FHA Loan Requirements Explained

According to FHA Loan Guidelines, FHA loans have the following requirements;

FHA MORTGAGE INSURANCE
FHA insured loans require mortgage insurance to protect lenders against losses that result from defaults on home mortgages. This only applies to borrowers who are financing more than 80% of the value of their home.

Mortgage insurance costs the home buyer 0.5 percent per year of the total amount of money borrowed and part of the escrow portion of their monthly mortgage payment. According to FHA, an upfront charge of 1.5 percent also applies.

Does mortgage insurance every terminate or expire? Yes, based upon the following;

*For mortgages with terms 15 years and less and with Loan to Value ratios 90 percent and greater, annual premiums will be canceled when the Loan to Value ratio reaches 78 percent regardless of the amount of time the mortgagor has paid the premiums.

*For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years.

*Mortgages with terms 15 years and less and with loan to value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.

FHA LOAN LIMITS
Loan limits vary based on housing types, the state in which you are buying a home or contemplating a refinance, and county in which the home is located.

CLOSING COSTS
FHA defines closing costs and provides which expenses are allowable as charges to the borrower based on amounts which are deemed reasonable and customary. Typical items include;

*Lender's origination fee
*Deposit verification fees
*Attorney's fees
*The appraisal fee and any inspection fees
*Lender's origination fee
*Cost of title insurance and title examination
*Document preparation (by a third party)
*Property survey
*Credit reports (actual costs)
*Transfer stamps, recording fees, and taxes
*Test and certification fees
*Home inspection fees up to $200

FHA DEBT RATIOS
There are two ratios that FHA follows in order to determine loan eligibility. According to FHA, these ratios are as follows;

1) MORTGAGE PAYMENT EXPENSE TO EFFECTIVE INCOME

Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 29%.

2) TOTAL FIXED PAYMENT TO EFFECTIVE INCOME

Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 41%

FHA & CREDIT
The following credit items will have an impact on a borrower's credit worthiness and ability to obtain financing:

NO CREDIT HISTORY

CHAPTER 13 BANKRUPTCY
Considered if payments toward Chapter 13 have been made with verification for one year.

CHAPTER 7 BANKRUPTCY
Borrower needs for two years to have gone by since a discharge through Chapter 7.

LATE PAYMENTS
Unlike many non-FHA programs, a pattern of credit behavior is observed and not incidental late payments.

FORECLOSURE
FHA is not offered to borrowers whose credit shows foreclosure within three years.

COLLECTIONS, JUDGEMENTS AND FEDERAL DEBTS
If a borrower's credit shows a judgment of any kind, this will have to be paid prior to closing on an FHA insured loan.

Before jumping into the loan process whether you go FHA or not, to save yourself time and trouble, make sure that you go to your lender prepared to provide some basic financial information to your lender.

*Address to your place of residence (past two years)
*Social Security numbers
*Names and location of your employers (past two years)
*Gross monthly salary at your current job(s)
*Pertinent information for all checking and savings accounts
*Pertinent information for all open loans
*Complete information for other real estate you own
*Approximate value of all personal property
*Certificate of Eligibility and DD-214 (for veterans only)
*Current check stubs and your W-2 forms (past two years)
*Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals

The best advice anyone can provide a potential home owner about mortgage refinance or FHA loan requirements is to find a trusted lender and determine based upon their credit and income ratios, how much house they can afford. Then it's Happy House Hunting!

The author Hank Bailey is real estate broker in the state of Georgia. He blogs at athensproperties.wordpress.com/.

hankbailey@kw.com
(c)706-621-1895
(w)706-316-2900