An Introduction to the FHA Home Loan Program
To better allow lower income Americans to be able to borrow money for the purchase of a home, the United States Federal Housing Administration offers mortgage insurance to back loans provided by an FHA-approved lender. There is a common misperception that the FHA Home Loan Program makes loans to borrowers, but in reality, they only insure loans made by those approved lenders. This insurance is offered to protect lenders in the event a borrower defaults on a loan. The FHA Home Loan Program began in the 1930s to counter the effects of the Great Depression when foreclosures and defaults were common.
To finance the program and obtain mortgage insurance from the FHA, buyers are required to pay an upfront mortgage insurance premium equal to 1.75 percent of the cost of the loan they are seeking. For example, if a borrower took out a loan for $100,000, they would be required to pay an upfront premium of $1,750. That is typically rolled into the overall loan amount by the lender and then paid to the FHA on the borrower’s behalf. Buyers are also required to pay a monthly mortgage insurance premium as well. This premium varies based on the terms of the loan.
If you are a First-time Homebuyer…
There’s nothing quite like the thrill of buying your first home. While it can be an exciting time, there are sure to be lots of things you’ll need to learn about, or you will have to rely upon the expertise of others to help you through a what can be a complicated process.
Because terms are generally more favorable, first-time homebuyers often choose to finance their purchase with a mortgage lender through an FHA loan. A few of those more favorable terms include:
- A lower down payment than with a conventional loan…as little as 3.5%.
- A lower credit score to qualify which, in some cases, can be as low as 500, although lenders prefer to see a minimum credit score of 580.
- A shorter time frame to be considered as qualified after you have gone through a bankruptcy.
Because buying a home can be daunting, there are numerous first-time homebuyer programs to assist homebuyers. In addition to the FHA providing more favorable terms for first-time homebuyers, there are also other government funded and government backed programs to assist people with their initial purchase.
The U.S. Department of Veterans Affairs helps service members, veterans and surviving spouse to make home ownership more affordable, often times required no down payment and no mortgage insurance.
The U.S. Department of Agriculture has a program that targets rural areas and by offering mortgage guarantees, and can provide some applicants with as much as 100% financing.
Fannie Mae and Freddie Mac often work with local lenders to offer a variety of mortgage options for first-time homebuyers.
In addition, there are numerous state, regional and local first-time homebuyer programs as well. Terms and conditions are usually localized to a particular area. To find out more about these, it is best to check with a county or city government, or contact a local lender directly who will have good insights as to what programs are available.
To also make home ownership more affordable, a first-time homebuyer tax credit is in place for people who purchased homes prior to July 1, 2010. It provided for up to $8,000 in incentives that have to be gradually repaid. The first-time homebuyer tax credit takes the form of an interest-free loan and is paid off in $500 increments over several years.
While first-time homebuyers enjoy many benefits, the fact is that all homebuyers enjoy several benefits, including:
- Home mortgage interest deduction
- Mortgage interest credit
- Mortgage points deduction
- Tax-free IRA withdrawals
- Property tax deductions
- Home improvement tax breaks
- Home energy tax credits
Focus on FHA Loan Guidelines
As a very large government agency that has served millions of people since it’s inception, the FHA has deals with several unique cases on an everyday basis.
As a result, there are a variety of specialized scenarios that will impact a person’s ability to secure an FHA loan. To answer many of these types of questions, the FHA has created a Knowledge Base page that gives potential borrowers pertinent information on a wide variety of topics. In addition, the agency continues to disseminate educational updates on a variety of topics of interest to potential borrowers and lenders. To access the FHA Knowledge Base page, go here.
Some of the specialized topics found in the Knowledge Base include the following:
I engage in property flipping. What are the guidelines regarding getting an FHA loan and then selling that property a short time later?
Property flipping has become a viable source of income for many people in recent years. The practice involves buying a home, investing a certain amount of money to make repairs and upgrades, and then immediately selling the house for a considerable profit. The FHA has certain restrictions on property flipping activities that property flippers should be aware of before they enter into any transaction. A property that is being resold within 90 days after the current owner’s date of acquisition is not eligible for an FHA loan. Properties that are being resold between 91 and 180 days after the current owner acquires it will require a second appraisal from a different appraiser and certain valuation criteria must be met prior to loan approval. There are several exceptions to FHA property flipping restrictions, and if you are engaged in this kind of activity it is best to check with the FHA to ensure you are in compliance before seeking a loan.
