FHA Loan Requirement & Fundamentals
The Federal Housing Administration, or commonly referred to as the FHA, allows borrowers to buy a house with a low down payment, which currently has a minimum of 3.5%. This program was started by the government in the 1930’s following the great depression and was intended to stimulate the housing market as the banks were reluctant to lend money, and most people didn’t have a down payment.
FHA typically requires a 580 credit score. However, lower credit scores may be possible with 10% down. With only the minimum of 3.5% down, we are also looking for three trade lines of credit activity. We love to see these trade lines on the credit report, and twelve months history is the minimum length necessary for us to legitimately use it. This history may consist of car payments, credit cards, existing mortgages, and other lines of credit or installment loans. Often we can use "alternative trade lines" if you don’t have 3 trade lines on your credit report. This can include things like car insurance, electric bills, and cable, however, the lenders' favorite is rent. Because it is preferable to show cancelled checks for rent, you should always pay your rent with a check instead of cash.
Bad credit like foreclosures, bankruptcies, and short sales can influence your ability to be approved for an FHA loan regardless of your score. You must wait three years after discharge if you have filed bankruptcy, however, with an exception, you can get accepted for an FHA loan in as little as two year. In order to get an exception, you have to be able to document a significant hardship. The seasoning period for a foreclosure is 3 years without any exceptions. For a short sale, you will have to wait 2 years; however, if there is a bankruptcy with a short sale, you are back at 3 year before you can acquire FHA financing.
Most of our underwriters permit only a small amount of collection activity. Medical bills are ignored, and the older the credit card collections the better. A maximum for total collection is subjective, and the strength of the file may cause the amount tolerated by the underwriter. The main point is that even if you have some collections, it doesn’t necessarily mean you can’t get approved for an FHA loan. You can find out if you are qualified to buy in just minutes…
You will need to have two years of work history in order to qualify for an FHA loan you. Although the same type of work is preferred, two different companies are acceptable. An exception to this qualification is if you just graduated from college or trade school, and you are working in a job related to your degree. For verification we will need your degree and transcripts. You will be required to produce two years of tax returns if you are self employed. Before you look at houses, it is important to find out how much home you are eligible to purchase.
Money Required to Close
FHA loans allow a down payment of only 3.5%. Closing costs in Gainesville can add another four to six percent of the loan amount based on the size of your loan. So all in all, you will need about 7.5% to 9.5% of the purchase price to close; however your Landmark Mortgage Planner has ways to help you lessen this burden, if cash to close is an issue for you.
Gifts are one way we can help cut the amount of cash you will need for your FHA loan. The gift must be from a relative or someone that we can show a close relationship to like a fiance. There are no limitations as to the amount of the gift, so the donor is allowed to pay for the entire down payment and all closing costs. The underwriter will require a verification from the giver’s bank to document the source of the funds as well as a gift letter.
We will have to show the source and provide proof that the money has been there for at least 2 months, regardless of where the money comes from. The underwriter will check for any deposits that are not payroll related; so if you sell the car (or make other deposits other than your normal paycheck), make sure that before make the deposit, you thoroughly document the transaction. A good way to be sure you don’t miss anything is to keep a paper trail for any deposits that go into your account. So in the example of the car sale you would need a copy of the check from the buyer, a copy of the title, and the deposit slip. This documentation is required by federal law to cut down on mortgage fraud and money laundering.
Grants and assistance programs are another source of funds for closing costs and down payment. Check with a Landmark Mortgage Planner to find out what programs can work for you.
Seller concessions are when the seller pays some or all of your closing costs for you. FHA loans allow seller concessions up to six percent of the sales price of the home. It is pretty common to ask for closing costs from the seller, especially on an FHA loan in today’s market. So don’t feel like you are presenting a weaker offer if it includes closing costs from the seller. Since you are asking the seller to decrease the price you are offering by the amount of the closing costs, you may want to modify the offering price to be competitive particularly if there is more than one offer. Although you may have the cash to pay for closing costs yourself, it’s smarter to ask for the seller concession anyways because then you can keep some cash in your pocket after closing.
Consult a Landmark Mortgage Planner to learn other ways that we can help reduce the amount of cash needed to close.
FHA is more strict regarding property requirements than conventional financing; however the thing to remember is that the house has to be functional.
We will need to get an FHA appraisal, which will be strict about issues with the house that otherwise might not be a problem. Things like loose screens or light switch covers may be a problem depending on the appraiser. Flooring is a more apparent issue - carpet needs to installed correctly and molding needs to be in place. The A/C or at least central heat needs to be there and working. When you are looking for a home that you plan to finance with an FHA loan you should pay attention to functionality issues. If a home you like requires more repairs than you would like to make yourself, and the seller is not willing to make the repairs for you, you may want to consider an FHA 203K Loan. This allows you to finance the purchase of the home as well as the remodeling or repairs in one loan.
Be aware that there are loan limitations for each county that vary dependent upon the average income of the residents in that county. You can access these loan limits on the HUD website, by entering the county and state where the home is located in.
As long as the home is going to be your primary residence, you can get an FHA loan regardless of where it is located, because there are no geographical restrictions with the FHA financing program. You cannot use an FHA loan for a 2nd home or an investment property. However, multi-unit properties up to four units are allowed on an FHA loan, as long as you plan to live in one of the units.
Acreage can sometimes become a problem with FHA financing - the land can’t be valued at more than the home on an FHA loan.
One last thing! To save time, get an FHA addendum from your Landmark Mortgage Planner in advance. When you make an offer on a home, have your real estate agent provide it with the rest of the offer for the seller sign. FHA can be a great product but there are some limitations and things change all the time. It’s best to meet with a mortgage planner or apply online to get pre-approved before you find a house.