FHA LOAN

What is an FHA Loan?

The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and conditions and to provide an adequate home financing system through insurance of mortgages. Families that would otherwise be excluded from the housing market were finally able to buy the homes of their dreams under this program.

An FHA loan allows you to buy a house with as little as 3.5% down, instead of the higher percentages required to secure many conventional loans. Taking advantage of the FHA loan program is a great way for first time buyers, or anyone with a shortage of down payment funds, to buy a home.

The FHA does not make home loans--it insures them. If a home buyer defaults, the lender is paid from the insurance fund. This is a perfect mortgage solution for those starting out or those having a tough time qualifying for conventional loans.

An FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan which is provided by a FHA-approved lender. FHA insured loans are a type of federal assistance and have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. To obtain mortgage insurance from the Federal Housing Administration, an upfront mortgage insurance premium (UFMIP) equal to 1.75 percent of the base loan amount at closing is required, and is normally financed into the total loan amount by the lender and paid to FHA on the borrower's behalf. There is also a monthly mortgage insurance premium (MIP) which varies based on the amortization term and loan-to-value ratio.

The FHA does not make loans. Rather, it insures loans made by private lenders, like 7^th Level Mortgage. The first step in obtaining an FHA loan is to contact several lenders and/or mortgage brokers such as 7^th Level Mortgage and ask them if they are FHA-Approved by the U.S. Department of Housing and Urban Development to originate FHA loans. As each lender sets its own rates and terms, comparison shopping is important in this market.

Second, the lender or broker ie. 7^th Level Mortgage, assesses the prospective home buyer for risk. The analysis of one's debt-to-income ratio enables the buyer to know what type of home can be afforded based on monthly income and expenses and is one risk metric considered by the lender. Other factors, e.g. payment history on other debts, are considered and used to make decisions regarding eligibility and terms for a loan. FHA loans for buyers who don't meet a minimum 620 FICO score may be subject to higher mortgage rates.

Although FHA establishes minimum FHA qualifying criteria for this type of loan, each lender that offers FHA financing may have stricter criteria or overlays. Not all lenders offer the same approval criteria so it is important to make sure you are dealing with a lender like 7^th Level Mortgage, LLC. We do NOT restrict FHA credit criteria nor do we impose any overlays.

For example, FHA will allow a borrower to qualify with a 55% total debt to income ratio. Most lenders have tightened their guidelines and will not approve borrowers with more than a 50% debt to income ratio. At 7^th Level Mortgage, LLC, we follow FHA guidelines and give homeowners every opportunity to qualify with no restrictions or overlays to the program.

Freddie Mac’s program

http://www.freddiemac.com/singlefamily/homepossible/

Fannie Mae’s program
https://singlefamily.fanniemae.com/media/7426/display

Most Prospective homebuyers seek to purchase a home using the FHA loan program for a variety of reasons. Mostly, first time home buyers and even repeat homebuyers will qualify under the FHA loan program because it has expanded qualifying criteria.

1. FHA allows for a down payment of only 3.5% of the purchase price
2. Debt to income ratio’s are expanded to 55% instead of 43- 45%
3. Down payments can be gifted from immediate family members
4. Credit score requirements are lowered to a minimum of 580
5. There are shorter waiting periods, typically 2 to 3 years from a discharged bankruptcy, foreclosure or short sale.
6. Seller’s can contribute up to 6% of the purchase price towards the closing costs

Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. An FHA down payment of 3.5 percent is required. Borrowers who cannot afford a traditional down payment of 20 percent or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario. Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.

You knew there had to be a catch, and here it is: Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront – or, it can be financed into the mortgage – and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.

Upfront mortgage insurance premium (MIP) — Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.

Annual MIP (charged monthly) —Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower's loan-to-value (LTV) ratio, loan size, and length of loan. There are different Annual MIP values for loans with a term greater than 15 years and loans with a term of less than or equal to 15 years. Loans with a term of greater than 15 Years and Loan amount < or =$625,000.

• Loans with a term of greater than 15 Years and Loan amount < or =$625,000
  • LTV less than or equal to 95 percent, annual premiums are 1.30%
  • LTV above 95 percent, annual premiums are 1.35%.
• Loans with a term of greater than 15 Years and Loan Amount >$625,000
  • LTV less than or equal to 95 percent, annual premiums are 1.50%
  • LTV above 95 percent, annual premiums are 1.55%
• Loans with a term of 15 years or less and Loan amount < or =$625,000
  • LTV less than or equal to 90 percent, annual premiums are .45%
  • LTV above 90 percent, annual premiums are .70%
• Loans with a term of 15 Years or less and Loan Amount >$625,000
  • LTV less than or equal to 90 percent, annual premiums are .70%
  • LTV above 90 percent, annual premiums are .95%

Example (for LTV less than 95 percent on a 30 year loan): $300,000 loan x 1.30% = $3,900. Then, divide $3,900 by 12 months = $325. Your monthly premium is $325 per month. The Mortgage Insurance will be in your payments for the entire loan term if your LTV is >90%. If your LTV is = or < 90%, the Mortgage Premium will be for the mortgage term or 11 years, whichever occurs first.