I have a debt that has gone into collections. How does that impact my eligibility for an FHA loan?
If one or more a borrower’s loans or debts have been turned over to a collection agency by a creditor, and the total of those balances is $2,000 or more, then the lender must verify that the debt has been paid in full prior to FHA loan approval, or that the borrower has made sufficient arrangements with the collection agency or creditor to pay off the debt. A lender must also report to the FHA if the collection amounts were the result of extenuating circumstances, the borrower’s inability to manage debt or if there was just a blatant disregard by the borrower toward their financial obligations.
My home was recently affected by a natural disaster and I want to know how this may impact the terms of my FHA loan and what steps I should take regarding this situation?
If you have been the victim of a wildfire, tornado, hurricane, flood or other natural disaster, you have been through a traumatic experience. Most federal disaster recovery assistance is triggered by the designation as a Presidentially declared disaster area. When this happens considerable resources may become available to impacted homeowners. The first thing a victim should do is contact their homeowner’s insurance provider and their mortgage lender as soon as they can. They will provide immediate relief and begin the process of helping you recover from your tragic circumstances. In addition, you may want to visit the federal government’s national disaster recovery site to obtain the most up-to-date information on programs, criteria and declared disasters. It is located here.
If you have a mortgage that has been insured by the FHA, you will be granted an immediate 90-day moratorium on foreclosure or forbearance if your home is located in a declared disaster area. You may be able to secure a new mortgage to help repair and recover from the disaster under the Section 203(k) Mortgage for Disaster Victims Program or the Section 203 (k) Rehabilitation Mortgage Insurance Program.
Focus on FHA Loan Requirements
Although FHA loans are considered more “user friendly” because they are backed by a government agency, there are still certain requirements that must be met to ensure that you will be successful in securing a loan. It is important to note that because the FHA only backs loans but does not issue them, the agency will have one set of criteria that they will want to see while an individual lender that actually issues the loan will also have their own set of criteria that will lead to approval.
In most instances, FHA loan requirements will be pretty clear. However, because the agency’s overall goal is to increase home ownership, they will attempt to work with lenders and with potential buyers who may not meet all of the criteria and who can demonstrate extenuating circumstances. There is no guarantee that a loan will be issued or that it will be backed in these cases, but the best thing a potential buyer can do is to start a dialog with one or more lenders to see if there is a way to execute a loan. Often times, there are certain hardship programs available at a state, county or even local level that can mean the difference between owning a home or not.
What are debt ratios and how do they figure into qualifying for an FHA loan?
When you apply for a loan, lenders and the FHA want to make sure you can handle the payments so that you do not get into trouble while trying to meet your obligations. One of the ways they analyze your risk is by calculating debt ratios. Simply put, debt ratios are the amount of debt you have versus the amount of income you receive each month. If your debt ratios exceed requirements to qualify for a loan, you could be rejected. As you prepare to buy a home, one of the things you should focus on is paying down all of your debts such as student loans, car payments, credit card bills and other similar encumbrances.
How are debt ratios calculated?
Lenders look at two types of debt ratios. The first is Mortgage Payment Expense to Effective Income. It is derived by taking the total amount of the new house payment and dividing by a household’s monthly gross income. The maximum ratio to qualify for an FHA loan under this scenario is 31%. The other is the Total Fixed Payment to Effective Income. It is derived by adding up the total mortgage payment and recurring monthly debt and dividing it by the household gross monthly income. The maximum ratio to qualify for an FHA loan under this scenario is 43%.
What is the FHA TOTAL Scorecard and how does it impact my ability to secure an FHA Loan?
To evaluate a potential borrower’s credit history and application information, HUD has developed a statistically driven algorithm called the FHA TOTAL (Technology Open to Approved Lenders) Scorecard. All FHA mortgage transactions are processed through TOTAL and this method ensures that all applicants are evaluated in a uniform manner regardless of which lender submits a loan to the FHA for approval. When the information is submitted, the TOTAL Scorecard either “accepts” or “refers” the results. An “accept” designation means the borrower’s loan will be insured without a manual underwriting review. A “review” designation means the loan must be underwritten by an FHA Direct Endorsement underwriter.
