WHAT IS AN FHA LOAN?

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. Since FHA loans are insured by the FHA, the owners of your mortgage are protected against loss if you default on your loan.

FHA loans require lower minimum credit scores and lower down payments than most conventional loans. However, you do have to pay an upfront Mortgage Insurance Premium (which can be financed) and monthly mortgage insurance premiums. If you cannot qualify for other loan programs, FHA is a great option. They are particular attractive for first-time homebuyers. In fact, according to FHA's 2021 Annual Report, more than 84 percent of all FHA loans were purchases done by first-time homebuyers.


FHA LOAN REQUIREMENTS

There are certain requirements all borrowers must meet in order to obtain an FHA mortgage. These are the most common:

The property must meet HUD guidelines and meet all minimum property standards.
The home must be a primary residence which means it cannot be an investment or second home.
You must occupy the home within 60 days of closing.
Verifiable Income. Self Employed requires 2 years of tax returns.
Must have no defaulted government debts including tax liens and student loans.

There are a few more specific conditions to qualify for an FHA mortgage including credit score, loan limits, major derogatory credit and income requirements. Those are discussed in more detail below.


FHA DOWN PAYMENTS

FHA requires lower down payment options than most Conventional Loan Programs.

Credit Score of 600+ could qualify for zero down with assistance
Credit Score of 580-599 requires 3.5% down payment
Credit Score of 500*-579 requires 10% down payment

*minimum credit score subject to change at any time


Credit and DTI (debt to income)

There are many factors that are considered when applying for a FHA mortgage regarding credit. Credit scores are used to determine what you qualify for the down payment but there are other factors that you should be aware of. The following items are also considered to qualify for an FHA loan:

Chapter 7 Bankruptcy must be discharged 2+ years. Chapter 13 can qualify while still in plan but must be at least 12 months and show all payments made on time. Court approval for an FHA loan is also required.
No major derogatory filed within 24 months. This includes charge offs, collections, repos, etc. This does NOT include medical.
No late payments on installment or mortgage debt within 12 months and no more than 2 times 30 day late within 24 months.
Revolving accounts will allow up to three 30 day late payments within 24 months. Cannot have any 60 or 90 day late on revolving accounts.
Rental payment history cannot have any 30 day late or more in the last 12 months.

Debt to income is typically limited to a housing rate of 31% and overal ratio of 43%. However, depending on credit score or compensating factors, ratios could go as high as 40% housing and 57% overall. Compensating factors are reserves, residual income and minimal increase and housing/rental payment.


Pros and Cons of FHA loans

FHA can be a great loan for many borrowers including first-time homebuyers. Here we will list some of the Pros and Cons of obtaining an FHA loan.

PROS

Lower Credit Scores
Lower down payment requirements
Lenient Credit Requirements
Better Interest Rates
Potentially Higher DTI

CONS

Mortgage Insurance Required
Upfront Mortgage Insurance Premium
Restrictive Loan Amounts


As you can see, FHA loans are a great option for many borrowers. If you would like more information, please call me at 352-446-9422 or email me at rick.scherer@cardinalfinancial.com. If you would like to get pre-approved, you can apply now:

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