FHA home loans are mortgage are insured by the Federal Housing Administration (FHA).
FHA loans allow individuals who may not qualify for a conventional mortgage to qualify for a loan, especially first time home buyers. These loans offer a lower down-payments, reasonable credit expectations, and more flexible income requirements.
- Ideal for the first-time home buyers unable to make larger down payments.
- The right mortgage solution for those who may not qualify for a conventional loan.
- Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.
Example of a closed loan
$470,000 Purchase Price
$461,436 Loan Amount: The initial loan amount was $453,500 but then was increased to $461,436 to include the up front Mortgage Insurance Premium (MIP) required by HUD
96.489% Loan to Value: The loan amount was just under 97% of the Purchase Price, but once the MIP is added it’s effectively 98.178% of the Purchase Price.
52.82% Debt To Income Ratio: This is the ratio of the total housing payment, including property tax, insurance, HOA Fees if any, and all the borrowers revolving and monthly installment debt divided by their monthly income.
General FHA guidelines:
- Loan Amounts: FHA Mortgage Limits https://entp.hud.gov/idapp/html/hicostlook.cfm
- Term: 30 or 15 years fixed rate terms.
- Credit Score of Min of 500 but that would limit the loan amount to 90% Loan to value. You need 580 for a 97.5% Loan to Value purchase or 85% refi
- Property Types: 1-4 Unit Single Family Residences. Condominiums are subject to HUD approval.
- Loan-to-Value: Up to 96% (Based on appraisal)
- Min two year employment required.
- Traditional income documentation required
- Debt-to-Income Ratio:
- 31% Total Housing Payment (Principle, Interest, Tax, Insurance, & Mortgage Insurance.) divided by Gross Monthly income.
- 43% Total Housing Payment, plus any monthly obligations like credit cards or installment debt, divided by your Gross Monthly Income. These ratios could be exceed with compensating factors.
FHA Loans VS. Conventional Home Loans
The main difference between a FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 2-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.
What Documents Are Required to Apply for a FHA Loan?
Your loan approval depends heavily on the documentation that you provide at the time of application. Depending on your employment, credit and asset situation, the following documentation would likely be requested.
- Complete Income Tax Returns for past 2-years
- W-2 & 1099 Statements for past 2-years
- Pay-Check Stubs for past 2-months
- For Self-Employed borrowers – Income Tax Returns and Year-To-Date Profit & Loss Statements for past 2-years
- Complete bank statements for all accounts for past 3-months
- Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.
- Recent bills & statements indicating account numbers and minimum payments
- Landlord’s name, address, telephone number, or 12- months cancelled rent checks
- Recent utility bills to supplement thin credit
- Bankruptcy & Discharge Papers if applicable
- 12-months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card, this indicates that you are not the one making the payments.
- Drivers License
- Social Security Card
- Any Divorce, Palimony or Alimony or Child Support papers
- Green Card or Work Permit if applicable
Refinancing or Own Rental Property
- Property Tax Bill
- Homeowners Insurance Policy
- A Payment Coupon for Current Mortgage
- Rental Agreements for a Multi-Unit Property