The FHA, or Federal Housing Administration, provides mortgage insurance on loans made by FHA-approved lenders. FHA insures these loans on single family and multi-family homes and has insured tens of millions of properties since it was created in 1934. It’s important to note that the Federal Housing Administration does not issue the home loan – this is done by your mortgage lender. However, if you default or stop making your mortgage payments, your home loan lender receives financial recourse from the FHA, therefore reducing the lenders’ risk and making them more willing to loan money, while also keeping borrowers’ costs down.
The combination of low rates, low down payment, and flexible lending guidelines have made it one of most attractive loans for home buyers today. It may help you save money and possibly qualify for a larger mortgage.
The FHA is more lenient and understanding about credit issues and personal problems. If you had a previous bankruptcy, you can usually get an FHA loan only two years after the discharge date. If you had a foreclosure, you’ll have to wait 3 years to apply. If you had late payments within a distinct time frame and had a good payment history the rest of the time, they may overlook that. Collections are usually not a problem. However, you will not be eligible for the FHA loan if you have had federal liens such as tax liens or defaults on student loans. Your credit score needs to be only a 620 when putting down the minimum three percent unlike other conventional loans that require a score of no less than 680 and sometimes in the 700s.
The super part of the FHA loan over conventional loans is the low amount of cash needed at closing. With an FHA mortgage, you can make a down payment as small as 3.5%. This benefits those home buyers who don’t have a lot of money saved up for a down payment; and, home buyers who don’t want to give up all their cash, but would rather save some of their money for moving costs or emergency funds.
Few loan programs will allow your entire down payment for a home to come from a gift. The FHA loan program allows your entire down payment to be a gift from a parent or relative an employer, an approved charitable group, or a government home buyer program.
This program will also allow seller concessions. This means you can ask the seller to pay up to 6 percent of the closing costs. Closing costs are additional expenses asociated with buying a house such as; loan origination fee, title search fee, recording fee, survey fee, prepaid interest, prorated taxes, and insurances.
FHA loans have very competitive rates, which means a lower payment each month. Having a lower interest rate means you will pay less over the life of the loan.
Debt to Income
The FHA loan does allow a high debt-to-income ratio. Having a car payment and student loans will still allow you to qualify. Still feel that you can afford the payment? The FHA will allow a maximum of 43 percent debt-to-income ratio, whereas conventional mortgages allow a maximum of 36 percent debt-to-income ratio. Figure your debt-to-income ratio by adding up all of your current debt, including your proposed new mortgage payment (including taxes and insurance), and divide it by your monthly income. The answer will be your percentage.
Basic Documentation Required To Apply
- Copies of paycheck stubs for the past 30 days
- Copies of W-2 forms or 1099 forms for the last two years
- Complete tax returns, including all schedules, for the past two years (if self-employed)
- Copies of all bank statements and investment account statements for the past two months
- Identification (driver’s license, passport, or military ID)
- Year-to-date profit and loss statement (if self-employed)
The FHA is pretty lenient about whom they will lend to. If you meet the credit requirements, have the 3.5 percent down payment, and have steady employment, you will probably be approved. Like any other loan, you will be required to provide all information related to your assets (personal property, cash in the bank, and investment account statements), which helps lenders determine the source of your down payment and closing costs. All-in-all, it can be an easier process than a conventional loan.