What is a Federal Housing Administration (FHA) Loan?
In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home.
FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund.
Buy a house with as little as 3.5% down.
Ideal for the first-time homebuyers unable to make larger down payments.
The right mortgage solution for those who may not qualify for a conventional loan.
Down payment assistance programs can be added to an FHA Loan for additional down payment and/or closing cost savings.
fha loans vs. conventional home loans
The main difference between an FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.
if i've had a bankruptcy in recent years, can i get an fha loan?
Yes, generally a bankruptcy won’t preclude a borrower from obtaining an FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn't be paid.
what documents are needed to apply for an fha loan?
Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:
Employment
Complete Income Tax Returns for past 2-years
W-2 & 1099 Statements for past 2-years
Paycheck Stubs for past 2-months
Self-Employed Income Tax Returns and YTD Profit & Loss Statements for past 3-years for self-employed borrowers
Savings
Complete bank statements for all accounts for past 3-months
Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.
Credit
Recent bills & statements indicating account numbers and minimum payments
Landlord's name, address, telephone number, or 12-months cancelled rent checks
Recent utility bills to supplement thin credit
Bankruptcy & Discharge Papers if applicable
12-months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card; this indicates that you are not the one making the payments.
Personal
Driver’s License
Social Security Card
Any Divorce, Palimony or Alimony or Child Support papers
Green Card or Work Permit if applicable
Any homeownership papers
Refinancing or Own Rental Property
Note & Deed from any Current Loan
Property Tax Bill
Hazard Homeowners Insurance Policy
A Payment Coupon for Current Mortgage
Rental Agreements for a Multi-Unit Property
how big of an fha loan can i afford?
Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.
P = Principal
I = Interest
T = Taxes
I = Insurance
Examples:
Monthly Income x .29 = Maximum PITI
$3,000 x .29 = $870 Maximum PITI
Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.
Monthly Income x .41 = Maximum Total Monthly Costs
$3,000 x .41 = $1230
$1,230 total - $870 PITI = $360 Allowed for Monthly Long-Term Debt
FHA Loan ratios are more lenient than a typical conventional loan.