Do I Qualify for an FHA Loan?

Federal Housing Administration or FHA mortgage loans is a government program administered by Housing and Urban Development (HUD)  to help Americans who can't qualify for a conventional mortgage loan become homeowners.  To obtain an FHA mortgage loan, one must meet the following requirements:

Income Requirement to Qualify for an FHA Mortgage Loan:  There is no minimum income requirement to obtain an FHA mortgage loan; however, one must prove steady income for at least three years, and demonstrate that you've consistently paid your bills on time.  Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family all qualify as income sources. Part-time pay, overtime, and bonus pay also count as income as long as they are steady.

Debt-to-Income Ratio:  The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. [With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing expenses and other debt.]  You may qualify to exceed this ratio if you have:  (1)  A large down payment; (2) A demonstrated ability to pay more towards your housing expenses; (3) Substantial cash reserves; (4) Net worth enough to repay the mortgage regardless of income; (5) Evidence of acceptable credit history or limited credit use; (6) Less-than-maximum mortgage terms; (7) Funds provided by an organization; and / or (8) A decrease in monthly housing expenses.  See Debt-to-Income Ratio

Down Payment:  You must have a down payment of at least 3% of the purchase price of the home. [Most affordable loan programs offered by private lenders require between a 3% - 5% down payment, with a minimum of 3% coming directly from the borrower's own funds.]  Besides your own funds, you may use cash gifts or money from a private savings club. If you can do certain repairs and improvements yourself, your labor may be used as part of a down payment (called "sweat equity"). If you are doing a lease purchase, paying extra rent to the seller may also be considered the same as accumulating cash.

Credit Score: The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if (1) two years have passed since a bankruptcy has been discharged; (2)  all judgments have been paid; (3)  any outstanding tax liens have been satisfied; (4)  arrangements have been made to establish a repayment plan with the IRS or state Department of Revenue; or (5) three years have passed since a foreclosure or a deed-in-lieu has been resolved.  You can qualify for an FHA loan without a credit history.  If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.

Closing Costs:  Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan. The FHA requires a single, up-front mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing. This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium - paid monthly - if your mortgage is over 15 years or if you have a 15-year loan with an LTV greater than 90%.

Are FHA Mortgage Loans Assumable? You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. You must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new mortgage loan.

What is a 203(b) loan?  This is the most commonly used FHA program. It offers a low down payment, flexible qualifying guidelines, limited lender's fees, and a maximum loan amount.

What is a 203(k) loan?  This is a loan that enables the homebuyer to finance both the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller's existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic guidelines for 203(k) loans are as follows:  (1)  the home must be at least one year old; (2) the cost of rehabilitation must be at least $5,000, but the total property value-including the cost of repairs-must fall within the FHA maximum mortgage limit; (3)  the 203(k) loan must follow many of the 203(b) eligibility requirements; and (4)  you should talk to your lender about specific improvement, energy efficiency, and structural guidelines.

How to obtain an FHA Loan:  Contact any lender such as a participating mortgage company or bank.  Together Wells Fargo, Citibank and Bank of America provide at least half of the mortgage loans issued in the United States.

Don't Think You Can Buy a House?  Maybe You Can With An FHA Loan!

Many people are not aware that the federal government wants all Americans to be able to buy their own homes.  As a result, there are loan programs to help those with lower incomes, less than perfect credit and other situations that might barr them from obtaining a conventional mortgage loanl.

If you think you can't qualify for a home mortgage or have been turned down by banks, credit unions and everywhere else you've applied, consider an FHA loan.  Think of an  FHA loan is your mortgage of last resort if you think you can't qualify for a home loan.

There are lots of reasons to ask your lender for an FHA loan instead of taking a conventional or an expensive and risky sub-prime mortgage loan. Why not take advantage of the many benefits and protections that only come with and FHA loan, such as the following:

Easier to Qualify for an FHA Loan:  Because FHA insures your mortgage, lenders are more willing to give loans with lower qualifying requirements so its easier for you to qualify.

Less than Perfect Credit Is Accepted:  Even if you have had credit problems, such as bankruptcy, its easier for you to qualify for an FHA loan than a conventional loan.   And remember, you can take steps to significantly improve your credit rating.

Low Down Payment:  An FHA loan requires a low 3% down payment, and that money can come from a family member, employer or charitable organization. Other loans don't allow this.

Costs Less:  Many times, FHA loans have competitive interest rates because the loans are insured by the Federal Government. Always compare an FHA loan with other loan types.

Help You Keep Your Home:  The FHA might be able to help you keep your home should encounter hard times after buying your home or avoid foreclosure.

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