June 5, 2017 | Joshua Kruger
FHA = Federal Housing Administration. Traditionally more lenient in many ways than a conventional loan, FHA loans are insured by the government, making them far less risky than loans that lenders back on their own. This means that borrowers are more likely to get approved for these loans, even with poor credit, low down payments, or high debt-to-income (DTI) ratios.
Like anything in life, though, the easiest choice is not always the best. In any case, the first step in finding success with your FHA loan is having all the information on your side. Read on to discover the facts you need in determining whether an FHA loan is the right choice for you!
As with any loan, the scores of each applicant (read: you and your spouse) will be taken into account. For the past couple years, the minimum credit requirement for an FHA loan has been 580. Lower scores may be considered, however, if your loan-to-value ratio (LVT—the loan value of the home divided by the actual value of the home) is 90% or less. In other words, if you are able to provide a down payment of at least 10%.
With FHA loans, lower down payments are part of the major draw, especially for first-time buyers and other credit-challenged borrowers who don’t have a huge chunk of money to throw at the loan principal right off the bat. While the minimum requirement is 3.5% for an FHA loan, you may want to put additional funds down in order to reduce your monthly payment or help lower your insurance premiums.
Speaking of insurance premiums, this is a big consideration if you’re considering an FHA home loan. While mortgage insurance premiums are part of the deal for anyone not putting at least 20% down on their home, FHA borrowers pay an additional sum up front (1.75%) as part of their closing costs. While this sum can also be financed, it is important to remember that your normal MIP will still be included in that monthly payment as well.
It’s true: there are no FHA requirements specifically involving income. There is, however, a maximum DTI ratio (amount of your total monthly debt divided by your total monthly income) of 43% for FHA borrowers. While this amount may go up to 45% depending on your underwriter and other factors determining your creditworthiness, the wise choice is to limit yourself to a payment that you’ll be able to maintain comfortably in case of emergency.
Because the government is going to be held responsible for the amount of the loan should you default, they exact fairly strict housing regulations concerning the quality of homes they’ll approve for purchase. Mostly, these involve the home being safe and marketable enough to sell to appropriate buyers. The property may be any single-family unit, including condos, townhouses, and even certain mobile homes.
While FHA loans are typically most attractive to first-time buyers, the FHA also provides refinancing and reverse mortgage options to homeowners over the age of 62 and home loan options (the FHA Energy Efficient Mortgage Program) to owners looking to make certain improvements to their homes. Be sure to speak to a representative if you think you may qualify!
Yes, just like with any loan application, you will need to submit to credit checks and background reports. In the case of an FHA loan, you will specifically need to clear a CAIVRS (Credit Alert Interactive Verification Reporting System) report. This is the federal government’s rolodex of past borrowers who have proven delinquent on federally-backed loans, including student loan payments. While you’ll usually have to wait at least three years from the date of the claim payment before applying for another FHA loan, you may be approved if you’re currently involved in a payment plan or have paid the delinquency in full.
But wait . . . there’s more!
Loan limits – FHA loan limits vary from state to state and county to county. Check out the listings in your areas to determine what loan amount will work for you or contact one of our loan experts today!
Delinquencies – Most people believe that it will be impossible to secure a home loan after a delinquency as drastic as a bankruptcy or foreclosure. In the case of FHA loans, however, you need only wait a period of one to three years past the date of the bankruptcy, foreclosure or lien, depending on the specific payment issue (chapter 7, chapter 13, etc.).
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