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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 home 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. Use the FHA down payment calculator to view the minimum down payment required.

  • 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 mortgage 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.

Use our FHA mortgage calculator to view the down payment, mortgage insurance and mortgage mortgage payment of a FHA loan.

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.


Source: FHA-Home-Loans.com, 1999-2012. "FHA Home Loans.com - FHA loans - FHA Mortgage Lender", http://www.fha-home-loans.com

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