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FHA Mortgage Loan Requirements Guide

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Gingerbread HouseWhen I was reading Dale Siegel’s The New Rules of Mortgages, was struck by the sheer number of available mortgage options available to Americans. I knew about your standard vanilla varieties (30 year fixed, 15 year fixed), even the trickier ones (ARMs, Option ARMs), but I knew very little about the various government sponsored programs designed to help low to moderate income or first time hombuyer families get a piece of homeownership.

One of these programs is the FHA, or Federal Housing Administration, mortgage insurance program. It’s part of the U.S. Department of Housing and Urban Development (HUD) and the FHA provides mortgage insurance on loans made by FHA-approved lenders. The logic behind the program is that low and moderate income families and first time homebuyers, especially in these economic times, may need a little extra help in the homeownership process. This help comes by way of an insurance program, that the borrowers will pay for at least five years of the loan, offered by the government.

About the FHA Program

The Federal Housing Administration was created in 1934 and was integrated into the Department of Housing and Urban Development’s Office of Housing in 1965. When the FHA was created, the economy looked a lot like it does today – “flat on its back” according to the website. While our economy today is still reeling, we certainly haven’t reached the depths seen in 1934.

According to the FHA website, the FHA program is entirely funded by its own revenue and uses no taxpayer funding. I think that’s pretty amazing, especially after the pain the housing industry has seen in recent years. To get an FHA loan, you will want to talk to an FHA lender and they can explain the whole program in much greater detail. I know the folks who run Mortgage Loan Place and they can help you out if you need it.

One warning, I’m not a mortgage expert, I hope that everything I’ve written is correct and accurate but I recommend you speak to a professional before making any decisions.

Cost of an FHA Loan

FHA loans offer rates that are comparable to conventional loans but are slightly more expensive because of the up front costs and the insurance component. The estimate is that the up front cost is 1.75% plus a 0.5% annual insurance premium, the FHA insurance, for at least five years. The 0.5% insurance fee goes away when you reach a loan-to-value of 78%. (Fortunately, FHA rules allow the seller to pay for closing costs up to 6% of the home’s appraised value).

The trade-off for added cost is that right now one of the easiest ways you can get a loan with only a little money down is with an FHA loan. With the credit crunch, most conventional loans will require at least 10% down before they’ll talk. It’s estimated that FHA loans make up 25% of the mortgage market.

FHA Mortgage Requirements

The FHA mortgage insurance program has a series of requirements you need to fulfill in order to qualify. The basic requirements are the same but the specific numbers will vary based on the lender and the state you’re in. I’ve included the most general figures here. If you are interested, it’s best you speak to an FHA approved lender to get the specific figures:

  • Type of residence: The program covers single family homes, 2-unit, 3-unit, 4-unit properties, as well as condominiums.
  • Maximum FHA mortgage loan limits: The amount of the mortgage loan must not exceed statutory limits, which you can look up on the HUD FHA mortgage limits page. FOr example, the limit for Howard County for a single family home is $560,000 as of February 2009.
  • Minimal cash investment: One of the big benefits of the FHA program is that you can own a home with a minimal cash investment. The maximum loan-to-value ratio is 97%, meaning you may only need to put down 3% to qualify for an FHA insured loan.
  • Income requirements: You must have at least two years of steady employment with increasing income, your mortgage payment may also not exceed 30% of your gross pre-tax income.
  • Minimum FICO score: The borrower must have a minimum FICO score of between 580 and 620, depending on the lender, as well as less than two 30-day late payments. If you have a foreclosure or bankruptcy, it must be at least three (foreclosure) or two (bankruptcy) years old with perfect credit since.
  • Appraisal requirement: Your future home will require a appraisal from a government-approved appraiser. Small problems, like a missing handrail, won’t be an issue but they will want larger systemic problems, like a leaky roof, will need to be repaired. FHA appraisals of a property are on record for 6 months.

If you’re looking for an FHA approved lender or just want a quote, I can recommend this tool from MortgageLoanPlace.

If anything on this page is incorrect, please let me know and I will correct it immediately!

(Photo: terren)

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23 Responses to “FHA Mortgage Loan Requirements Guide”

  1. Anonymous says:

    We’re using a 30 year FHA loan for the new house and everything you wrote looks about right. It’s definitely a lot of hoops to jump through, but after running the numbers, this seemed like the best deal.

  2. JJ says:

    I wouldn’t really say that FHA loans geared toward “low or moderate” income individuals or families. It seems to be geared more toward first time home buyers (although, nowhere does it state that as requirement) who have very little to put down and may have a few blemishes on their credit report. It’s more of a myth that you have to be of “low income” to qualify for an FHA loan. Of course, Donald Trump has no need for one, so I suppose, it’s not geared toward him.

    • Jim says:

      Low to moderate isn’t meant to be disparaging, it’s how other sites have described it too. I did add a note in there about first time homebuyers too because they certainly benefit from these programs as well.

  3. John says:

    “…as well as less than two 3-day late payments”. Was that meant to say “30-day late payments” instead or is that accurate?

  4. Starting January 1, 2009, an FHA loan down payment has increased from 3% down to 3.5% down. Three years ago, only about 2% of borrowers used FHA mortgages (since most everybody used those lovely *cough* exotic mortgages). The latest numbers now show about 25% of all homes sold today are backed by the FHA.

