Federal Housing Administration (FHA) loans have been helping people become homowners since 1934. The FHA – which is a part of HUD – insures the loan, so your lender can offer you a better deal.
- Low down payments
- Low closing costs
- Easy credit qualifying.
FHA Loans are the most popular mortgage loan program in the United States. The United States Department of Housing and Urban Development, HUD, is the parent of FHA. Under the HUD FHA handbook 4000, 1. FHA will permit borrowers with FICO credit scores far below 620 and a maximum of 46.9% debt to income ratio (DTI) front end debt to income ratios, referred to as the housing ratios and the maximum DTI is 56.9% on the back end.
Both first time home buyers and seasoned home buyers with prior bad credit, a prior bankruptcy, prior foreclosure, prior deed in lieu and a prior short sale can qualify for FHA loans.
Buying your First Home
FHA might be just what you need. Your down payment can be as low as 3.5% of the purchase price. Available on 104 unit properties, with a minimum FICO of 580 provided you find lender with no overlays. An overlay is a more stringent requirement above the minimum FHA guideline and is legal, in fact most lenders require a minimum FICO of 620 or higher.
FHA Loan after bankruptcy ?
Tradional FHA loan programs require the following waiting period.
- Mandatory 2 year waiting period after the discharge date of a bankruptcy
- Mandatory 3 year waiting period after a foreclosure, deed in lieu of foreclosure and short sale.
Lost a job through involuntary termination and/or a company shutdown and due to this had to file bankruptcy or had to go through a foreclosure, deed in lieu of foreclosure, or short sale can qualify for the new FHA Back to Work Extenuating Circumstances due to an economic mortgage loan program in only one year after the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale waiving the traditional waiting period
FHA Guidelines On Collection Accounts
A borrower can qualify for FHA Loans with bad credit, unpaid collection accounts, charge offs and even judgements. FHA will not require you to pay off your old collection accounts in order to get an FHA loan approval and clear to close on your mortgage loan. However, the majority of mortgage lenders have lender overlays. A term used meaning a more stringent lending guideline above the minimum FHA guidelines. Most lenders will require unpaid collections be resolved because of the risk of the collection agency pursuing judgement proceedings. When researching lenders and if you have any of the applicable life situations it may do you good to ask if the lender if they have guidelines (overlays) above the minimum FHA guidelines. Your situation may require locating a lender that does not have any additional overlays above the minimum FHA guidelines
Unpaid Medical Collection Accounts
Unpaid medical collection accounts are permissible under FHA. Medical collections are exempt and a high balance of unpaid medical collection accounts are acceptable with FHA. However, non-medical collection accounts may not be reuired to pay off if the total of unpaid collection balance is greater than $1,000, FHA will count 5% of the unpaid collection balance as monthly debt obligation and this will in effect the spread on your Debt to Income ratio (DTI), even if you do not pay anything. This could present a problem for a large amount, for example:
$20,000 unpaid collection X .05 (5%) = $1,000 that will be counted as a monthly debt obligation to be counted toward your DTI. This can stop the mortgage application process if the borrower has higher DTI ratios. FHA will allow you to enter into a written payment agreement with the creditor but whatever is agreed to mutually will be used by the mortgage loan underwriter as your monthly debt. Using the example given if you come to a mutually accept payment agreement with the creditor for $200,00 a month this will be your monthly debt payment on the collection of $20,000 account instead of the 5% or $1,000.00. No payment seasoning requirement is required with this rule.
High Debt To Income Ratios
If you are a borrower that was considering a Conventional Mortgage loan and you have high DTI you may turn to FHA loans to qualify due to a more lenient DTI standard. Maximum DTI for conventional loans is capped at 45% DTI. FHA is far more forgiving with DTI ratios. FHA caps their back end DTI to 56.9%. FHA loans have a front end debt to income ratio cap of 46.9% DTI. FHA loans are an outstanding resource and offer a fantastic means for first time home buyers, home buyers with bad credit and low credit scores, self-employed buyers, and home buyers who have higher debt to income ratios.
One other big advantage of is FHA permits the borrower to add a non-occupant co-borrower for income qualification purposes. The non-occupant co-borrower needs to be related to the main borrower by marriage, blood, or law. Special exceptions may be made if the non-occupant co-borrower has been close friends to the main borrower for at least 5 or more years.
Gift funds And Sellers Concessions
FHA allows the home buyer to get 100% gift funds to be used for the down payment and/or closing costs. Gift funds needs to come from a relative of the home buyer and a gift letter needs to be signed by the donor stating that the funds is only a gift and is not a loan and does not have to be paid back to the donor. This gift letter is often a form letter that meets all of these criteria.
FHA allows up to a 6% sellers concessions towards a home buyers closing costs. However, the closing costs cannot be wasted so make sure you do not get excess sellers concessions where you cannot apply it to your closing cost. In the event if there is an overage in sellers concessions, it needs to go back to the home seller.
- Fannie Mae Lending Guidelines
- USDA Eligibility link
- HUD 4000.1 FHA Handbook
- Freddie Mac Lending Guidelines
- VA Lending Guidelines
- Home Path Home
- Income Calculator
- Fannie Mae Rental Income Form
The Larry Stepp Team at The Money Store is committed to the highest standards of Customer Service by providing an informational and resource center for industry professionals of Mortgage and Real Estate professionals, a forum to share opinions and ideas on a variety of topics. The Larry Stepp Team at the Money Store recognizes experience is the best Teacher and is committed to sharing successful experience than can become the experience for new Homeowners, investors and even families. The Mortgage and Real Estate Industry has undergone many major changes since 2008 and now operate under stringent new regulations and guidelines that are troubling to comprehend. We are committed to providing informational blogs by tenured experts in Real Estate, Mortgage Loan Consultants, Real Estate Legal experts, title agents, escrow agents, insurance agents, contractors and other professionals outside of Financial and Real Estate Services.