What is a FHA Loan?
The Federal Housing Administration (FHA) was found in 1934. Created to boost the home ownership in the US for those who lacked the ability to come up with conventional down payments. Today FHA is still a great program for homebuyers seeking the American dream but lacking sizeable down payment.
Most conventional loans require a 20% or higher down payment. FHA only requires a 3.5% down payment. In addition to a lower down payment, FHA allows lower than traditional credit scores in some cases as low as 580.
FHA Loans vs. Conventional Home Loans
The FHA qualifying criteria process for a borrower is not as strict as the standard financing process. FHA allows home loan applications coming from those who have few or no “credit problems” and those without any credit history. Despite this leniency, the borrower still needs to submit a reasonable explanation about their credit history. This explanation, together with all the other requirements, are reviewed and underwritten reasonably. With this kind of approach, borrowers with justified explanation regarding their bankruptcy, that was released at least 2 years ago, are given the chance to work around their credit difficulty.
Compare the FHA approach to the conventional financing approach, and it can be found that the conventional financing relies heavily on credit scoring. Credit score is a rating given by a credit agency, such as Experian, Trans-Union, or Equifax. These credit agencies ranks you up based on your credit profile. Your credit score is lowered based on the credit derogatory, public profile or inquiry that shows up in your credit report. Thus, if your score is below the minimum standard, you will not be able to qualify for the conventional loans available.
I’ve had a bankruptcy in the past. Can I still get an FHA Loan?
Borrowers with a bankruptcy history will not prevent their negative credit history to obtaining an FHA Loan. There are, however, prerequisites for borrowers that declared bankruptcy. First, they should have already restored at least a minimum of two credit accounts, such as a credit card or a car loan. Then, two years should have already passed since the release of their Chapter 7 bankruptcy or they should have at least a year’s worth of repayment with Chapter 13 – with court permission.
There are, however, on a rare occasion, that bankruptcy had to be declared because of justified circumstances. One such example is a cancer survivor had to declare bankruptcy because the medical bills were over the top. Given these kinds of situations, special exceptions can be made. Though, it is a case-to-case basis.
What documents are needed for a FHA Loan?
The documentation you submit to FHA will be the deciding factor regarding your loan approval. To ensure that your loan will be completely 100% approved, you must provide all the required and proper documents. For a smooth transaction, it is important you have all your documentation before the initial application of the loan.
– The latest copies of 2 years complete tax returns with all schedules
– The latest copies of two years W-2’s, 1099’s, etc
– The latest pay stubs that covers a one-month period.
– For self-employed individuals only: you will need to provide 3 years Tax Returns and YTD Profit and Loss Statement.
– The latest copies of your complete and combined three months bank statements from any and all accounts with pages.
– The latest copies of your statement from retirement, 401K, mutual funds, monkey market and stocks.
– The latest copies of your billing statement, where it indicates your minimum payments and account numbers.
– The name, address and contact details of your landlord, or a 12 months cancelled rent checks.
– If you have no credit, you may provide just the copy of your latest utility bills.
– If you have filed bankruptcy, you must provide a copy of your complete Bankruptcy and Discharge papers.
– If you co-signed for a mortgage, car or credit car, you must provide 12 months cancelled checks, front and rear, indicating you are making the pay.
– Photocopy of your driver’s license
– Photocopy of your Social Security Card
– If you’re separated from your spouse, you may have to provide details of the divorce, palimony, or alimony papers.
– If you own a green card or work permit, you should also present them.
– If you own another home.
If the loan is for a Refinance or your own Rental Property, please also bring a copy of the following documents:
– Note & Deed from current loan
– Property Tax bill
– Hazard Insurance Policy
– Current mortgage payment coupon.
– Rental Agreements – *only if the property is multi-unit.
How big of a FHA Loan can I afford?
Part of the provision before availing of the FHA loan, you’ll have to make sure that your monthly housing costs should not exceed 29% of your gross monthly income. The total housing costs also includes the mortgage principal plus interest, property taxes, and insurance. These four stipulations are often lumped together and called as PITI.
Monthly Income x .29 = Maximum PTI
When your monthly income is $3,000, this means that $3,000 x .29 = $870 max PIT
Your monthly expenses, adding PIT and long-term debt, should not exceed 41% of your monthly gross income. Examples of long-term debt include car loans and credit card balances.
Monthly income x .41 = Maximum Total Monthly Costs
When your monthly income of $3,000, this means that $3,000 x .41 $1230
$1,230 – $870 PIT = $360 allowed from monthly long-term debt.
Compared to the typical conventional loan, the ratios of FHA loans are more lenient. For conventional home loans, PITI expenses cannot exceed 26-28% of your gross monthly income, and total expenses should not be more than 33-36%.