FHA loans provide an important service for many low-income or higher-risk buyers to purchase a home. Many people get confused by thinking that the FHA provides the loans themselves, but this is not the case. Borrowers still must obtain the loan from a lender, but the FHA provides the mortgage insurance (or the protection against default) on that loan.
Having the FHA on hand to back mortgages has played a critical role in the housing industry since its inception in the 1930’s. Some buyers don’t have the substantial down payment that a traditional mortgage might require or be interested in refinancing the property but not have the adequate amount of home equity at that time. If there are credit problems in the buyer’s history, an FHA loan can be an excellent option as well.
The Basics for Buyers
Since the FHA provides insurance on mortgages that are considered higher risk, there are several guidelines in place in order to work with them.
Property and Amounts:
The mortgages that FHA will insure are single family homes, condos, and multi-unit homes. Although the maximum borrowing amount can depend on the area, the average cap is $521,250.00
Income and Job:
It’s critical that the buyer has maintained steady work for a minimum of two years. If they have been with one employer for two years or more, that is even better. In addition, the buyer’s income should have stayed the same at a minimum, and preferably risen over time. The annual income figures should be 70% greater than the total amount of debt.
Check credit scores before moving forward with any mortgage situation. You’ll want to have 2 or less delinquent items on the report. Review a free copy of the report. Buyers should then fix any mistakes as well as pay off any delinquencies. If there’s a bankruptcy or foreclosure in the past, all hope is not lost, but the buyer must have maintained perfect credit since the incident. Additionally, no bankruptcies in the last two years and no foreclosures within the past three years. Timing is very important here, so monitor the credit report and history closely.
If you’re considering working with the FHA for your insured mortgage in 2013, there are several updates to previous guidelines with regard to costs. The mortgage payment should not be any larger than 30% of the buyer’s monthly income. The down payment is another critical piece of the puzzle. The down payment should be at least 3.5% if the buyer has decent credit. If the credit score is low, the down payment must be 10% or more. Additionally, plan to factor in an upfront mortgage insurance premium through closing costs. This is 2.25% of the purchase price.
A seller can assist with closing costs, but only up to 3% of the home’s total price, and the home that is being purchased must be for use as a primary residence.
The best way to prepare for the underwriting guidelines for FHA is to be aware and be prepared. Knowing whether a person is a candidate for working with the FHA is an easy way to speed up the process as well, rather than investing time only to learn a few days or weeks later that one or more of the guidelines wasn’t met.
New as of 2013, there is a minimum credit score of 620 required. Additionally, the FHA plans to scale back their market share of loans, particularly those where the balance is high.