FHA (Federal Housing Administration) loans have been available for over 60 years. These loans offer chances to borrowers and first-time home buyers for financing when they may not meet conventional lending guidelines. First-time home buyers benefit greatly from FHA loans because the ability to finance up to 97% of the value of the home.
Why and when choosing a FHA loan?
As mentioned these loans can typically assist borrowers that may have been denied financing by conventional lenders. However FHA still has guidelines to adhere to and they go by the basic categories; capacity to pay (income and debt ratio), credit worthiness, collateral (home value), and assets (down payment). Below we will go into each category and discuss how FHA differs from conventional lending. This article will finish with the bigger factor associated with FHA loans, mortgage insurance.
Capacity to pay (debt to income)
Your capacity to repay the loan is the first component in the underwriting process. FHA doesn't have minimum requirements on the level of income the borrower makes. The only factor is the debt to income ratios, specifically 2 ratios.
Housing Payment to Gross Income
This ratio is calculated by taking the full mortgage payment (principal, interest, taxes, hazard insurance & mortgage insurance) then dividing it by the gross monthly income of the borrower(s). The maximum ratio is 29% for qualification.
Total Payments to Gross Income
This ratio will add your above total housing payment to all monthly revolving and installment debt payments (anything on your credit report, credit cards, student loans, car loans, etc.). Then divide that by the gross monthly income. This ratio is typically capped at 41%. In addition to reviewing your debt ratios FHA requires a solid job stability. They will require a 2 year employment history that is verifiable.
Credit Worthiness
Here FHA differs in the sense that it doesn't require a minimum FICO score. It will actually not care about your score at all. FHA will look at the overall credit profile and history of payments and accounts. Also conventional lending will require a minimum of open accounts. FHA does require a minimum of 2 lines of credit to apply but will accept alternative credit (utility bills, cell phone with a 12 month history of payments). FHA also will allow those that have had a bankruptcy (Chapter 7 or 13) and in some cases even a Foreclosure. FHA wants to know more of your history and explanations behind credit problems. Where conventional lending is more stringent and will deny without an explanation. FHA is more forgiving on a case by case basis and encourages borrowers to explain themselves.
Collateral
FHA will require an appraisal and also an in depth inspection of the property. You aren't required by conventional lenders to obtain an inspection, that is typically just a benefit to you. FHA does require the inspection for themselves. FHA also has lending limitations based on the type of property and where it is located (state and county). For instance a single family home located in Boston, MA (Suffolk County) would be limited to a loan amount of $362,790. You can found the fha mortgage limits on the HUD website.
Assets and/or Down Payments
The biggest difference in this category is FHA will allow for the borrower to obtain Down Payment Assistance for those who qualify. There are numerous down payment assistance programs available they allow buyer to purchase there home with little or no funds up front. Gift funds are allowed to be used to pay for closing costs and down payment. FHA will require a gift letter, gift giver to be a relative of the borrower, and that the funds be deposited into the borrower's account or escrow account for closing.
Mortgage Insurance
The main difference between most conventional programs and FHA is the mortgage insurance. Put simply mortgage insurance protects the lenders against loss if the borrower goes into default. FHA's mortgage insurance basically allows most loans to become approved since the lender will be protected. It is required on any loan where the loan to value is higher than 80% (or when the buyer has less than 20% down payment). The cost of mortgage insurance is 1.5% of the loan amount up front at closing and then 0.5% of the loan per year included in the monthly mortgage payments. For example mortgage insurance for a $200,000 loan would be $3,000 up front and $83.33 per month. Mortgage insurance will continue for 5 years or when loan to value reaches 78%.
FHA loans for first time home buyers
In conclusion, FHA programs are great for first-time home buyers with little funds available for down payment and also those with a checkered credit history. So if you are interested in buying your first home make sure you keep an FHA program in mind it could be your best option.
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FHA (Federal Housing Administration) loans have been available for over 60 years. These loans offer chances to borrowers and first-time home buyers for financing when they may not meet conventional lending guidelines. First-time home buyers benefit greatly from FHA loans because the ability to finance up to 97% of the value of the home.
Why and when choosing a FHA loan?
As mentioned these loans can typically assist borrowers that may have been denied financing by conventional lenders. However FHA still has guidelines to adhere to and they go by the basic categories; capacity to pay (income and debt ratio), credit worthiness, collateral (home value), and assets (down payment). Below we will go into each category and discuss how FHA differs from conventional lending. This article will finish with the bigger factor associated with FHA loans, mortgage insurance.
Your capacity to repay the loan is the first component in the underwriting process. FHA doesn't have minimum requirements on the level of income the borrower makes. The only factor is the debt to income ratios, specifically 2 ratios.
This ratio is calculated by taking the full mortgage payment (principal, interest, taxes, hazard insurance & mortgage insurance) then dividing it by the gross monthly income of the borrower(s). The maximum ratio is 29% for qualification.
This ratio will add your above total housing payment to all monthly revolving and installment debt payments (anything on your credit report, credit cards, student loans, car loans, etc.). Then divide that by the gross monthly income. This ratio is typically capped at 41%. In addition to reviewing your debt ratios FHA requires a solid job stability. They will require a 2 year employment history that is verifiable.
Here FHA differs in the sense that it doesn't require a minimum FICO score. It will actually not care about your score at all. FHA will look at the overall credit profile and history of payments and accounts. Also conventional lending will require a minimum of open accounts. FHA does require a minimum of 2 lines of credit to apply but will accept alternative credit (utility bills, cell phone with a 12 month history of payments). FHA also will allow those that have had a bankruptcy (Chapter 7 or 13) and in some cases even a Foreclosure. FHA wants to know more of your history and explanations behind credit problems. Where conventional lending is more stringent and will deny without an explanation. FHA is more forgiving on a case by case basis and encourages borrowers to explain themselves.
FHA will require an appraisal and also an in depth inspection of the property. You aren't required by conventional lenders to obtain an inspection, that is typically just a benefit to you. FHA does require the inspection for themselves. FHA also has lending limitations based on the type of property and where it is located (state and county). For instance a single family home located in Boston, MA (Suffolk County) would be limited to a loan amount of $362,790. You can found the fha mortgage limits on the HUD website.
The biggest difference in this category is FHA will allow for the borrower to obtain Down Payment Assistance for those who qualify. There are numerous down payment assistance programs available they allow buyer to purchase there home with little or no funds up front. Gift funds are allowed to be used to pay for closing costs and down payment. FHA will require a gift letter, gift giver to be a relative of the borrower, and that the funds be deposited into the borrower's account or escrow account for closing.
The main difference between most conventional programs and FHA is the mortgage insurance. Put simply mortgage insurance protects the lenders against loss if the borrower goes into default. FHA's mortgage insurance basically allows most loans to become approved since the lender will be protected. It is required on any loan where the loan to value is higher than 80% (or when the buyer has less than 20% down payment). The cost of mortgage insurance is 1.5% of the loan amount up front at closing and then 0.5% of the loan per year included in the monthly mortgage payments. For example mortgage insurance for a $200,000 loan would be $3,000 up front and $83.33 per month. Mortgage insurance will continue for 5 years or when loan to value reaches 78%.
FHA loans for first time home buyers
In conclusion, FHA programs are great for first-time home buyers with little funds available for down payment and also those with a checkered credit history. So if you are interested in buying your first home make sure you keep an FHA program in mind it could be your best option.