Many clients are frequently baffled about where to begin the financing process and what they should be looking for in a mortgage. With so many changes over the years, it’s hard to keep up! We decided to simply and effectively lay out the most common loans and their general guidelines over the coming weeks as part of a series “Let’s Talk Loans”.
If you missed us last week, check out the first part to our series Let’s Talk Loans: Conforming Conventional Loans
What is it? Created in 1934 under The National Housing Act, in the midst of the Great Depression, The Federal Housing Administration (FHA) insures mortgage loans to FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage. This is done by requiring two kinds of mortgage insurance premiums: one that is paid upfront and in full or can be financed into your mortgage, and the second is a monthly payment. As of June of 2013, borrowers can no longer apply to have the mortgage insurance removed when they reach 22% equity in the property so, unlike conventional loans, that mortgage insurance stays with the borrower as long as they have the loan. In the past several years, FHA loan fees have increased substantially, making it a less attractive option to many buyers, especially since 5% down conventional loans are more common.
Why is that important? FHA historically offers low down payment options and helps individuals with less than perfect credit get a loan. FHA not only helps provide adequate insurance to mortgage lenders, but it stimulates the housing market by making loans more accessible and affordable. It is a popular choice among first-time home buyers.
What are the guidelines? With an FHA, you want to have minimum a credit score of 580, HOWEVER, most underwriters are generally looking for 640 and above with at least 2 years of strong employment history. It requires 3.5% as your down payment, which can be gifted to you by an outside source such as a family member or employer. Additionally, you need a front-end ratio (this is typically your mortgage payment and insurance, property taxes, home insurance and any applicable HOA Fees) of 31% or below of your gross income, and a back-end ratio (which is your mortgage plus all monthly debt, e.g., credit card, car loans, student loans) of 43% of your gross income or lower. The property which you are looking to purchase has to be appraised by an FHA-approved appraiser. If it does not meet required appraisal standards, and the sellers do not agree to make the repairs, you will be expected to pay for the repairs upfront at closing in which the funds will be held in escrow until the repairs are complete.
Next Up: Let’s Talk Loans: VA
To find out more, or to speak with a home loan expert, contact us!