The Federal Housing Administration is a branch of government that provides mortgage insurance and special housing programs designed to assist underqualified citizens in purchasing a home. They are the largest insurer of residential mortgages in the world! Read on to find out why so many people use them and what the FHA Guidelines are.
FHA Credit Qualifications
Before you can be approved for a loan, the lender will evaluate your credit history based on the agency’s requirements. Red flags include late payments, poor financial choices and delinquent accounts. These factors will greatly decrease your eligibility. Here are the major items that they look for in this evaluation.
Typically two lines of credit are expected, but a borrower with insufficient history may use substitute forms of credit. Individuals who are still paying on a Chapter 13 bankruptcy will be considered if they have one year of prompt payments, a signature from the court trustee, a written explanation and re-established credit. In addition to the above-mentioned, FHA guidelines dictate that two years must have passed from the discharge date of a Chapter 7 bankruptcy.
An isolated period of late payments does not make you automatically ineligible for a federal loan. Rather, the overall loan history will be analyzed and your trustworthiness as a borrower determined. If you have been foreclosed upon in the past, an exception may be made on your behalf if it was the result of extenuating circumstances and you have since re-established your credit.
According to FHA credit qualifications, collections are allowed as long as they are minor, but all judgments against you must be paid in full before the loan may be closed. If you are not current on the payments of any federal debt, such as student loans or tax liens, you will not be able to qualify.
FHA Guidelines for Closing Costs
FHA loans are designed to allow some of the closing costs to be financed into the mortgage itself rather than paid up front. There is a list of which fees and charges qualify for this option, although the individual loan officer has the definitive say on what amounts are allowed.
Eligible costs include: lender’s origination fee; deposit verification fees; attorney’s fees; the appraisal fee; cost of title insurance and examination; third-party document preparation; property survey; credit reports; transfer stamps, recording fees and taxes; test and certification fees; and home inspection fees up to $200.
In a federal refinance, allowable charges include wire transfer fees, courier fees, re-conveyance fees and bills to be paid.
Running Down the Loan Checklist
Before you can begin the mortgage process, you must provide the following information to your loan officer: address to your place of residence for the past two years; social security numbers for you and your co-applicant/family members; names and locations of your employers for the past two years; gross monthly salary at your current job; pertinent information for all checking/savings accounts and all open loans; complete information for other real estate owned by you; approximate value of your personal property; and check stubs and W-2 forms for the past two years. If you are a veteran, you have to provide your Certificate of Eligibility and DD-214. For the self-employed, personal tax returns for the past two years, a current income statement and a business balance sheet will be required.
FHA guidelines dictate that lending limits shall be determined based on the type of housing and the state and county where it is located. Go to http://www.fha.com/lending_limits to find out how high you can go!
Be aware that the agency will be evaluating your debt ratio when considering you for a loan. This is done to make sure that borrowers are not putting themselves underwater with their new mortgage. Can you cope with the added financial burden of owning a home? The answer is determined in two ways. First, the Mortgage Payment Expense to Effective Income ratio is analyzed. Take your total monthly payment for your new house and divide it by your gross monthly income. The maximum for qualifying persons is set at 31%. Secondly, they will calculate your Total Fixed Payment to Effective Income ratio. Add up all your monthly payments, including the new mortgage, and divide it by your monthly income. The highest allowable rate is 43%.
Mortgage insurance is essential to the functioning of the Federal Housing Administration. It acts as a safety net for lenders, which allows them to offer loans to borrowers with less-than-perfect circumstances. Be prepared to make an upfront insurance payment and an annual premium in monthly installments.
Now that you are aware of the basic FHA Guidelines, you can tap in to the most widely-used mortgage society on the planet! With a good overall payment history, established credit and a low debt ratio, your family will be excellent candidates for a federally-backed mortgage.