FHA Loans

What Documents are Needed to Apply for an FHA Loan?

Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:

• Complete Income Tax Returns for past 2-years
• W-2 & 1099 Statements for past 2-years
• Pay-Check Stubs for past 2-months
• Self-Employed Income Tax Returns and YTD Profit & Loss Statements for past 3-years for self-employed borrowers

• 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 canceled rent checks
• Recent utility bills to supplement thin credit
• Bankruptcy & Discharge Papers if applicable
• 12-months canceled 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
• Any homeownership papers

• Note & Deed from any Current Loan
• Property Tax Bill
• Hazard Homeowners Insurance Policy
• A Payment Coupon for Current Mortgage
• Rental Agreements for a Multi-Unit Property

FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA).  FHA loans are available for single-family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn't issue loans or set interest rates, it just guarantees against default.

FHA loans allow individuals who may not qualify for a conventional mortgage to obtain a loan, especially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.

How much of an FHA Loan can I afford for a mortgage?

Your monthly costs can not exceed 29% of your gross monthly income for an FHA Loan. The total housing costs often lumped together are referred to as PITI.

P = Principal

I = Interest

T = Taxes

I = Insurance

Examples:

Monthly Income x .29 = Maximum PITI
$3,000 x .29 = $870 Maximum PITI

Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.

Monthly Income x .41 = Maximum Total Monthly Costs
$3,000 x .41 = $1230
$1,230 total - $870 PITI = $360 Allowed for Monthly Long Term Debt

FHA Loan ratios are more lenient than a typical conventional loan.

Federal Housing Administration (FHA) Loan History

In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home.

FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund.

• Buy a house with as little as 3.5% down.
• Ideal for the first-time homebuyers 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 an FHA Loan for additional down payment and/or closing cost savings.

What Is a Federal Housing Administration Loan (FHA Loan)?

An FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA). This is designed for low-to-moderate-income borrowers. Additionally, FHA loans require a lower minimum down payments and credit scores than many conventional loans.

As of 2019, you can borrow up to 96.5% of the value of a home with an FHA loan (that means you will need to make a down payment of 3.5%). You will need a credit score of at least 580 to qualify for this loan. If your credit score falls between 500 and 579, you can still get an FHA loan provided you can make a 10% down payment. With FHA loans, your down payment can come from savings, a financial gift from a family member or a grant for down-payment assistance.

All these factors make FHA loans extremely popular with first-time homebuyers.

You pay for that guarantee through mortgage insurance premium payments to the FHA. Your lender has less risk because the FHA will pay a claim to the lender if you default on the loan.

How an FHA Loan Works

An FHA loan requires that you pay two types of mortgage insurance premiums—an Upfront Mortgage Insurance Premium and an Annual MIP (charged monthly). The Upfront MIP is equal to 1.75% of the base loan amount (as of 2018). You pay this at the time of closing, or it can be rolled into the loan. If you’re issued a home loan for $350,000, for example, you’ll pay an UFMIP of 1.75% x $350,000 = $6,125. The payments are deposited into an escrow account set up by the U.S. Treasury Department, and the funds are used to make mortgage payments in case you default on the loan.

You will make Annual MIP payments every month. The payments range from 0.45% to 1.05% of the base loan amount, depending on the loan amount, length of the loan, and the original loan-to-value ratio. The typical MIP cost is usually 0.85% of the loan amount. If you have a $350,000 loan, for example, you will make annual MIP payments of 0.85% x $350,000 = $2,975, or $247.92 monthly. This is paid in addition to the cost of UFMIP.

FHA Loans vs. Conventional Home Loans

The main difference between an FHA Loan and a Conventional Home Loan is that an 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 3-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.

If I've Had a Bankruptcy in Recent Years, Can I Get an FHA Loan?

Yes, generally a bankruptcy will not preclude a borrower from obtaining an FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a credit card, or car loan. Then wait approximately two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (you will need to get permission from the courts). Also, the borrower shouldn't have any credit issues like collections, credit charge-offs, or late payments since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition and had to declare bankruptcy because the high medical bills could not be paid.

Are you ready for your dream house?

If you have any questions about FHA loans please feel free to contact us any time!  This seems a lot more confusing than it actually is.

For more information check out https://www.hud.gov/buying/loans