What's an FHA Loan?
The Federal Housing Administration, (FHA) was established in 1934 to improve housing standards and conditions and to supply an adequate home financing system through insurance mortgages. Families that would preferably be excluded from the housing market were finally in a position to shop for the homes of their dreams under this program.
An FHA loan allows you purchase a house with as little as 3.5% down, rather than increased percentages required to secure many typical conventional loans. Taking advantage of the FHA loan program may be a great method for first time home buyers, or anyone with a shortage of down payment funds, to purchase a home.
The FHA does not originate or create home loans. They insure them. If a home buyer defaults, the lender is paid from the insurance fund. This can be an excellent mortgage alternative for those starting out or those having some difficulty obtaining a conventional loan.
FHA Loans vs. Typical Home Loans
The main advantage of FHA home loans is that the credit qualifying criteria for a borrower does not seem to be as strict as standard mortgage financing. FHA can allow the borrower who has had a few "credit issues" or those with little credit history to obtain financing. However, good rationalization of these derogatory items will be considered when an underwriter reviews the entire credit history. Most notably, borrowers with extenuating circumstances surrounding bankruptcy, require a minimum two years discharge prior to their loan application. Standard financing, on the opposite hand, relies heavily upon credit scoring. Credit scores are issued by credit repositories such as Experian, Equifax, and Transunion. These scores rank your total credit history. How you pay your bills on time? or late?, affect your credit scores among numerous other factors. Your mortgage, automobile, and credit card loan payments and outstanding balances are just some examples of how credit scores are determined. Your credit scores play a major role in obtaining credit which reflect your ability to repay your indebtedness.
I've filed bankruptcy in previous years. Will I be able to obtain an FHA loan?
Generally a bankruptcy can not preclude a borrower from getting an FHA loan. Ideally, a borrower should have at least two re-established credit accounts (such as credit card, automobile loan, etc.) A chapter 7 discharge should be a minimum of two years old before applying. The borrower should not have any late payments, collections, or credit charge off's since the discharge of bankruptcy.
Although rare, if a borrower has suffered through extenuating circumstances ( such as surviving cancer, but had to declare bankruptcy because medical bills were impossible to repay). Special exceptions may be made on a case by case basis.
What documents are needed for an FHA loan?
The approval process is based upon receiving all the necessary, up to date documentation your loan officer and processor request. To ensure a smooth transaction, take the extra steps gathering this personal documentation in advance of meeting or talking with your loan officer. The following is a list of general documentation and perhaps additional items may be requested from an underwriter during your loan process.
Most recent 2 years (complete signed w/all schedules) federal income tax returns, (1040's)
Most recent 2 years W-2's, 1099's, etc.
Paystubs (current/updated - covering one month)
(If applicable self employed) - 2 years 1020's all schedules & signed
Savings Information - (3 mos bank statements all pages)-checking & savings
Retirement Account - (most recent statement - 401 k, mutual funds, money market, stocks, etc.
Revolving & Installment bill statements - current statement showing minimum monthly payment & balance
If Applicable - name, address, phone number of landlord ( 12 mos cancelled checks ).
If Applicable - (No Credit) Copy of all utility bills for establishing credit.
If Applicable - (Bankruptcy) Copy of complete filing including all schedules & final discharge.
If Applicable - (Copy of Co-Signed Note) Copy of 12 mos canceled checks(front & back) from third party showing you do not make the payments.
Copy of Driver's License.
Copy of Social Security Card.
If applicable - (Divorce Papers - All pages including alimony, child support and or Palimony.
If Applicable - (Green Card or Work Permit, Visa)
If a Refinance or you own Rental Property
Copy of Note & Deed from subject property.
Copy of Property Tax Bill.
Copy of Home Owners Insurance Policy, (Hazard Policy)
How much of an FHA Loan can I afford?
For an FHA loan , your monthly housing costs should not exceed 29% of your gross monthly income. Total monthly housing expenses include: Mortgage principal and interest, 1/12th annual property taxes, 1/12th annual hazard insurance, and 1/12 mortgage insurance premium(MIP). This combined monthly housing expense is known as PITI.
Monthly Income x .29 = Maximum PITI
For a monthly income of $3,000. That means $3,000. x .29 = $870 ( Maximum PITI )
Your total monthly minimum debts (e.g. car payment, credit card, child support, etc.) are now added to your monthly housing expenses for a combined total. This figure may not exceed 41% of your gross monthly income.
Monthly Income x .41% = Maximum PITI and Combined Monthly Minimum Expenses ( PITI + Monthly Debts)
For a monthly income of $3,000. That means $3,000. x .41 = $1230.
Based upon the example above, a person who makes $36,000 annually has $3,000 per month of gross monthly income. Their PITI cannot exceed $870. Also, that figure plus total minimum monthly debt cannot exceed $360. A total of the combined PITI & Monthly Minimum Debt x Gross Monthly Income. $870 + 360 = $1230 (41%) GMI