Key benefits of an FHA home loan
There are many important benefits associated with an FHA insured home loan:
You can still qualify for a loan even if your credit is less than perfect. If your credit score is 580 or higher, you can qualify for a mortgage with as little as 3.5 percent as a down payment. If your credit score is between 500 and 579, you can also get a loan as well, but you will be required to put at up least 10 percent as a down payment. If your credit score is under 500, then you will probably not qualify for an FHA loan, however, there are certain circumstances where the FHA will make exceptions for people with unusual credit histories or insufficient credit. To find out if you may meet criteria with a low credit score, it’s best to talk with an approved FHA mortgage lender.
How do I check my FICO credit score?
You can check your credit score in a number of ways, and if you’re considering an FHA loan, you should check your credit reports as early as possible in the planning process. If you are already applying for a loan, as a matter of documentation, a lending institution will run your credit scores and make a copy available to you. You can also contact the three credit reporting bureaus and request a copy. They are Equifax, Experian, and TransUnion. You are also entitled to one free copy of your credit report annually from each of these three bureaus. You can order a copy online at annualcreditreport.com or by calling 1-877-322-8228.
What steps can I take to improve my credit score?
If you find that you are struggling to meet minimum qualifications for an FHA loan due to your credit score, there are several steps you can take. Assuming that you already know your credit score, consider these steps:
- The FHA places a high value on making your existing debt payments on time for at least one year before applying for a loan. It may be simple and it may be obvious, but you should direct all your efforts to making sure you pay all your installment debts on time.
- Enroll in a Consumer Credit Counseling program. If you are struggling, this free service will help you address issues such as your income-to-debt ratio, how to budget and meet obligations on time, how to challenge any errors on your credit reports and more.
- Do not apply for any additional forms of credit, such as credit cards, car loans or other similar debt instruments. When you have too much available credit, even if you do not fully tap into it, this will be seen as a negative as it relates to your credit score.
Is there any leeway when it comes to credit score ranges and whether or not I will qualify for an FHA loan?
Under FHA rules, borrowers with good credit scores of 580 or above are eligible for the maximum amount of financing for an FHA loan. Borrowers in a marginal zone from 500 to 579 may still qualify by could be required to make a higher down payment due to a perceived higher risk.
What is important to note is that there are FHA minimum credit score standards and participating mortgage lender minimum standards. These two can vary quite a bit. For example, some lenders may require minimum credit scores in the mid-600s before approving a loan. In other instances, there may be “special case” scenarios that could allow for a few borrowers to qualify for a loan even if they have a FICO score below 500. While rare, the best thing you can do is start a conversation with several possible lenders to find out what their specific requirements are and what favorable factors may work to your advantage.
Closing costs can be included in the loan. If you’re a bit cash strapped or want to preserve funds to put into fixing up your new home, then you’ll be happy to know that closing costs can be included into the FHA loan, meaning that they can be paid over the life of the loan, instead of in one single lump sum. Closing costs may include a title report, appraisal, and other related fees. Be sure to compare loan costs with the same terms because mortgage lenders will typically charge more for a loan if those closing costs are included.
In addition to closing costs, you can also borrow funds to make repairs on your new home. The FHA offers a 203(k) loan for borrowers who want to use the extra cash to improve their homes. Loans are made up to a limit that is based on what the value of the home is projected to be after the repairs are made, so borrowers can access a greater amount of funds and still stay within program guidelines. There is also a streamlined 203(k) loan that gives borrowers the opportunity to finance up to $35,000 for non-structural repairs.
Mortgage lenders must be FHA approved. Because the FHA is not a lender and only insures loans, borrowers seeking an FHA home loan must go through a pre-approved lender. While this gives borrowers a certain level of peace of mind, it should be noted that different FHA-approved lenders will offer different interest rates and costs for the exact same loan. Therefore, it pays to shop around, ask questions and find the most competitive mortgage lender with the most consumer friendly underwriting standards.
What is the history of Federal Housing Administration?
The FHA was created as part of the National Housing Act of 1934, during the Great Depression and at a time when many banks failed causing a big drop in the ability of people to get home loans and enjoy home ownership. Because banks were in a crisis mode, they had to recall many home mortgages because vast numbers of homeowners who were out of work were unable to make mortgage payments. History shows that the FHA was originally intended to regulate and stabilize the terms of mortgages that it insured, giving more people access to home ownership. Since then, at various times of economic uncertainty, the FHA has been an important part of helping people obtain loans, with FHA loans growing to as much as one third of all homes purchased following the subprime mortgage crisis when the riskiest borrowers sought relief from the FHA. With assistance from the FHA, home ownership has increased from 40% in the 1930s to a high of 69% in 2005.
