FHA Housing Loans - Everything You Need to Know
If you want to buy a home but don't qualify for a conventional mortgage, an FHA Housing Loan might be the solution you're looking for. Here's what you need to know.
Getting Started With Low-Income Housing Loans
Home ownership is a core element of the American dream, but for many Americans the high cost of a home and difficulty qualifying for a mortgage have placed that dream out of reach. The Federal Housing Administration (FHA) helps to bridge the gap and give mid to low income individuals and families a fair shot at owning their own home. Legislative actions during the last four years have expanded mortgage access for hundreds of thousands of Americans who previously were unable to qualify for mortgages. While restrictions tightened in 2015, an FHA loan is still one of the most effective routes to home ownership for lower income buyers.
The program is insured through the Federal Housing Administration, an agency within the Department of Housing and Urban Development. The mortgage insurance protects the lender should the borrower default, allowing lenders to take more risks and provide potentially lower interest rates with less stringent standards and more flexible requirements.
- Regulations have been written to allow buyers in a variety of scenarios to qualify. Buyers with high credit scores can make smaller down payments, and buyers with lower credit scores can still buy a house if they are able to make a down payment. The FHA allows sellers and lenders to help with payment of closing costs. A parent may be able to co-sign for a child under what is called a "non-occupant co-borrower" provision. All these options provide buyers and lenders with more flexibility.
Lower Down Payment
- An FHA loan requires a 3.5% down payment. Down payments for traditional mortgages can be 10-25%.
- FHA loans offer much more than fixed-rate mortgages. They can also be used for home repairs, with amounts based on the projected value of the property after repairs.
- There are regulations to ensure that borrowers will be able to pay their mortgages on time. However, hardships do occur and under some circumstances relief can be provided in terms of temporary forgiveness, modifications, and deferred interest.
Qualification is easier for most buyers than qualifying for a traditional (conventional) mortgage, but there is still a long list of regulations that must be followed. Here are things to keep in mind when you're considering this option.
The Right Buyer
Down Payments and Credit Scores
- Borrowers with a minimum credit score of 580 qualify for a 3.5% down payment. A 10% down payment is needed for borrowers with scores from 500 to 579. Only very select circumstances would allow a borrower to secure a loan with a credit score below 500. The down payment can come from a family member or, when applicable, from a state or local Government grant. The down payment does not have to be the product of the buyer's income and savings.
Debt / Income Ratio
- The total debt of the borrower cannot exceed 43% of his monthly pay. The mortgage portion of that debt maxes out at 31%. As with most policies, there are some tradeoffs for a borrower with a good credit score and cash reserves.
- Because restrictions on FHA loans are less stringent than those on conventional mortgages, lenders look for buyers with secure employment. They want to see employment with the same company / organization for two years.
- This type of loan is government-insured. Before approving, the lender will want to see that the borrower has not defaulted on any prior government programs such as previous FHA or student debt.
The Right House
- Approval for a house within the limit for that buyer and area is vital. You can calculate your limit with a special calculator here
. A limit has been established by county for single homes, duplexes, triplexes, and fourplexes. You can check the limits for your area here
- The house must be appraised by an FHA-approved appraiser.
- This money is intended for the primary residence of the borrower. It is not intended for investment property or for homes purchased for other residents such as family members.
The Right Lender
In order to secure a loan, the lender must be FHA approved. Even among approved lenders, rates, costs, services, and underwriting standards vary. It's wise to shop around and find the lender that offers what you need.
- Certain documents must be provided before an application is considered. These documents include complete tax returns from the past two years, W-2 and 1099 forms, and recent pay stubs. For self-employed borrowers, tax returns for the past three years plus profit/loss statements must be submitted. You will need bank statements, retirement and investment statements, credit card bills, and any loan statements. When applicable, bankruptcy and alimony documents are required. Other required documents include the address of your residence for the last two years, social security number, and information about any other real estate property that you own.
- After the documents are submitted, the lenders get to work. Lenders must verify employment, income, and bank account amounts. They need credit reports from three bureaus. Also, it is the job of the lender to secure an appraisal and title report to check for liens on the property.
- When processing is complete, an application goes to an underwriter. The underwriter reviews the file and makes a final decision as to whether the application aligns with all requirements. The underwriter submits a written decision on approval.
Delays are to be expected. Glitches may be related to the buyer, the seller, the property, the real estate agent, or the lender. A number of people and agencies are involved. Things can go wrong with any one of these. Additional documents may be needed or inspection may uncover flaws or needed repairs in the property. When the issues are resolved, the process can continue.
The number of FHA loans has quadrupled in recent years. These popular government-backed mortgages help low-income individuals and families secure a manageable mortgage and get moved into their own homes now instead of later.
Want to learn more? Check out our FHA Checklist
guide. Here we provide further information on the materials commonly included in an application.
For additional information you can visit the Federal Housing Administration