History of the Federal Housing Administration
FHA loans have been around for a long time, dating all the way back to 1934. FHA stands for the Federal Housing Administration. The FHA is a branch of the U.S. Department of Housing and Urban Development (HUD). The sole purpose of this entity is to insure the loan for the lender in case the homeowner defaults down the line. What does that mean? The FHA will pay back the mortgage lender for you, essentially letting you off the hook. Sounds like a win-win if you ask me. Who is the ideal candidate for an FHA loan?
Those home buyers who have had credit issues in the past – leaving them with a low credit score and for those who cannot afford a 20% down payment. A 20% down payment is the standard down payment on most conventional loans. Which a lot of people cannot afford. The typical FHA down payment is 3.5%. The great part about all of this is that it allows pretty much anyone the opportunity to own a home regardless of their economic standing. The GovLoans.gov website is a great resource for anything FHA related.
Now that we’ve given you some background on the FHA, let’s dive into some actual guidelines.
Watch this video below as it contains useful information on the guidelines for 2016.
Credit requirements you need to qualify for an FHA loan
What are the required credit scores?
Great question. Glad you asked. You need a credit score of 580 or higher in order to be eligible. You may be asking well that seems kind of low. The answer is you’re right, but remember FHA loans are designed for those potential home owners who have low credit scores. Also, you need a score of 580 in order to make a 3.5% down payment. Otherwise, you need to put down 10% if your credit score is less than 580.
Based on your current economic situation having to put down 10% might be difficult for you to achieve. As a result you may need to give it some more time and improve your credit score and try again.
In some cases if you fall outside of the above two categories, the FHA may still grant you a loan. This is rare and is done on a case-by-case basis.
The biggest difference between FHA and conventional mortgages is that you can put down as little as 3.5% as opposed to 20% which is required for a conventional mortgage.
With that being said you will need to pay mortgage insurance when putting down only 3.5%.
These insurance premiums are typically calculated on an annual basis. Below are some examples of how much you can expect to pay for insurance premiums based on your mortgage term, down payment, or equity.
• 15-year loan, down payment (or equity) less than 10%: 0.7 %
• 15-year loan, down payment (or equity) of 10% or more: 0.45%
• 30-year loan, down payment (or equity) of less than 5%: 1.35 %
• 30-year loan, down payment (or equity) of 5% or more: 1.30 %
After that annual mortgage insurance premium is calculated, it is then divided by 12 and that number is added to your monthly payment.
Even though you have to pay mortgage insurance, it will still cost you less than if you put 5% or 10% down.
Other Basic Requirements You Need To Satisfy That Are Part Of The FHA Application Process
- Your income history needs to be stable and consistent. What does that mean? For instance if you currently make $50,000 a year they want to see that you make at least that or more in 2 consecutive years.
- Being employed by the same company for a time of 2 years or longer is a requirement. If you have jumped from company to company after being there a short time that raises a red flag. This can cause you not to qualify for an FHA loan.
- This sounds obvious, but you need a valid social security number. If you’ve misplaced your social security card you may want to get a replacement before filling out an application. You need to present your card as proof that you are who you say you are.
- You need to be a legal U.S. resident and at least 18 years old.
- When having the property you’re considering for purchase you are to have it appraised by an FHA approved appraiser.
- Your monthly loan payment (principal, taxes, interest, mortgage insurance) should not exceed 31% of your gross monthly income. Should you exceed 31% of gross monthly income for a particular home you might still be able to qualify if you explain in detail to the lender how you will make that monthly payment. Common sense calls for you to never get yourself in a situation you cannot afford.
- If you’ve had a bankruptcy in the past you must be 2 years post bankruptcy before you’re able to apply for an FHA home loan. Sometimes exceptions are made, but the chances of that happening is slim to none.
That’s a wrap on the basic requirements you need to meet in your quest for an FHA loan.
What is the limit on how much you can borrow in an FHA loan?
It all depends upon the state in which you reside. As you know each state has it’s own guidelines on how much you can qualify for as it relates to FHA loans. So, I suggest you find out what number is based on the state in which you live in. Also, be sure to check out FHA Lending Limits for more on this topic.
This will conclude FHA home loan guidelines.