What is the role of the FHA?
Despite what many people think, the FHA does not issue loans. It provides mortgage insurance on loans made by FHA-approved lender in the United States. It is the largest insurer of single family, multifamily, and manufactured homes, and hospitals in the world. Since 1934, it has insured more than 34 million properties.
Where can I get more information on the FHA?
The Federal Housing Administration has been a part of the U.S. Department of Housing and Urban Development since 1965. You can access a wealth of information on their official website located here.
Low initial down payments make FHA home loans an affordable option for people trying to get into their first home. Conventional loans typically require as much as 20 percent of the value of a home as a down payment. However, FHA home loans can be offered with as little as 3.5 percent as a down payment because the balance of the loan is insured by the FHA. This gives mortgage lenders confidence that they will not lose funds in the loan transaction over time if a borrower defaults.
Borrowers have a lower barrier to entry into home ownership. Borrowers have to meet less stringent credit standards to obtain financing. With an FHA loan, your credit score can be as low as 500, but with a conventional loan, your credit score must be at least 620 to qualify for a loan. In addition, if you have major problems with your credit history, such as foreclosures or bankruptcies, then going the FHA home loan route means that less time needs to be elapsed before these items will no longer have a major impact on your ability to borrow funds.
Types of FHA home loans
- FHA Fixed Rate Mortgage. Fixed rate loans are the most common and are also known as 203(b) loans. FHA insurance can be rolled into the monthly payment and is roughly half the cost of what mortgage insurance would cost with a conventional loan. There is no minimum income required to qualify for an FHA loan, but a borrower must meet minimum debt ratios that are specific to the state where the home will be purchased.
- FHA Adjustable Rate Mortgage. Referred to as a Section 251 loan, these types of loans will have payments that will fluctuate over time as interest rates increase or decrease. The maximum amount of fluctuation in any single year cannot exceed one percent. Over the life of the loan the total fluctuation cannot exceed five percent from the initial rate. Borrowers are given about 30 days notice when the rate and their corresponding payment will change. It is also easy for borrowers to switch over to a Fixed Rate Loan at any time as well. This type of loan is limited to owner occupants.
- FHA Secure Refinance. When homeowners borrow money with adjustable rates, they can get into financial trouble if there is a spike in interest rates and their payments rise beyond their means. This can lead to foreclosure in many instances. To prevent foreclosure, the FHA helps homeowners who have missed as many as three mortgage payments in the previous 12 months to avoid foreclosure under this program. The program targets people who don’t already have an FHA loan, assisting them with lower payments to prevent a loan default and to protect their investment. To qualify, you must have steady income, and be able to show your current delinquency is the result of increased interest rates that have created higher mortgage payments.
- FHA Reverse Mortgage. This loan is designed for people 62 years and older. It allows borrowers to convert equity in their home into a line of credit or into income. It is paid back when the homeowner no longer lives in the property. Unlike other FHA loans, there are no income or credit qualifications for this type of loan. Borrowers are required to live in the home and claim it as their primary residence and the loan can be used for up to a four-unit complex as long as one of those units is occupied by the owner. When the home is sold, the loan is repaid from the proceeds of the sale of the property. Any remaining equity is returned back to the homeowner.
- FHA Energy Efficient Loan. Current or potential future homeowners can lower their utility costs by adding energy efficient improvements. With an FHA Energy Efficient Loan, the loan can be rolled into a regular FHA loan or by refinancing a current mortgage loan. This is part of the government’s overarching goal of making energy conservation and efficiency a way of life for as many Americans as possible. The loan can be combined with a conventional FHA loan as long as the LTV value stays under 96.5 percent. Energy Efficient Loans generally follow the guidelines laid out in the similar 203(k) FHA Loan program. To qualify, a borrower will need to get an energy savings audit by a qualified energy consultant or by using a home energy rating system. This type of loan is available only for single family homes and duplexes. Financing caps out at 5 percent of the property’s value up to $8,000, or $4,000, depending on which one is greater.
- FHA Graduated Payment. This type of loan is for home buyers who are currently considered low to middle income, but who expect to increase their income significantly over the next five to 10 years. Also referred to as a Section 245 loan, mortgage payments are allowed to grow over a period of up to 10 years. There are five loan options under this program. Three of them allow mortgage payments to increase by 2.5, 5 or 7.5 percent for the first five years of a loan. In the sixth year of the loan, payments will stay the same for the life of the loan. In the other two loans, payments increase at either 2 or 3 percent annually over 10 years. In the 11th year of the loan, payments will stay the same for the life of the loan. This type of loan is limited to owner occupants only.
