FHA

HOME LOAN

3.5% Down Payment

FICO as Low as 600

Higher Debt to Income

Mortgage Insurance Required

What is an FHA Home Loan?

An FHA home loan is a government insured home loan designed for first-time home buyers, which is guaranteed by the Federal Housing Administration (FHA).The FHA home loan program continues to open the door to home ownership for millions of Americans who might struggle to secure conventional financing.

FHA loans require a low down payment of 3.5% of purchase price and borrowers may be able to qualify with a credit score as low as 600. For home buyers with less-than-perfect credit, FHA loans offer additional significant benefits. The government backing means average FHA interest rates are typically lower than average rates for conventional mortgages.

 

Requirements for FHA Home Loan

Income

A minimum 2 year work history is required for lenders to be allowed to use income earned from employment. Self employment income allowed, however, to qualify requires a minimum 2 year tax return history and a current profit and loss statement. Other forms of income such as disability, social security, child support are also allowed if it meets specific guideline requirements.

Credit

A minimum 600 FICO score is required. No bankruptcies in the previous 2 years and no foreclosures in previous 3 years.  Collection accounts over $2,000 may have an adverse affect in qualifying and high consumer debt may limit the amount of home loan a borrower may qualify for.

Assets

A buyer will be required to have enough cash to cover the down payment and closing fees (click here for more on closing fees). Buyer must have cash in the bank or in a retirement account that allows an early withdrawl. FHA home loans also allows be a family member to “gift” funds toward the down payment and closing fees.

Debt to Income  

The maximum allowed debt-to-income is 55%. This means that the mortgage payment, including taxes and insurance, plus monthly liabilities cannot exceed a buyer’s monthly income by 55%. For example, a borrower earns a $5,000 monthly salary and has a monthly debt liability of $500. The borrower is seeking buy a home and the estimated mortgage payment plus taxes and insurance is $2000. Does the borrower exceed the maximum debt-to-income allowed?

(mortgage payment and taxes and insurance) + (monthly debt liabilities) / (monthly salary)

$2,000 + $500 / $5,000 = 50% debt-to-income

The borrower has a debt-to-income less than the maximum allowed (55%), so the borrower may qualify for the home loan purchase. Other factors are also taken into considering to qualifying. 

Property  

Purchase property’s condition must conform to FHA guideline standards. Any deficiencies in the property will be the buyer’s responsibility to repair before closing (seller may agree to make contribution for repairs). Two to four unit property permitted. Condominiums allowed but must be FHA approved. Buyer must occupy property as a primary residence, 2nd homes and investment property not allowed.

FHA Financing Breakdown

3.5% Down Payment

A 3.5% down payment is required. For example, if a buyer purchases a home for $300,000, the down payment required on the purchase is  $10,500 ($300,000 x 3.5%).

FHA home loans have 2 types of mortgage insurance premiums:

Up Front Mortgage Insurance Premium 

This mortgage insurance premium is a one-time upfront payment that is financed into the home loan, so it is NOT an out-of-pocket expense to the borrower. The up front mortgage insurance premium is set at 1.75% of the loan  amount.

Example: A borrower buys a home for $300,000 and puts the minimum required 3.5% ($10,500) as down payment. The borrower will pay a premium on the loan amount $289,500 ($300,000 – $10,500). The loan amount is multiplied by 1.75%, which gives us the upfront mortgage insurance premium: $5,066.25. The $5,066.25 will be added to the loan amount. 

Monthly Mortgage Insurance Premium 

This mortgage insurance premium is paid monthly with the mortgage payments. The borrower is required to pay .85% of the loan amount annually. However, this payment is divided by 12 months, as the mortgage insurance premium is paid monthly along with the mortgage payments. The mortgage insurance premium is permanent and cannot be cancelled, regardless of how much equity the property gains. The only way to eliminate the mortgage insurance premium is to refinance into a conventional loan.

Example: A $289,500 loan amount will have a $205.06 monthly mortgage insurance payment.

$289,500 x (.85%/12) = $205.06

FHA Loan Limits

Loan limits vary by county.

 

Example of FHA Home Loan Purchase  

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