Back to VA Loans

Back to Mortgage page

        The Federal Housing Administration (FHA) is a federal agency within the U.S Department of Housing and Urban Development (HUD). FHA's primary objective is to assist in providing housing opportunities for low to moderate income families. FHA has both single family (1-4 unit homes) and multi-family (5 or more units) mortgage lending programs. The agency does not generally provide the funds for the mortgages, but rather insures home mortgage loans made by private industry lenders such as mortgage bankers, savings and loans and banks.

Qualifying for a FHA loan is like applying for a regular loan.

        To be considered for a low down payment loan, you generally need to have:

• sufficient income to support the monthly mortgage payment
• enough cash to cover the down payment
• sufficient cash to cover normal closing costs and related expenses (explained below)
• a good credit background that indicates your payment history or "willingness to pay"
• sufficient appraisal value, which shows the house is at least equal to the purchase price
• a cash reserve equivalent to two monthly mortgage payments (P.I.T.I. described below)

        A credit report will be obtained on the borrower and any lates, collections, judgments, foreclosures, bankruptcies, etc. must have a justifiable explanation in writing by the borrower.

FHA loan qualifications  

        If you do not met the qualifying guidelines, FHA allows a parent or relative to co-mortgage. Contact our office for details.

        When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for homeownership.

        Homeowner's insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount which may be insufficient to rebuild a badly damaged house.

Two key factors in qualifying for a Home Loan

        In attempting to approve home buyers for the type and amount of mortgage they want, lenders basically look at two key factors: the borrower's ability and willingness to repay the loan. Ability to repay the mortgage is verified by your current employment and total income. Generally speaking, lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years. Willingness is related to how you have fulfilled previous financial commitments, thus the emphasis on the credit report or rent and utility bills.

        It is important to remember that there are no rules carved in stone. Each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for the weak one. Everyone involved in real estate is in the business of selling homes, in one way or another. Therefore, if the loan makes sense, lenders and insurers will do their best to see that you qualify.

        By its very nature, FHA loans provide home affordability, because it allows families to purchase homes with less cash on hand. FHA plays a central role in helping low- and moderate-income families become homeowners.

What financial documentation will be required ?

        The loan approval process generally begins with a lender reviewing your income, assets and credit history. You will need to supply information to verify your income and assets used to buy a home.

        It is best to obtain a pre-approval before house hunting to determine in advance what price range you can realistically afford and the mortgage amount for which they can qualify. 

Financial information for a home loan.

• A purchase contract for the house (if you have one)
• Copies of your bank bank statements covering the most recent 2 month period.
• Copies of pay stubs for a one month period, Copies of W2 withholding forms for a 2 year period.
• Federal tax returns for two years are required if you are self employed, receive a pension or social security. In addition, if you wish to, include income from interest or dividends, rental income or alimony, 2 years federal tax returns will be required.
• Profit and loss and balance sheets if you are self- employed
• Landlord name and telephone number if currently renting.
• Divorce settlement papers, if applicable
• Gift letters, if you are using a gift from a parent or relative to help pay the down payment and/or closing costs. This letter simply states that the money is in fact a gift and will not have to be repaid. A copy of the bank statement from the gift donor showing the ability to provide a gift is required. FHA loans allows gift funds for the entire down payment and closing costs. We will provide to you the gift letter form.

        Having these items on hand when your typed loan application arrives will help speed up the application process.

What type of property can I buy with a low down payment loan?

        There are few restrictions regarding the type of home you may buy with a low down payment loan. In addition, low down payment loans may be used with the wide variety of mortgages. If you are buying a condo the project must have been approved by FHA

        Besides price range, there are many other factors to consider when purchasing a home. It's in your best interest to take care in selecting a home that will have lasting value as well as provide shelter. Be sure the neighborhood and house meet the needs of your family. If you have children, you may want to know if there are other children in the neighborhood and what schools or playgrounds are nearby. Also consider the availability of public transportation and how far family members will have to commute to work or school.

       Check on the condition of the plumbing, heating and electrical systems and whether they are up to code regulations. The best and easiest way to do this is through a certified home inspection, from a certified inspector.

       If you are like most people, a home is the single largest purchase you will ever make. It is important that you select a home that will meet your family's needs and keep you happy for years to come. And most important, you must be able to afford to remain in that home for as long as you please. FHA's mortgage programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. There are no maximum income limits. FHA mortgage insurance encourages mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the mortgage company against loan default on mortgages. HUD sets the mortgage limits.

        Down payment requirements can be low: In contrast to conventional mortgage products, which frequently require down payments of 5 percent or more of the purchase price of the home, single-family mortgages insured by FHA under Section 203(b) make it possible to reduce down payments to as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage. The down payment can be 100% gift funds. This is one of the key benefits to the FHA program. Gift donors are restricted primarily to a relative of the borrower.

