Sunday, 13 October 2019

Who Can Qualify For An FHA Loan?

This article was written to help you get a better understanding of what it takes to qualify for an FHA loan. And why there are so many different stories about what FHA really has to offer and what it takes to get qualified. I will be going through the important factors that are going to help you get qualified, or you the realtor hope you get borrower qualified to purchase a new home. So, we are going to go over understanding FHA and some of the misconceptions in how to qualify for an FHA home loan.

Let's Get Started

FHA is a great option for first-time homebuyers, for buyers that have a little bit more debt ratio than is allowed under Fannie Mae or Freddie Mac, even borrowers with less than perfect credit. 

FHA Is Not A Lending Program

It's easy to say that FHA is probably the most lenient of all the lending programs out there, but it's important to know that FHA is not a lender, FHA is an insurer, and they write guideline, and then they give the guidelines to lender and say, if you will approve a loan based on our guidelines, we agreed to insure it, but you can also put any extra conditions on that, you feel are important. That is why it's very important to know which lender you are going to go with because every lender is going to underwrite FHA a little bit differently in very few.

There is a lot of Flexibility With FHA

It's also good for borrowers with a limited down payment because with FHA you only need 3.5% down, and that actually can come in the form of a gift from a family member or 401k funds, so, there is a lot of flexibility with FHA.

FHA Minimum Downpayment Is 3.5%

With FHA the minimum downpayment is 3.5% if your credit score is over 580, if your credit is between 500 and 579, you would need 10% down plus closing costs. Again, all of that can come from your own funds, retirement funds, 401k, or even a gift from a family member. FHA loans are not just for first-time homebuyers, they are also great for people who have restricted income or they have a high debt ratio, or you are just trying to buy a little bit more home than Fannie Mae or Freddie Mac would be willing to give approval for.

Here Is What They Are Looking For When Qualifying For an FHA Loan.

Verifiable Income

There are two different categories, you either have a person who is employed or a person who is self-employed. And they looked at someone differently, every lender is going to take a complete loan application and run it through an automated underwriting approval system and the underwriting approval system is going to tell that lender exactly what they need in order to verify and get the loan finally closed and approach. If you are an employed person that means that you go to a job and your w-2 in taxes are taken out, so, your gross income from that job is going to be used to calculate your qualifying income. If you are self-employed, that means that you control your own income in your own expenses, so, they are going to want to see a 2-years average of your tax returns to get qualified. And you have to be self-employed for at least 2-years in the same occupation in order to get approval through FHA.

If you are employed that means you get a paycheck in a w-2, you only have to be on your job for 6 months with a 2-years history. What that means is if you were a college student and you have recently started a job and you have been on in 6 months, that is fine. They are going to ask for a copy of your transcript showing your student and then verify of employment shown that you have been employed for 2-years.

FHA is a Good option For First-time Homebuyer.

One of the nice things about FHA, if for a first-time homebuyer or somebody just getting started, you can also have a non-occupying co-borrower. In the old days, they used to call them Kitty Condos, if you go to university and you want to buy a condo that you can live in all 4 years, but as a student, you clearly wouldn't qualify because you don't have a regular and recurring income. In that case, the loan could go in your name and your parent's name assuming you are over 18-years of age and the loan would be based on your income if you have any, your debts, and your parent income and debt. It's a great way for a person who is trying to purchase a home to find a family member that is willing to be a non-occupying co-borrower. Remember that non-occupying co-borrowers, credit score, their income, and their liabilities are all taken into account, so, finding the right non-occupied co-borrower is going to help you substantially in getting approved.

Stability Of Income

They want to make sure that the work history is good as we mentioned, 2-years for self-employed and at least 6 months on the job if you are employed. You really shouldn't have more than 4 jobs in the last two years if you are employed, job stability is very important. The second thing is if you want to be able to afford the housing payment in any other debts that you have, what they are going to do is they going to make the house payment, taxes, insurance, and any other minimum payments that appear on your credit report in all of those combined need to equal in a good rule of thumb is about 50% of your gross monthly income. For example, if your income is $4,000 a month, 50% would be $2,000, and inside of that $2,000 you should be able to pay the house, taxes, insurance, an HOA, homeowners association, and any other bills that appear at your credit report.