- FHA Growing Equity Loan. Also known as the FHA Section 245(a) loan, this program allows borrowers to apply additional payments to their loans over time. These additional funds are applied directly to the principal balance of the loan, reducing the term of the mortgage. In effect, it allows borrowers to pay off their homes more quickly. Borrowers can select a plan that allows them to increase their payments by anywhere from one to five percent annually for the life of their loan. Over time, this will effectively cut the life of a loan down to no more than 22 years in duration, and could be much less with a more aggressive strategy. It is available only to borrowers who plan to make the home in question their primary residence.
- FHA Condominium Loans. Designed specifically for borrowers who want to purchase a condominium, this program allows loans to be taken out for 30 years on properties with at least four units. It is also known as a Section 234(c) loan. There are specific rules governing buildings that have been converted to condos from apartments. It is best to check with an FHA Home Loan specialist for exact details.
Focus on FHA Streamline Refinance Loan
The FHA Streamline Refinance loan allows people with existing FHA loans to refinance their mortgages. It is considered streamlined because the refinance process waives documentation typically required by a bank, including income, employment, FICO scores, new appraisals, and levels of home equity. Refinancing allows homeowners to readjust their loans to save money that can then be used for other more pressing purposes, such as paying for a child’s college education, reducing other debts, increased savings accounts, or for any other purpose. The only catch is that money cannot be pulled directly out of an FHA Streamline Refinance loan. Cost savings from the new loan must be manually applied by the homeowner to other areas they deem appropriate.
No home appraisal requirement means that homeowners in markets where there has been a significant downturn in housing prices can still benefit, making this a popular option. Under this program, the FHA will allow homeowners to use their original purchase price as their home’s current value or the home’s most recently appraised value, regardless of what it is currently worth on the market today. Although it may seem counterintuitive, the FHA Streamline Refinance loan program actually encourage homeowners to apply who are underwater on their home loans as a way of assisting them. Even under this scenario, there are no added costs or penalties.
Is an FHA Streamline Refinance Loan easy to get?
Yes! A few years ago, the FHA abolished most of the verifications that people normally must comply with to get a mortgage. Currently, to get an FHA Streamline Refinance loan, employment verification is not required; income verification is not required; and, credit score verification is not required. In addition, there’s no requirement for a home appraisal either. The reason for this is because the FHA’s chief role is to insure mortgages, and not fund them. So, it is in their best interest to help as many people as possible to qualify for the lowest mortgage rates possible.
What are the minimum standards to apply and be approved for an FHA Streamline Refinance Loan?
Although many of the traditional verifications for a loan approval are not used, there are still minimum standards that must be met when applying for this type of loan:
A perfect payment history is required for the past three months. Only one mortgage late payment is allowed in the previous 12 months. And loans must be current when you close.
There is a 210 day waiting period if you have recently refinanced your FHA loan. The FHA requires that a homeowner make a minimum of six mortgage payments on their current loan and that 210 days must have passed from the most recently loan closing date before a person can be eligible for an FHA Streamline Refinance Loan.
What is a Net Tangible Benefit and how does it factor into approval?
Applicants must demonstrate that there is a Net Tangible Benefit if they intend to refinance. In other words, there must be a legitimate reason for refinancing. Taking cash out to pay down other bills is not considered a Net Tangible Benefit, however, reducing a combined interest rate by more than one-half of one percent is. For example, if a homeowner has an FHA loan with an interest rate of 4.00% and a monthly mortgage premium of .85%, their combined rate is 4.85%. If they refinance and are quoted a new rate of 3.50% and a mortgage premium of .45%, their new combined rate is 3.95% for a net reduction of .90%. This means their FHA refinance application is eligible.
Another possible Net Tangible Benefit is refinancing an adjustable rate mortgage loan into a fixed rate loan.
What are the parameters with this type of loan?
The FHA Streamline Refinance is pretty much the same as a regular FHA loan. This means it is available as a fixed rate or an adjustable rate mortgage loan. It is available in a 15- or a 30-year term. There are no FHA prepayment penalties. There are no penalties for being under water on your current loan or if you have very little equity. And perhaps the biggest plus of all is that Streamline Refinance rates as the same as they are for FHA mortgage rates.