       Closing Costs: Closing costs, or settlement costs, are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average, closing costs run approximately 2% to 3% of the house price. This percentage may vary, depending on where you live. Closing costs include loan origination or discount points, prepaid homeowner's insurance, appraisal fee, lawyer's fee, escrow fee, recording fee, title search and insurance, property taxes,   mortgage insurance and other fees. Points are finance charges that are calculated by the lender at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. Lenders may charge 1, 2 or 3 points in up-front costs in addition to the down payment. The more points you pay, the lower your interest rate will be. FHA rules impose limits on some of the fees that mortgage, escrow or title companies may charge.

So how much of a mortgage can you afford?

         There are two basic formulas commonly used by lenders to determine how much of a FHA mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

        It is important to remember that the following ratios are guidelines. Each application is handled on an individual basis.

        Generally speaking, to qualify for FHA loans, the monthly housing costs ratio is 29% to 35% of your gross monthly income. Monthly housing costs include the mortgage principal, interest, FHA mortgage insurance, property taxes and home insurance, often abbreviated PITI. In addition, if you buy a home with a Homeowners Association there will be a monthly fee often called HOA dues. For example, if your annual income is $30,000, your gross monthly income is $2,500, times 33% = $825. So you would probably qualify for a FHA home loan that requires monthly payments of $700 (P.I.T.I)..

        The second qualifying formula and most important, is total monthly expenses. The formula is determined by totaling your proposed monthly housing costs (P.I.T.I) and reoccurring monthly bills such as credit cards, car or student loan payments. Monthly credit card payments and any expenses( car, installment or student loans) that extend 12 months or more into the future are termed long-term debt. The total monthly costs, including PITI and all other long-term debt, should equal no greater than 41% your gross monthly income. Using the same example, $2,500 x 41% = $1,025. So the total of your monthly housing expenses plus any long-term debts each month cannot exceed $1,025.

Maximum allowable monthly housing expense- 
29% - 35%  of gross monthly income

Maximum allowable monthly housing expense and long-term debt-
41% of gross monthly income

In the event of a foreclosure... 

        The borrower has three years from the date the claim was paid until he/she is eligible for another FHA loan, unless the foreclosure was the result of extenuating circumstances beyond the borrower's control and the borrower has since established good credit.

Chapter 7 bankruptcy requires the borrower to wait at least two years from the date of discharge.

Chapter 13 bankruptcy requires the borrower to have been paying on the bankruptcy for at least one year, performance must have been satisfactory and the borrower must also receive court approval to enter into the mortgage transaction.

FHA Refund Information

      If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back.

      About 100,000 FHA borrowers (1 in 10), left money in their escrow accounts when they paid off their loans. The average refund for each borrower is about $700.

      Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, or write HUD at P.O. Box 23669, Washington DC 20026-3699. Or you can look for your name at HUD.

 FHA Loan Limits

        Loan amounts within these limits are established from the average cost of homes in each market place, usually county by county throughout the nation. Loan limits for specific areas can be found at the Housing and Urban Development web site. Many areas of California are in High-Cost market places.

        The amount of an FHA loan is based on the lesser of the purchase price plus allowable loan closing costs or the value of a property, up to the limits noted above. Generally down payments range from 3% for lower priced properties, up to 6% for properties priced near the upper loan limits.

        Refinance loans with no cash out are available under the same terms and limits as a purchase loan. Loans with cash out to the borrower are limited to 85% LTV.

Section 203 (b) - FHA Fixed Rate

        The 203b program is the popular FHA fixed rate loan. The term can be up to 30 years and it is a fully amortizing loan. It can be used to purchase new or existing, 1 to 4 family owner-occupied primary homes. It is also available for refinancing homes. The maximum loan limits for properties within continental US are listed above.

        The interest rate of a FHA fixed rate loan can be lowered for the life of the loan by paying discount points to the lender. This is referred to as a "permanent" (life of loan) buydown. The rate can also be bought down on a temporary basis. A popular temporary buydown is the 2-1, which means the rate is 2% lower than the note rate for the first year, 1% below the note rate for the second year, and at the note rate thereafter. For Example: The rate may be at 6% for the first year, 7% the second year, and 8% thereafter.

        This 203b program is limited to detached or Planned Unit Development (PUD) homes, including manufactured homes meeting certain eligibility requirements.

Section 251 - FHA Adjustable Rate

        The 251 program is the Adjustable Rate Mortgage (ARM) that FHA began offering about 12 years ago. The properties covered and the loan limits are the same as stated above. This type of loan is subject to a rate adjustment every year, indexed to the rates of US Treasury Securities. However, there are limits (Caps) on how much the rate can change annually (1.00%) and over the life of the loan (5.00%). The 1% annual cap is an excellent feature compared to conventional ARM loans that typically adjust 1% each six months or 2% annually. The FHA 251 ARM is fully amortizing.

 

Back to top of FHA page