FHA Mortgage Basics

Today, I am covering FHA Loan basics, which has information about this exciting loan option. Today FHA has proven once again what a great program it is by either helping people stay in their homes or by giving them the opportunity to purchase a piece of the American dream. This can be done with an affordable mortgage through FHA with less than perfect credit or with not a lot of funds available.

 FHA Basics:

Maximum Loan Amount: click on Loan Limits for your area.

Credit score minimum: 580(yes and no) When the loan is submitted initially , it's first step is through an automated underwriting system(computer). If the loan is accepted at that point, even if the credit score is 500, the loan can be done. However, if the results come back as a decline. A loan where the borrowers credit score is less than 580 will not have the option of being manually underwritten(a human being).

It is also important to understand that when any FHA loan is underwritten the weight given to the borrowers credit score is much less than conventional loans.

Example:

Credit score: 560 

Debt Ratio: 24%/35%

Loan to Value: 70%

Since all the factors above were excellent, except for the borrowers credit score, the automated underwriting system gave an Accept.   However, if the Loan to Value had been 97% the results would  be a decline and with a credit score of 560 the loan could not be manually underwritten. This illustrates the very nature of FHA in that each borrowers overall scenerio is different, so a complete picture of the borrowers situation is needed.

Credit score minimum to get best rates: 580(that being said, FHA is moving to a mortgage insurance plan that is risk based(credit score and LTV) that will reduce or increase the borrowers premiums depending on their situation as of July 14th.

Mortgage Insurance: Currently the FHA Mortgage Insurance premium is 2%. 1.5% of the loan amount is added to the loan total and .5% is calculated as a monthly premium over the life of the loan. These percentages are changing on July 14th.

Maximum Loan to value on a purchase or a no cash-out refinance is 97%.

Maximum Loan to value for a cash-out refinance is 95%.

Debt to Income:  31%/43%(these ratios can be exceeded, depending on the situation)

Employment: 12 months continual employment.

Rent or Mortgage: Last 12 months on time(If there is a 30 day late this will reduce the available LTV significantly)

Full Income Documentation: Most often 2 years W-2's(if you are self employed 2 years 1040's, look at line 37 of these forms and add up both years. Divide by 24 and this will give you a rough estimate of the income that will be used to qualify.)

Room and Board income: is accepted if boarders are related by blood, marriage or law , however it must be documented on the borrowers tax returns.

Common Property types: single family, manufactured, 2-4 unit homes & condominiums.

Property must be owner occupied

Gift Funds:

With FHA gift funds can go up to 6%. Plus the 3%(included in the 6%) minimum down payment can come from either family members or a non-profit organization(contact me for details on this).

All basic guidelines listed here are not always set in stone and can vary with the borrowers situation. Also not all guidelines are listed. This information is meant to give a solid foundation of basic FHA loan guidelines.