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FHA Loan Program Guide
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At first glance, the home loan process including the FHA loan program can seem overwhelming, but careful review
of this guide will reveal; what an FHA loan is, the advantages, requirements,
and limits of an FHA loan, and what documentation must be provided when applying
for an FHA-insured loan.
What is an FHA Loan?
The Federal Housing Administration (FHA), established in 1934 during the Great
Depression, is a government agency that insures home mortgages against default.
FHA provides mortgage insurance much like a conventional loan requires private
mortgage insurance or PMI. While the FHA does not loan money directly to a borrower for the purchase
or refinance of a
home, it does insure loans for banks for borrowers who fall within certain requirements.
Following are some highlights of the FHA loan program.
- Down payment amounts for FHA loans can be as low as 3.5 percent which is
substantially lower than a conventional loan.
- The FHA loan is one of the most flexible loan types because it is insured by
the federal government.
- Interest rates and terms are set by lending institutions and then FHA
insurance is purchased by the borrower, through the lender, until twenty percent
of the loan value has been repaid.
- After the outstanding loan is less than 78 percent of the home’s market value,
the borrower can gain approval to drop the FHA insurance because the repayment
record has been established.
- FHA mortgage loans are a popular option for first-time home buyers who wish to
establish credit while purchasing a home.
- Available loan terms include 30-year fixed, 15-year fixed, buy-down and adjustable
rates.
Advantages of FHA Loans
Lenders offer a similar terms to borrowers who qualify under FHA guidelines
because the risk of non-payment is absorbed by a guaranteed insurance policy
offered through the federal government. Financial institutions still investigate
the credit history and score, annual income, and requested loan amount, and then
evaluate the borrower’s qualification under FHA guidelines. Establishing a firm
foundation of repayment is the primary goal that must be addressed prior to loan
approval. FHA mortgages allow more borrowers to qualify through these
advantages.
- Simpler loan qualifications – Lending standards are amended when the borrower
qualifies for FHA insurance because the perceived risk of non-payment is
mitigated.
- Lower credit scores qualify – People who are recovering from credit problems
are more likely to qualify for an FHA home loan. Proven payment records are
considered in the months since a bankruptcy or loan default. Credit score
requirements are lower than conventional loan requirements.
- Credit issues forgiven – The borrower must wait three years after a short sale
or foreclosure of a previous home. If bankruptcy is in the credit history, the
borrower must wait two years prior to applying for an FHA loan. Most lender require
a minimum 620 credit score on your credit report.
- Lower down payment requirement – 3.5 percent down
payment is all that is required on an FHA mortgage loan. When purchasing a HUD home, the down payment
can be as low as $100. This lower amount allows the borrower to purchase a home
sooner and begin to repay the loan while carrying FHA mortgage insurance. Conventional
loans require a larger down payment.
- Reduce mortgage costs – Without FHA insurance, the first-time home buyer would
be required to pay a higher interest rate. FHA mortgages carry lower mortgage insurance
rates because the lender is guaranteed repayment from the Federal Housing
Administration. Additional FHA set limits on the amount of certain fee's that
are allowed to be charged.
- Easier refinance options – Borrowers who already have a FHA loan are
eligible for simple refinancing options via FHA. Streamline refinance allows the
refinance of an existing FHA mortgage without requiring an appraisal or a credit
report assuming you are lowering the monthly payment.
FHA Loan Requirements
Since the financial institution is the lender in the FHA loan agreement, their
lending guidelines must be met prior to final mortgage loan approval. Loan
applicants must meet the mortgage lender’s income, assets, liabilities, and credit
history requirements prior to being considered for an FHA mortgage. During the
loan application process, the lender will offer terms and requirements for various
types of loans that can be insured through the Federal Housing Administration.
Then the borrower must meet the following qualifications set forth by the FHA:
- Income verification – Salary and hourly wages, overtime and bonus income,
part-time income, retirement and social security income, alimony, child support,
and maintenance income are all aspects of the borrower’s financial annual
income. Most lenders will require proof of the two prior years of income and
base the loan qualification on the base income.
- Earnings capacity – Consistent income is required to prove the ability to
repay the loan. The borrower must be able to show that their current income
streams will endure for the next three years. Fluctuating income records will
disqualify most borrowers from loan approval by lenders even if the borrower was
to be insured by the FHA.
- Debt-to-Income Ratio – After the borrower’s income has been validate, the
monthly obligations are evaluated to determine ability to repay the loan.
Lenders use two ratios called debt to income or DTI to assess the debt burden that will weigh on the borrower
during the term of the FHA loan.
- Front-End Ratio – Housing Cost Ratio – The actual housing expenses for the borrower
cannot exceed 31 percent of the total income. Monthly housing costs will include
the loan principal and interest payment as well as the taxes and insurance
collected for escrow.
- Back-End Ratio – Total Expense Ratio – All monthly payments including credit
cards, student loans, auto loans, and any other monthly payments on outstanding
debt commitments. This ratio cannot exceed 43 percent of the borrower’s total
monthly income.
- FHA-approved appraisal – The property must pass FHA guidelines of acceptable
condition prior to loan approval. If the house has structural problems, a
damaged roof, or missing siding, the appraisal will disqualify the property even
if the borrower qualifies for the FHA mortgage loan.
FHA Loan Limits
The Federal Housing Administration maintains a full schedule of property types
and values for each county and state in the country. The most expensive area in
the country has a property price limit of $729,750 while the least expensive
area has an FHA lending limit of $271,050.
Every year the FHA evaluates the home
prices across the country to ensure the lending limits are set accurately.
Lending institutions refer to official tables when setting the FHA mortgage loan
limits for the loans they approve.
Required Documents to Apply for a FHA Loan
Proper preparation of documents will help make for a smooth mortgage application
process. Following is a list of documents within 4 main groups required when applying for any
type of mortgage.
Employment Information
- Two years of complete federal tax returns including all schedules.
- Two years W-2 forms, 1099 forms, and all other tax forms stating income.
- Pay stubs including the most current one month period.
- For self-employed applicants: Three years federal tax return forms with all
schedules and the current year-to-date profit & loss statement prepared by an
accountant.prepared by an
accountant.
Savings Information
- Three months of complete bank statements for every checking and savings
account, including every page.
- For retired applicants: Recent statement of retirement income, including:
pension or social security, 401k payouts, mutual fund income, money market
statements, stock value certificates, etc. statements, stock value certificates, etc.
Credit Information
- Current statements from outstanding debts bills, including minimum payment
requirements and valid account numbers.
- Complete contact information for landlord at current residence and copies of
one full year of rent checks.
- For those without established credit: Copies of recent utility bills are
required.
- For those who have filed bankruptcy: Complete copies of the bankruptcy and
discharge documents.
- For co-signees of other debts: If the borrower has co-signed a loan for
another person, copies of the mortgage, car, credit card, statements must be
accompanied by copies of the most recent 12 months of front and back of the payment checks to indicate
someone else is paying the loans. someone else is paying the loans.
Personal Information
- Copy of valid driver’s license.
- Copy of original social security card.
- For the divorced applicant: Include a complete copy of the divorce decree,
palimony agreement, and alimony documents.
- For the legal non-citizen resident: Copy of green card or work permit.citizen resident: Copy of green card or work permit.
Conclusion
The Federal Housing Administration was established to assist people in achieving
the dream of home ownership by offering favorable loan terms with a minimal down
payment. A misconception is that FHA loans are limited to first time home buyers
but in fact most homebuyers will qualify for a FHA making it one of the best
options for buying a home or refinancing.
Please visit our mortgage calculator section.
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