Hey everyone, it’s Hayley Thomas again with C4 Elite Real Estate Team and Coldwell Banker. We are going to talk about FHA loans today. Hopefully we will answer some questions that you may have and help clear up any confusion.
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What is a FHA Loan?
FHA Loans are a government backed mortgage, which is insured and covered by the Federal Housing Administration. These loans are popular with first time home buyers. The requirements and qualifications are a little more lenient. For example, you have a lower minimum credit score requirement. Keep in mind, the down payment varies depending on credit score. First Time Home Buyers benefit from the FHA loan for a few reasons. The first one is that the credit score can be as low as 500 with some lenders, However, keep in mind, the lender may require you to have a a bigger down payment with a lower credit score. Secondly, they benefit the First Time Home Buyer due to lower down payments.
Down Payment for FHA Loan
If you are looking for less of a down payment, as many First Time Home Buyers are, there are options. With a better credit score, you can finance up to 97.5% of the loan amount. Minimum credit score for most lenders starts around 580. However, your down payment goes down to 3.5% of the sales price. An important item to note is that the down payment must be paid up front and cannot be included in the loan.
The source of the down payment has regulations and can require documentation depending on the circumstances. For example, if more than 2% of the sales price is put down or when it appears excessive based upon borrowers’ history of savings, the lender may require documentation on that. Some acceptable sources of a down payment are your savings or checking account. Also, cash savings at home or other account types, savings bonds, IRA’s, 401k investments, and gifts. Again, the down payment is again separate from closing costs. If receiving a gift from a family member be sure to discuss this with your lender ahead of time. You can also receive grants for the down payment from a government program. Please check with your lender on how this works and if you qualify.
Qualifications for FHA Loan
It is ideal to have two years’ work experience or two years with the same employer. This will be verified with pay stubs, tax returns, and bank statements. All lenders will require a ton of documentation so prepare ahead of time to supply this paperwork. Additionally, the lender may ask for updates of the same paperwork throughout the process. It seems very aggravating and repetitive; however, the guidelines are strict for lending money for homes. Be sure to submit what whatever the lender needs in a timely manner to prevent delays.
Debt to Income Ratio
Your Debt to Income (DTI) ratio cannot exceed 43% of the gross monthly income. However, some lenders do allow up to 50%. The DTI is monthly debt payments, excluding the mortgage, compared to your gross monthly income.
The appraisal must be done by an FHA approved appraiser and the property has to meet HUD guidelines. FHA appraisers, in addition to confirming the value for the lender, is looking for health and safety issues. Should any concerns arise, they are written up in the appraisal and must be taken care of prior to settlement.
If you have been through a bankruptcy recently, FHA says you must wait a minimum of two years to purchase a home using their program. If your past home was foreclosed by the bank, you must wait three years. Additionally, you must re-establish your credit and show good credit history after the bankruptcy or foreclosure. Some exceptions can be made for extenuating circumstances and that just depends on the lender.
Prime Mortgage Insurance (PMI)
FHA requires each borrower to have Prime Mortgage Insurance (PMI). PMI reduces the lender’s risk because it is a government backed loan and it is a requirement for all FHA loans effective in 2015. Most FHA home buyers take out a 30-year mortgages with down payments of less than 5%. At that the premium, the PMI is .8% of the loan amount per year. For example, a $300,000 home, that amount would be $2,400 annually. You must keep the PMI if the loan to value is 70% or less. It can be removed after 11 years if more than 10 percent was put down.
Every FHA loan will have a premium of 1.75% of the loan amount due at closing. In order to get rid of premiums, the loan you must do a refinance. It can be a streamline refinance, which is a much simpler process in that it does not require income verification. There is not a full credit check and typically there is no need to meet or to calculate the debt to income ratios. Additionally, the mortgage must be paid on time for 12 months and there is often no appraisal needed. A refinance will also switch loan programs and therefore remove the PMI. Be sure to talk to your lender about removing the PMI prior to taking out a FHA loan as rules change constantly.
Recap on FHA Loans
FHA loans are typically good for First Time Home Buyers and consumers with lower credit scores trying to build their credit. Additionally, it is a great option for those that may be having a hard time qualifying to buy a home. If you have a smaller down payment available, the FHA loan program might also be for you.
Please give us a C4 Elite Real Estate Team. We’d be happy to point you in the right direction of somebody that can answer your questions and help you get into an home. Thanks so much. Have a wonderful day.