FHA Loan Requirement & Fundamentals
An FHA (Federal Housing Administration) loan allows borrowers to buy a home by way of a small down payment. Presently the minimum is 3.5%. The government actually started the program back in the 1930’s after the great depression in order to stimulate the housing market because the banks were afraid to lend money, and most people didn’t have a down payment.
In order to qualify for an FHA loan, you need a middle score of 620. We are always looking for 3 trade lines of credit activity in the mortgage business. Twelve months history is the minimum length required for us to officially consider a trade line and we love to see them on the credit report. This can include existing mortgages, credit cards, car payments, and other installment loans or lines of credit. Often times we can use alternative trade lines if you don’t have 3 trade lines on your credit report. This can consist of things like car insurance, electric bills, and cable, however the lenders prefer rent. It is always better to pay your rent with a check instead of cash because it’s preferable to show cancelled checks as verification.
Negative credit occurances like foreclosures, bankruptcies, and short sales can affect your chance to be accepted for an FHA loan despite your score. You must wait 3 years after bankruptcy discharge, 2 years with an reasonable exception, before you can get approved for an FHA loan. You have to be able to document a noteworthy hardship to get an exception. With no wiggle room or exceptions allowed, three years is the seasoning period required for a foreclosure. You will have to wait 2 years for a short sale, however if there is a bankruptcy with a short sale, you are back to 3 years before you can acquire FHA financing.
Most of our underwriters allow a low level of collection activity. Clearly the older any credit card collections the better, and medical bills are pretty much ignored. A maximum of $5000 for total collection is a good rule of thumb, but this is really an individual issue and the strength of the file may cause the underwriter to decrease or increase this amount. The main point is that even if you have some collections, it does not mean you can’t get approved for an FHA loan. Finding out if you are qualified to buy will only take minutes…
You will need to have 2 years of work history in order to qualifying for an FHA loan, preferably in the same type of work. However the work history can be from more than one company. The exception to the 2-year rule is where a person has recently graduated from college or trade school, and the degree they received is in the same field that they are now employed. We would need transcripts and degree to supply for confirmation. If you are self employed, you will be required to produce 2 years of tax returns. It is crucial to find out how much home you qualify to purchase before you look at houses by getting a pre-approval.
Money Required to Close
FHA loans call for a down payment of 3.5%, and closing costs in The Villages can account for an additional four to six percent depending on the size of your loan. So all together, you are looking at about 7.5% to 9.5% of the purchase price that will be needed for cash to close, however there are ways that your Landmark Mortgage Planner can assist you in reducing this burden if cash to close is a problem for you.
One of the ways we can help diminish the amount of cash you will need to close on your FHA loan is through the use of gifts. Some lenders require the gift be from a family member, but some aren’t as strict on this requirement and allow the gift to come from anybody. There are no boundaries as to the percentage of the gift – the contributor is permitted to pay for the whole down payment and the entire closing cost. We will have to document the source of the funds through a gift letter and confirmation from the giver’s bank.
No matter where the funds are coming from, we will have to prove the source and verify that the money has been there for at least 2 months. The underwriter will find out if there are any deposits that are not payroll associated. For example if you sell the boat (or make any other deposits outside of your regular paycheck), it is critical that you document the deposit before you make it. A great way to be sure not to miss anything is to keep a duplicate of every piece of paper that you come in contact with during the transaction. In the case of the boat sale that would include the check from the buyer, a copy of the title and the deposit slip. This record is necessary by federal law in an effort to lower mortgage fraud and possible money laundering.
FHA loans additionally allow seller concessions up to 6% of the sales price. Seller concessions are when the seller pays all or some of the closing costs for you. Sometimes the selling bank is only willing to pay 3% on foreclosed homes. However, don’t let this confuse you. If you are able to get it, FHA allows 6%. It is pretty common to ask for closing costs on FHA loans in today’s market, so don’t feel like you are presenting a weaker offer if it is asking for closing costs from the seller. However, because you are asking the seller to decrease the price by the quantity of the closing costs, you may want to adjust your offer price to be competitive particularly if there is more than one offer on the home.
Consult a Landmark Mortgage Planner to learn other ways that we can help reduce the amount of cash needed to close.
Although there are some property requirements for an FHA loan that are stricter than conventional financing, the primary thing to keep in mind is that the house has to be functional.
We will have to acquire an FHA appraisal that will be more serious about items that usually would not be an issue on a conventional mortgage. Things like loose light switch covers or screens may be a concern depending on the appraiser. Flooring is a more evident issue, for molding needs to be in place and carpet needs to be installed properly. The A/C and/or central heat needs to be present and working. When looking fot a home that you plan to finance with an FHA loan, you should be aware of functionality issues. You may want to consider an FHA 203K Loan, if a home you like has more repairs than you want to make yourself. This allows you to finance the purchase of the home along with the repairs or remodeling with one low rate mortgage loan.
You should be made aware that there are FHA loan limits specific to your county. These limits depend on the median income of the residents within that county. By entering the state and county where the home is located, you can look up those loan limits on the HUD website.
Because there are no geographical limitations with the FHA financing program, as long as it is going to be your primary residence, you can get an FHA loan on a house regardless of where it is located. However, you can’t use an FHA loan to purchase an investment property or a 2nd home. As long as you plan to live in one of the units, multi-unit properties are acceptable on an FHA loan, up to 4 units.
Acreage can sometimes be a problem with FHA financing. The majority lenders will give value for only 5 acres, and the land cannot be worth more than the home on an FHA loan.
FHA can be a fantastic product but there are some limitations and extra requirements. It is always best to apply online to get pre-approved or meet with a mortgage planner before you look for a house so you can shop with confidence.