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FHA Loans

FHA home loans, backed by the Federal Housing Administration (FHA), provide mortgage security against default. They cater to both single-family and multifamily residences, enabling banks to lend with minimal risk or capital demands. Rather than originating loans or determining interest rates, the FHA ensures against default.

These loans benefit individuals, particularly first-time homebuyers, who might not meet conventional mortgage criteria. They feature low minimum down payments, reasonable credit standards, and adaptable income prerequisites.

What is an FHA Loan?

Established in 1934, the Federal Housing Administration (FHA) aimed to enhance housing standards and establish a reliable home financing system through mortgage insurance. This initiative opened doors for families previously excluded from the housing market to realize their homeownership dreams.

Rather than originating home loans, the FHA provides loan insurance; in case of default by the homebuyer, the lender receives payment from the insurance fund.

Key features of FHA loans include:

  • Purchasing a house with a minimal down payment of just 3.5%.
  • Suited for first-time homebuyers who struggle with larger down payments.
  • A viable mortgage solution for individuals ineligible for conventional loans.
  • Access to down payment assistance programs, supplementing FHA Loans for additional down payment or closing cost savings.
Eligibility Overview
  • 580 minimum FICO score 
  • Borrower must intend to live in the home as his or her primary residence
  • The amount borrowed must be within FHA loan limits which vary by county and are higher in parts of the country where real estate is more expensive
  • One to Four Unit Homes, Manufactured, Approved Condos, PUDs
Documents Needed for FHA Loans

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
  • Pay-Check 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

  • Drivers 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
FHA vs Conventional

The primary distinction between an FHA Loan and a Conventional Home Loan lies in the lower down payment requirement and less stringent credit qualifications of the FHA Loan. This accessibility enables individuals without a credit history or those with minor credit issues to achieve homeownership. FHA mandates a reasonable explanation for any negative credit history but employs practical credit assessment methods. Certain borrowers, particularly those with extenuating circumstances like a bankruptcy discharge three years prior, can overcome past credit challenges. In contrast, conventional financing heavily relies on credit scoring provided by agencies such as Experian, TransUnion, or Equifax. Failure to meet the minimum credit score threshold could result in disqualification.

How Much Can I Afford?

For an FHA Loan, it’s recommended that your monthly expenses stay within 31% of your gross monthly income. These combined housing costs are often referred to as PITI:

  • P = Principal
  • I = Interest
  • T = Taxes
  • I = Insurance

Here’s an example calculation: Monthly Income x .31 = Maximum PITI For instance, if your monthly income is $4,000: $4,000 x .31 = $1240 Maximum PITI

Your total monthly expenses, including PITI and long-term debts like car loans or credit card payments, should ideally not surpass 43% of your gross monthly income.

Monthly Income x .43 = Maximum Total Monthly Costs For example, with a monthly income of $4,000: $4,000 x .43 = $1720 Subtracting the maximum PITI ($1240) leaves $480 allowed for monthly long-term debt.

FHA Loan requirements tend to be more forgiving compared to conventional loans.

For more information, check out the Mortgage Calculators.

Bankruptcy and FHA Loans

In general, filing for bankruptcy does not automatically disqualify a borrower from securing an FHA Loan. It is advisable for a borrower to have rebuilt their credit by maintaining at least two active credit accounts, such as a car loan or credit card, ideally for a minimum of two years following the discharge of a Chapter 7 bankruptcy. For Chapter 13 bankruptcy, the borrower should have completed a minimum of one year of repayment (subject to court approval). Additionally, the borrower should have maintained a clean credit history without any late payments, collections, or credit charge-offs since the bankruptcy. However, exceptions may be granted in cases where the borrower has experienced extraordinary circumstances, such as serious medical issues leading to bankruptcy due to the inability to cover high medical bills.