-2 forms or self-employed equivalent, authorization for a credit check, and recent bank statements.
At Bank of Bozeman, we’re here to help guide you through the process of applying for your home loan. It’s important to determine which loan is right for you and your home ownership goals—from how you qualify, to the loan terms and payments. As FHA-approved Montana mortgage lenders, we’ll be with you every step of the way for your homeownership journey.
If you’re ready to apply for an FHA loan, or you have questions about the process, we invite you to connect with our team. We’re proud to partner with first-time home buyers, offering our expertise on the ins and outs of Montana loans to give you confidence and peace of mind as you purchase the home of your dreams.