What are the FHA Loan maximum amounts?
On the surface, this sounds like a simple question, but there are many factors that go into determining what a maximum FHA loan amount will be, and they are not the same in every part of the country or even with every transaction.
One of the keys to determining a maximum loan amount depends on the housing market where you want to buy a home. There is no single or set dollar amount that establishes a limit for loans that will be guaranteed by the FHA.
Aside from housing markets, FHA loan limits are also impacted by loan-to-value ratios. These can vary from transaction to transaction. The LTV is calculated as a percentage of the loan satisfied by the down payment. FHA insured mortgages have a minimum LTV ratio of 96.5 percent based on a 3.5 percent minimum down payment. In some instances, the LTV will be required to be higher if the borrower has credit issues requiring a larger percentage down payment.
Actual mortgage limits are calculated based on median house prices within a Metropolitan Statistical Area. MSAs are typically determined by the census. Median house prices and corresponding loan limits are revised annually.
FHA Loan Calculator
Home buying is a complex process, but ultimately the one thing you must be most concerned with is how much your monthly payments will be after the transaction has been completed. You need to know if you’ll be able to afford your new home and how much you should budget each month so that you can responsibly manage your household budget.
You will need to consider several components of an overall payment so that you know can come up with the most accurate amount.
- Purchase price of the Home
- Down payment
- Term of the Loan
- Adjustable rate mortgage or fixed rate mortgage
- Interest rate
- Property taxes
- Homeowners insurance
To calculate how much your payments would be, you can use an FHA loan calculator found here.
In addition, you can also start to shop for a loan by comparing terms offered by several lenders. Bankrate.com is an excellent source for side-by-side comparisons and you can glean lots of information from one stop here.
Are there any other costs I should take into consideration when attempting to create a budget for my new home expenses?
In addition to the actual monthly costs associated with buying a home, you will also want to make sure you plan accordingly for several other related costs as well, especially if you are a first-time homebuyer. If you are coming from a rental situation, your landlord may have paid for some or all of your utilities. As a homeowner, you will now need to budget for things such as electric service, natural gas service, water, trash and other related expenses. If you are moving to a larger home than before, you might also expect to pay more for cable service if you increase the number of outlets.
What do I need to know about closing costs and how much they will impact my out-of-pocket expenses or what they will be if they are added into my loan?
In many cases, closing costs can be rolled into a loan and can be paid off as you pay off your loan over a 15-year or 30-year time frame. If you are buying a home there will be several line items associated with closing costs that you will need to take into consideration or at least be aware of so any sticker shock is minimized. Those costs can include most or all of the following:
- Origination charges
- Appraisal fee
- Credit report fee
- Flood certification
- Title search and lenders title insurance
- Home inspection
- Postage and courier fees
- Attorney, closing and settlement fees
- Government recording fees
- Transfer taxes
- Homeowner’s insurance
- Escrow insurance and escrow property taxes
- Title insurance
You can reasonably estimate what your closing costs might be by using a Closing Costs Calculator found here.
What are my closing costs if I am a seller?
In general, sellers can expect to pay about 1.5% of the sale price of a home, plus whatever broker’s commission has been negotiated. This will typically be between 5-7% of the sale price of the home. The seller will pay some or all of the following:
- Loan payoff costs
- Transfer and recording fees
- Title insurance fees
- Attorney fees
- Unpaid homeowner association dues
- Home warranty premium
- Repair bills or issue a credit to the buyer for agreed upon repair bills found during a home inspection.
What are FHA Loan Limits?
How do I find out what the FHA loan limits are for my state?
The FHA has a maximum amount that it will insure and this is known as the FHA lending limit. These limits are calculated annually. Some of the factors that go into figuring out what these amounts are include what type of home is being insured (single family or duplex) and also what loan limits are being set by Fannie Mae and Freddie Mac.
The U.S. Department of Housing and Urban Development maintains an FHA Mortgage Limits calculator page. Visitors can look up limits for more than one area and list them by county, state or Metropolitan Statistical Area. The results will also include a median sales price value for each jurisdiction. To access the calculator, go here.
What is a Jumbo Loan and how does it relate to FHA Loan Limits?
