FHA stands for Federal Housing Administration. FHA has been providing mortgage insurance on loans made by FHA-approved lenders since 1934 and is the largest insurer or residential mortgages in the world.
A lot of people are very attracted to FHA loans because of the low possible downpayment which is only 3.5%. Because the downpayment is so low you will be required to pay mortgage insurance. Generally ANY LOAN with a downpayment under 20% will require mortgage insurance. In regards to FHA mortgage insurance the homeowner will have to pay .5% per year of the total loan amount. The .5% will be broken up into each months payment. FHA also requires a 1.5% upfront mortgage isurance payment. The monthly mortgage insurance premiums will be automatically terminated when the following occurs:
- Mortgages with terms of 15 years or less and with loan to value ratios (ltv) of 90 percent or more will be canceled when they reach 78% LTV
- Mortgages with terms over 15 years the premiums will be canceled when the LTV ratio reaches 78% ONLY if the mortagor has paid the annual premium for a minimum of 5 years
- Mortgages with terms of 15 years and less and with LTV ratios of 89.99% and less will not be charged annual mortgage insurance premiums
FHA LENDING LIMITS: The FHA mortgage limits for a single family home in Riverside County is $500,000. The limit for Orange County is at the maximum for any county in California and is $729,750.
FHA DEBT RATIOS: The last thing that is wanted is for a homebuyer to get into a home he/she cannot afford. To help prevent this there are debt ratios called “debt to value” which will help determine if the buyer is qualified for the home. There are two types of DTV ratios. The first is the front-end ratio which is just the future loan amount divided by the buyers income. The loan amount used in this equation inclues principal and interest, taxes, hazard insurance, mortgage insurance premium, homeowner’s dues etc…You might hear the term PITI which stands for principle, interest, tax and insurance. The income includes a spouse. This ratio cannot exceed 29% to be qualified. The other ratio that is MORE commonly used is the back-end ratio. This ratio includes the PITI as well as all recurring monthly debt. This debt is your car loans, personal loans, student loans, credit cards, etc… Take the PITI and all monthly recurring debt and divide it by your income to get the back-end DTV ratio. This ratio cannot exceed 41% to qualify for an FHA loan.
If you find yourself with a DTV ratio that does not qualify then you will have to work on lowering your debt. It is not uncommon for buyers to have to pay off credit cards, car loans etc…
CREDIT INFORMATION: Before any loan is approved the lender will analyze all buyers past credit history as well as current. In order to qualify for an FHA loan you must have 2 lines of credit. There are some cases where they will allow a substitute form if there is not sufficient credit. Even if a buyer is still paying on a Chapter 13 bankruptcy he/she can still qualify for a FHA loan. The payments will have to be verified for a period of one year. There are other hoops you will have to go through like court trustee approval and of course you will have to have good credit, great financials and job stability. If you have been through chapter 7 bankruptcy you will have to wait for 2 years from the “discharge date” to apply for an FHA loan. When an underwriter is examining your credit the overall pattern of credit is reviewed rather than specific cases. If you have a good pattern of payments with a couple cases of late payments you may still qualify. Generally if you have been foreclosed on in the past 3 years you will not be able to apply for an FHA loan or any loan for that matter. If you have any judgements they will have to be paid before closing on a home. If you are past due on any federal debts like student loans or tax liens you will not be elgible for a loan.
OTHER IMPORTANT INFORMATION:
To qualify for the 3.5% down payment you will need AT LEAST a 580 credit score. If you do not you will need to pay at least 10% down. Non FHA loans usually require at least a 620 point FICO.
A common misconception is that in order to qualify for an FHA loan you must be a first time homebuyer. This is NOT TRUE. Anyone may get an FHA loan as long as they do not have more than one FHA insured loan at any one time.
There are ways to get 100% financing with an FHA loan. You can use down payment assitant programs and are allowed up to 6% of seller credits. This makes it possible to not have to pay ANYTHING down.
Benefits of FHA loans:
- Gifts for downpayments and closing costs ARE allowed, unlike most loans.
- FHA allows a home purchase TWO years after a Bankruptcy
- FHA allows a home purchase THREE years after a Foreclosure
- FHA allows higher debt ratios than other loan programs