  5. CF says:

    The FHA will allow certain lenders to monetize your First Time Home Buyer Tax Credit for use towards your down payment or closing costs. (Granted this is only good til 12/1/09 unless they extend it).

    Info is at: http://www.federalhousingtaxcredit.com/2009/faq.php#19

    Read FAQ #20.

  6. Laura M. says:

    I believe the minimum required downpayment for FHA went up to 3.5% as of 01/01/09.

  7. Ken says:

    Also you can only drop the insurance after 5 years if the LTV is 78% or less.

    So that means 5 year minimum of insurance payments no matter what.

  8. Sandra says:

    It sucks, I have a client who is closing on their home tommorow. They put 20% down, and because it was not 22% down, they had a premium of over 5k for their mortgage insurance, and they’re stuck with it for 5 years. ;( However, it was our only option. The house was originally listed at 520k, and they got it for 380k, so it was worth it! Another program a lot of people don’t know about is USDA, which allows a borrower to buy with no money down. It does have income limits, and the house has to be eligible.

    • Jim says:

      After your comment I did some research into that USDA program, I had no idea it even existed. Thanks for your comment, a post is forthcoming.

  9. Kat says:

    Don’t forget the Veteran Affairs loans.

  10. Jay says:

    Here are all the FHA Loan Limits by County all across the country.

    http://www.docstoc.com/docs/6757353/FHA-Loan-Limits-by-County

  11. Jim,

    FHA loans make sense when the borrower has good credit and is able to make the monthly payments. It is the loan of choice for a quarter of first-time home buyers and as prices drop, more properties qualify for FHA financing.

    One note: FHA is a government program so although it’s ostensibly “self-funded” all actions are backed by the full faith and credit of the US Government. In other words, you & I are guaranteeing all those mortgages.

    Here’s a great article about FHA’s precarious reserve position:
    http://www.realestateconsulting.com/Newsletters.aspx?quicklaunch=true&newsletter=Strategic/strategic200909

  12. BenC says:

    Do you have anymore information on the income requirements? I’ve worked at four different companies in the past two years with a variation in my payscale of around $10K. I’m at the low end of that right now and we’re trying to buy a new house. We’re not first time home-buyers and with the housing market as it is, after we sell our current house, we’ll only get around 10% of the downpayment we’d like to place on our new house.

  13. AloraF says:

    I have a 100% paid for home I purchased 7/13/09. How long do I have to “own” it before I can apply for a home loan?

    • Madeline Sanders says:

      If your question means that you currently have an FHA loan, the answer is you can purchase another property using FHA financing w/certain provisions in place which are: (1) increase in family size & thus need for more space or (2) relocation due to employment. There might be one more which needs to be researched.

  14. Rico says:

    Hi there, I’m currently processing an FHA through Lending Tree; I was lead to believe it would go through without any issues… I informed them up front that I was and still am an overseas contractor for the past 5 years. Everything was fine until now when I’m being told that my loan may not be approved because my employer would not guarantee I would be employed for the next three years, they did state that the contract would last three years… is this an FHA requirement? What employer would make such a guarantee? Would any of your employers make such a statement? This seems to me a bit odd to say the least, in addition I have to prove that I would reside at the home for 50% of the time… again they knew upfront I was an overseas contractor I spend possible 30 days of the year in the US… nonetheless I had to pay the lenders processing fees upfront to find out now that I will more than likely not get the loan for these two reasons. Can anyone comment as to the validity of these requirements?

    Thanks

  15. Brian says:

    Rico,

    Yes, I’m experiencing the same issue.

    While I’m 100% US-based, I’ve had two separate FHA loan attempts shot down due to my employer being unable to guarantee my contract will last for 3 years (it’s currently a minimum of 2 years). In both cases the lender thought they could work around this, but this was not the case.

    As you said, what company can guarantee a “permanent employee” will be employed with them in three years?

    • Aaron says:

      Just last week I was told that I could get an FHA loan. Then the lender said because I’m overseas, that I wouldnt occupy the home for 50% of the time. I have good credit, a great savings account, and checkings, and more than three years on the job, and you mean to tell me I cant get a home under FHA!!! So its seems to me, that I would have to loose evrything work in the states, under a bad economey, make less money, and then I can get a home. WOW!!!

  16. Jenn says:

    I am a first time home buyer and currently supposed to close on my new home on Friday. Pyramax is currently giving me the run around on my FHA. I had to paint the outside of the house because of pealing paint (minor) in WI in Feb as a requirement and was told I could not escrow these repairs. Painting was completed in a snowstorm and since it was below 60* we will have to repaint in spring. Was this correct that we couldn’t escrow the repairs ($500)? I am now being told that even though we have given written proof of home insurance for the year on the new home that we still are required to escrow our home insurance because it is a FHA loan. Is this correct?

  17. Jacque S. Young says:

    Does FHA finance mortgage loans for a single (not married) borrower? If so, what are the requirements that a single borrower must meet?.

    Also can the borrower pay for home owners insurance without escrowing it? I was also told that FHA loans require the borrower to escorw the home owners insurance. Please advise, thanks.

    Jacque Young


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