Today I will provide you with a fun FHA fact filled post. I can’t cover everything in one post but I’ll get to the most important items. You can obtain an FHA loan for a single family residence up to a four-plex (where four families would be able to live) but to simplify things, we’ll stick with the single family unit guidelines for they’re the most common.
Ready to explore a FHA purchase? Let’s go.
1. Required Down payment- The minimum down payment for FHA loans is 3.5% of the purchase price. This isn’t too bad considering that most conventional loans require anywhere from 10-20% down.
2. Loan Limits- Like I just stated, FHA loans are available for 1-4 unit homes/buildings. Loan limits are determined on a county by county basis – you can find your specific county here. In Wake County, you’re looking at a $295k limit which is fairly high; this basically means that if you want to get an FHA loan, the amount must be under $295k. Most buyers looking to take advantage of an FHA loan are shopping in the $200s.
3. MI or Mortgage Insurance – A quick note on MI – this is the insurance that the lender pays to protect themselves against your loan defaulting. Most conventional loans require you to pay mortgage insurance until you reach the 78% LTV point which they then deem you to be less of a risk and are satisfied with the amount of equity in the home and the MI requirement is dropped. For FHA loans, the same basic situation exists – you’re required to pay MI unless you’re putting down 20% or more. There are two items you need to consider about FHA MI – you’re charged a 1.75% upfront fee (which is rolled into the loan amount) and a .55% fee per year for the total loan amount. That second part is what determines the amount that you’ll be paying every month. A quick example would be if you had a $200k loan, your MI fee would be (200k x .0055)/12months= $91.67/month. Get it? Good, we’re moving on.
4. Closing Costs – For an FHA purchase you can expect to see the following costs: Origination Fee, Attorney’s Fees, Appraisal Fee, Title fees, Credit Report, and a Home Inspection Fee.
5. Credit Requirements – The credit requirement for FHA loans is usually 620 but each lender will have their own requirement overlays. You must have at least two lines of credit, 2 revolving accounts, to be eligible for an FHA loan. These accounts must have a pretty good history of on-time payments – your FHA loan will be inspected closely by underwriters and any questionable bill pay habits will be viewed quite negatively. You can still obtain a FHA loan if you’ve gone through a chapter 7 bankruptcy in the past; you just have to wait a minimum of two years after the discharge date (not the filing date). You do not have to wait, however, to apply if you’re currently paying off a chapter 13, as long as you’ve made on-time payments for the past year. You will need a written letter of explanation and a letter from your appointed court trustee. You’ll also have had to have rebuilt your credit to the required levels.
6. Debt to Income Ratios – Every time you apply for a loan, there are debt ratio requirements. For FHA, they’re a bit stricter; they want to make sure you’re getting yourself into a situation that you can afford. Also, with regards to ratios, all lenders have their own requirement overlays that will affect these numbers. You have two ratios that lenders are interested in:
1. your Mortgage Payment Ratio – This is your monthly mortgage proposed payment over your overall monthly income. So if your proposed mortgage payment is $700 and your overall gross income for the month is $2500 – you’re at $700/$2500=32%. FHA requires a maximum ratio of 29% to qualify.
2. your Total Expenses Ratio – This ratio is calculated by adding your monthly proposed mortgage payment to any monthly revolving debt (credit cards bills, car loan, etc) and dividing that by your total gross monthly income. FHA requires a maximum ratio of 41% to qualify.
So that was a brief rundown on what to expect as far as requirements go – things change quite often so if you find conflicting information or you’re confused about a certain item, just give me a call.
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