FHA Does Not Have a Maximum Debt To Income Ratio

Many lenders say that your debt ratio should not exceed 50%, but in reality, FHA does not have a maximum debt to income ratio per the guideline, so, when you run into this situation where a lender say oh, you have to have a 580 credit score or you have to have 640 or even a 680 credit score. That is where the lender has imposed additional guidelines on top of the actual FHA guidelines. Because FHA says you can have a credit score as low as 500, but with a low credit score like that you are going to have to have 10% down, and you are going to have a good story behind why the credit score is what it is. For example, maybe you were part of a hurricane, maybe you had a bad accident and the credit report is littered with medical bills, so, there has to be a compelling reason why you should get approved.

Credit Score of 580 and Above, You Only Need 3.5% Down Plus Closing Cost

If the credit score is 579 all the way down to 500, you are going to need 10% down plus closing cost, so, you keep hearing me say closing cost.

What Are The Closing Cost?

Well, you have to order an appraisal, you also have to establish an escrow account, that way the lender can hold taxes and insurance, so, that at the end of the year, the taxes and insurance can be paid for you. The size of the escrow account depends on what time of the year you are buying a home. A good lender you choose will give you more details on that. But remember the downpayment can be a gift from a family member, and the downpayment itself, the 3.5% or 10% has to come from the borrower or a gift from a family member. The other closing cost can actually be paid by the seller.

Let's say that you find a home that you want to purchase, it's $300,000, the seller can contribute up to 6% of the sales price for your closing costs. Remember that down payment has to come from you, the closing cost can actually be paid by the seller. Let's pretend that you find a house that you want to purchase and it's listed in MLS for $310,000, and you have negotiated it down to $300,000, but you need an extra $7,000 for closing cost, so, you can write the contract for $307,000, with the seller contributing $7,000, they still get their $300,000 you agree upon and $7,000 will go towards your closing cost to reduce your out-of-pocket cash, so, you can get the home that you truly desire.

Minimum Credit Score Require

FHA minimum credit score is 500. A lot of people are going to tell you 580, 600, 620, that is because they have overlays and let me help you understand that a little better. If you went to a bank like Chase, Wells, Fargo, Bank of America, they are all regulated by the FDIC ( The Federal Deposit Insurance Corporation). What they are doing is making sure that all the people who put money in the bank, their money is safe. So, the FDIC says they can't make a loan to anybody when the credit score below 620, so, even though, FHA would approve 500 credit scores. If you go rolling into the bank with a 593 credit score they are going to turn you down. Because your credit score is below their internal set number of 620. Some banks say 640, some banks go like 680, but the actual guideline for FHA is 500. So, choosing the lender is very important.

A lot of Realtors don't understand how important this is, they work hard trying to find a customer they get them all lined up and send them to the preferred friend at the bank. And the bank turns them down. Most people will say FHA turn them down, that is not true, FHA actually did not turn them down, they were turned down by the bank. All you need is to choose a great lender.

The higher The Credit Score - The Lower The Interest Rate

It's always great to have a great credit score, but sometimes the cost of waiting, I hear people say I am trying to get my credit score a little bit higher, and they find the perfect home that they can buy for $200,000, and a year from now that house is going to be $230,000. So, by waiting a year to try and save a quarter on the interest rate, they ended up spending $30,000 more for their home. That is a big mistake. If you can qualify for the home, buy the home, you can always refinance it a year or two, then you get your credit score increased. 

Choosing A Wrong Lender

If you go to a lender with overlays and they have a higher minimum credit score or they have additional reserve requirements and you don't meet those, they are going to turn you do, and they are going to tell you that you were turned down by FHA. Which again is not true. So, make sure you choose the right lender.

FHA is Not The Lender - FHA Is The Insurer

They write the guideline the lender follow. All lenders don't follow the exact guideline. 

Home Purchase Price

FHA has federal set limits on how much you can borrow with an FHA money it varies by state and by county. Fortunately, the limits are high, the limits are $350,000 in Austin, which is the maximum loan amount. I don't know what the limit is in other states. That means you can buy a house probably for about $400,000 with a little bit of 3.5% down, you are there, so, that is good news. 

FHA Does Not Have Income Limit

Some of the other programs you maybe have heard of home possible or home ready they have income limits, again based on County. FHA does not have an income limit, you can make as much as you want and still qualify for an FHA loan.

The Draw Back To FHA Is You Have To Have Mortage Insurance

Mortgage insurance, it's insurance that incases you are defaults, the lender gets help in getting the loan paid off if the house sells at a loss. The only drawback with FHA is you are borrowing more than 80% of the value and you have mortgage insurance. Mortgage insurance protects the lender in case the home goes into default to cover any shortage when the house is sold. FHA used to allow you to get rid of the mortgage insurance once the loan was 80% of the value.

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