In some places, housing costs are so high that FHA loan limits and the conforming limit set by Fannie Mae and Freddie Mac severely impact a borrower’s ability to find an property they are interested in. When this happens, borrowers can apply for what is known as a Jumbo Loan. In many counties, any mortgage of more than $424,100 is considered a Jumbo Loan. In places where home prices are high, the conforming limit for Fannie Mae and Freddie Mac loans is $636,150. To find out what the FHA limits are by county, Bankrate.com has a mortgage calculator that will show what the limits are. To access the calculator and loan information, go here.
Qualifying for an FHA Home Loan
There are criteria that must be met to qualify for an FHA backed mortgage loan.
With few exceptions, your credit score must be at least 500. Conventional loans generally require a credit score of at least 620.
Mortgage lenders will look at your payment history and so it’s important to show you have made payments for all of your bills on time for the past 12 months prior to applying for a loan. This can offset some negatives if you have a low credit score resulting from bankruptcy, foreclosure or a short sale. When trying to determine loan worthiness, the FHA rulebook is clear that a borrower’s overall pattern of handling their financial matters is a critical part in determining whether or not an FHA loan should be approved.
The FHA does allow co-signers, co-borrowers and non-occupying co-borrowers to be a part of the loan. The lender will require that each borrower supply a credit report if they will have any part of the loan obligation.
FHA Home Loans do not feature a minimum or a maximum income requirement. Approval of loans is based on credit scores, income ratios and other factors. Not all lenders will offer all types of FHA Home Loans, so it’s best to shop around until you find the mortgage lender with the best terms and is willing to work with your particular situation.
A borrower is not required to be a citizen of the United States, but they must have legal status. A borrower must be able to prove that they are a lawful permanent resident. This proof can be provided by U.S. Citizenship and Immigration Services. A non-permanent resident alien must have a valid Social Security Number and have proof that they are legally allowed to work in the United States. With proper documentation, refugees and asylum seekers may also apply for an FHA Loan.
Because there are many lenders who offer FHA Home Loans, terms and rates are highly competitive. It is best to shop around with several lenders to see which one can offer you the most favorable terms for your situation.
FHA Loan Qualifications
While FHA loan qualifications are generally less stringent that conventional loan qualifications, there are still certain standards that must be met to get approval for a loan. Not all homebuyers are created equal, and many will bring unique and specific circumstances to the homebuying process that may require additional work or more documentation to ensure that a loan is granted.
One of the biggest hurdles that many potential homebuyers face is that in a rising home price market, several homes will be beyond the loan caps set by the FHA for loans. In most areas, this cap is $417,000, but in higher priced markets, this amount can be up to $625,150. Exceeding these values when applying for an FHA loan doesn’t mean you are out of luck, it simply means that you may need some form of a modified loan and you’ll have to take a few extra steps to qualify.
In today’s home-based technology driven economy, more people than ever are also self-employed, which can also present a few hurdles when applying for an FHA loan. Many lenders will take extra steps to prove that you have stability in your job, as well as producing several tax returns and bank statements to show your level of stability as well.
What are the requirements to successfully secure an FHA loan if I have gone through a bankruptcy?
When compared to a conventional loan, the waiting time is much shorter for someone who wants to apply for an FHA loan after they have gone through a bankruptcy. The type of bankruptcy will also have an impact on the waiting period (also known as the “seasoning period) before someone can apply for a loan.
For a Chapter 7 bankruptcy, a borrower must wait two years after the discharge date of the bankruptcy. Do not confuse this with the date the bankruptcy was filed. For a Chapter 13 bankruptcy, the FHA may allow a lender to approve an FHA loan application from a borrower who is still paying off their Chapter 13 bankruptcy. The only caveat is that the borrower has made those payments on time for at least one year. In addition, the court’s trustee must give written approval as a condition of the loan being granted and the borrower must submit a detailed written explanation of the bankruptcy and submit it with their application. The borrower must also have good credit and a stable employment history as well.
What happens if I apply for an FHA loan, but the property appraisal value is lower than my offer?
After an offer on a home has been accepted, a mortgage lender will order and appraisal to make sure the value of the loan requested meets the appraised value. If the appraised value comes back as lower than the offered purchase price, then there could be some trouble in getting the lender to issue a loan. Generally, they will not loan more than the value of the house. If this happens, then a buyer has a few options. They can offer a higher down payment to cover the difference between the loan amount and the purchase price of the home, or negotiate a lower purchase price with the seller, or move on to the next deal and find a more affordable property.