Single family home mortgages with amortization terms of 15 years or less, and a loan-to-value (LTV) ratio of 78 percent or less, remain exempt from the annual MIP.

FHA Mortgage Insurance Duration

• The duration of your annual MIP will depend on the amortization term and LTV ratio on your loan origination date. Please refer to this chart for more information:

Basic FHA Loan Requirements

• Must have a steady employment history or worked for the same employer for the past two years
• Must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state
• Must make a minimum down payment of 3.5 percent. The money can be gifted by a family member.
• New FHA loans are only available for primary residence occupancy
• Must have a property appraisal from a FHA-approved appraiser
• Your front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, home insurance) needs to be less than 31 percent of your gross income, typically. You may be able to get approved with as high a percentage as 46.99 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
• Your back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of your gross income, typically. You may be able to get approved with as high a percentage as 56.99 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
• Minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
• Minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants' credit worthiness.
• Typically you must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you've managed your money in a responsible manner.
• Typically you must be three year out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you've improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.

FHA Loans vs. Conventional Home Loans

The main advantage of FHA home loans is that the credit qualifying criteria for a borrower are not as strict as conventional financing. FHA will allow the borrower who has had a few "credit problems" or those without a credit history to buy a home. FHA will require a reasonable explanation of these derogatory items, but will approach a person's credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding bankruptcy that was discharged 2 years ago can work around the credit hurdles they created in their past. Conventional financing, on the other hand, relies heavily upon credit scoring. Credit scoring is a rating given by a credit bureau (such as Experian, Trans-Union, or Equifax) which ranks you upon your credit profile. For each inquiry, credit derogatory or public record that shows up in your credit report, your score is lowered (even if such items are in error). If your score is below the minimum standard, you will not qualify--end of story.

I've had a bankruptcy in recent years. Can I get an FHA loan?

Generally a bankruptcy will not preclude a borrower from obtaining an FHA loan. Ideally, a borrower should have re-established a minimum of two credit accounts (such as a credit card, car loan, etc.) and wait 2 years since the discharge of a Chapter 7 bankruptcy or have a minimum of 1 year of repayment with a Chapter 13 (the borrower must also seek permission of the courts to allow this). Furthermore, the borrower should not have any late payments, collections, or credit charge-offs since the discharge of the bankruptcy.

Although rare, if a borrower has suffered through extenuating circumstances (such as surviving cancer but had to declare bankruptcy because the medical bills were too much), special exceptions can be made.

What documents are needed for an FHA Loan?

It is important to understand that the loan approval is 100% dependent on the documentation you provide. To insure a smooth transaction, it is crucial that you have all your documentation in order before the initial application of the loan.

Employment Information

• Most recent two years complete tax returns with all schedules.
• Most recent two years W-2's, 1099's, etc.
• Most recent pay stubs covering one month period.
• If applicable: Self-employed will need three years Tax Returns and Ytd Profit & Loss Statement.

Savings Information

• Most recent three months complete bank statements for any and all accounts with all pages.
• Most recent statement from retirement, 401k, mutual funds, money market, stocks, etc.

Credit Information

• Most recent statements from your bills, indicating minimum payments and account numbers.
• Name, address, and phone number of your landlord, or 12 months canceled rent checks.
• If applicable: Should you have no credit, copies or your most recent utility bills will be needed.
• If applicable: Copy of complete Bankruptcy and Discharge papers.
• If applicable: If you co-signed for a mortgage, car, credit card, etc, need 12 months canceled checks. front and rear, indicating you are not making payments.

Personal Information

• Copy of Drivers License.
• Copy of Social Security Card.
• If applicable: Copy of complete Divorce, Palimony, Alimony Papers.
• If applicable: Copy of Green Card or Work Permit.
• If applicable: If you own another home(s) - see below

If a Refinance or you own Rental Property:

• Copy of Note & Deed from current loan.
• Copy of Property Tax Bill.
• Copy of Hazard (homeowners) Insurance Policy.
• Copy of Payment Coupon for current mortgage.
• If applicable: If the property is multi-unit, need Rental Agreements.

How big of an FHA Loan can I afford?

For an FHA loan, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.

Example:

Monthly income X .29 = Maximum PITI

For a monthly income of $3,000, that means $3,000 x .29 = $870 Maximum PITI

Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.

Example:

Monthly income x .41 = Maximum Total Monthly Costs

For a monthly income of $3,000, that means $3,000 x .41 = $1230

$1,230 total - $870 PITI = $360 allowed for monthly long term debt

The ratios for an FHA loan are more lenient than for a typical conventional loan. For conventional home loans, PITI expense cannot usually exceed 26-28% of your gross monthly income, and total expense should be no more than 33-36%.