Can I apply for an FHA loan if I want to buy a mobile home?
Yes, but you will also need to buy the land you intend to live on or already own it. In addition, mobile home loans also have shorter terms and you may have to pay a higher interest rate than you would for a conventional single family home.
Conventional Loans Questions, Answered.
What is a conventional home loan and how is it different from an FHA loan?
A conventional home loan is one that is obtained by a borrower who works directly with a lender, such as a bank or a credit union. Typically, if has less paperwork and complexity than an FHA loan, since an FHA loan is a government backed loan program. There are some important differences and advantages worth noting between the two types of loans:
Conventional Loan Advantages
- Conventional loans are not capped, unlike FHA loans which have certain loan limits.
- Under certain circumstances a down payment can be as little as 3%
- Mortgage loan insurance is required only on loans exceeding 80% loan-to-value.
- Mortgage insurance will automatically end when a borrower reaches a 78% loan-to-value.
- Mortgage insurance is credit sensitive. The better your FICO score, the lower premium you may pay, unlike FHA mortgage insurance where one premium fits all.
FHA Loan Advantages
- Down payments can be as low as 3.5%.
- Will accept borrowers who have lower credit scores. In some cases this may be as low as 500, while conventional loans typically require a FICO score of 620 or above.
- FHA loans are assumable and can be eligible for streamline refinancing.
- May qualify for an FHA loan in a much shorter timeframe following a major credit problem. Must wait 7 years after a foreclosure and for years following a bankruptcy for a conventional loan. Must wait only 3 years after a foreclosure and 2 years after a bankruptcy for an FHA loan.
- Rates are usually less than for a conventional loan.
- Can use a non-occupant co-borrower to help qualify for the loan.
What are the requirements and guidelines to qualify for a conventional home loan?
If your personal circumstances dictate that you prefer to seek out a conventional home loan instead of an FHA home loan, there are several requirements and guidelines you will need to do to be successful:
- Down payment. The standard down payment for a conventional loan is 20%, although there are may ways to circumvent this requirement. You can choose a home loan program that requires a smaller down payment, and in some instances, no down payment at all. You may also choose to purchase mortgage insurance which is added to the cost of your monthly payment. You stop paying it when your loan reaches a required loan-to-value.
- Credit score. Most conventional loans follow the guidelines set by Fannie Mae and Freddie Mac, two of the largest lending institutions in the United States. Both purchase loans from other lenders, so those lenders are careful to make sure they loans they make will comply with Fannie and Freddie standards. As such, lenders require a credit score of at least 580 and some prefer a score of at least 620.
- Income. Your monthly mortgage and debt payments must not be more than 28% of your gross monthly income. This includes taxes, insurance and other fees. Your monthly mortgage payment when combined with your other monthly debt such as credit cards, student loans, car loans., etc. must not exceed 36% of your gross monthly income.
- Financial history. You will need to verify your employment and salary history for the past two years by supplying pay stubs and tax returns. If you are self-employed, you will need to provide additional documentation as well.
- Home price. In some areas, lenders will not loan to borrowers if the amount is more than $417,000 because this is the maximum amount that Fannie Mae and Freddie Mac will consider for a conventional loan.
How difficult is it to obtain a conventional loan after I’ve been involved in a foreclosure?
Going through a foreclosure can be a traumatic experience on many levels. In addition to the emotional turmoil, a homeowner is also going to be facing a certain degree of financial duress as well. In fact, many people wonder if they’ll ever be able to own a home again.
The good news is that while you will experience a large negative mark on your overall credit health, you can take steps and repair your credit over time. Regardless of whether or not you seek an FHA loan or a conventional loan, you’ll need to meet FICO score minimums to be successful. FHA loans are the most forgiving after a foreclosure, with only a three year waiting period that starts at the time the foreclosure case has ended. You may be able to apply sooner than that if you can show extenuating circumstances such as a divorce, job loss or a major illness or death in the family.
An FHA loan may not be for every borrower, and unfortunately, the waiting times will be a bit longer. Unless you can document extenuating circumstances, there will be a 7-year waiting period following a foreclosure. This is not a completely hard and fast rule though. Some lenders will shorten the time period if you make a larger down payment and agree to a higher interest rate.
In the short term, the best things you can do are pay your bills on time, keep credit balances low, monitor your credit scores and start an ongoing dialog with several lenders to make sure you understand exactly what you’ll need to do after a foreclosure.