FHA Loan: Advantages Of A FHA Loan
By Gustan Cho
There are many of advantages of a FHA Loan, especially for first time home buyers and home buyers with prior bad credit, prior bankruptcy, and prior foreclosure, deed in lieu of foreclosure, and short sale. FHA loans make home ownership possible with only a 3.5% down payment as well as those home buyers who have credit scores as low as 580 FICO. Those home buyers who can afford to put a 10% down payment but have credit scores as low as 530 FICO, can still qualify for a FHA insured mortgage loan. FHA offers extremely flexible mortgage lending guidelines and those with unpaid collection accounts can still qualify for a FHA loan. First time home buyers who do not have the required 3.5% down payment can get the down payment gifted from their parents, brothers, sisters, grand parents, sons, daughters, cousins, in laws, or other family members. FHA allows down payments to be gifted. 100% of the down payment can be gifted. A gift letter needs to be signed by the donor of the gift as well as the deposit slip and sourcing of the gift funds leaving the donor’s account and being transferred to the home buyers bank account.
Mortgage Rates For FHA Loans Compared To Conventional Loans
Mortgage rates for FHA loans are normally lower than conventional mortgage rates, however, FHA requires mandatory upfront mortgage insurance premium that is a one time fee of 1.75% of the mortgage amount but can be rolled into the mortgage balance. FHA also requires mandatory annual mortgage insurance premium to be paid monthly along with the mortgage loan borrower’s mortgage payment which is escrowed along with the homeowner’s property insurance. The annual mortgage insurance premium is 1.35%.
FHA Mortgage Lending Guidelines
FHA mortgage underwriting guidelines are much more relaxed than conventional mortgage loan underwriting standards. Minimum FHA down payment requirements is 3.5% down payment. Conventional loan minimum down payment requirements are at 5%. Minimum credit score requirements for FHA loans are 530 FICO. However, if your credit scores fall between 530 FICO and 579 FICO, FHA requires that you have a 10% down payment. To qualify for a 3.5% down payment FHA loan, you need a credit score of at least a 580 FICO or better. Minimum credit scores to qualify for a conventional loan is 620 FICO. FHA standards on debt to income ratios are much more lenient than conventional mortgage lending guidelines. You can have a debt to income ratio of up to 56.9% DTI and still get an approve eligible per DU FINDING on a FHA Loan as long as you have a credit score of 620 FICO or higher. For FHA mortgage loan applicants with credit scores under 620 FICO, the debt to income ratios are capped at 43%. Conventional loan programs debt to income ratio requirements are capped at 45% maximum. Many high credit score mortgage loan applicants who have higher debt to income ratios who do not qualify for a conventional loan can qualify for a FHA loan.
Shorter Waiting Periods After Bankruptcy And Foreclosure
Other advantages of a FHA Loan versus conventional loan programs is that the mandatory waiting period is shorter after bankruptcy and foreclosure. To qualify for a FHA loan after a bankruptcy discharge, the waiting period is only two years from the discharge date of the bankruptcy whereas there is a mandatory 4 year waiting period after a bankruptcy to qualify for a conventional mortgage loan. There is a mandatory waiting period of 3 years after a foreclosure to qualify for a FHA loan whereas the minimum waiting period after a foreclosure to qualify for a conventional loan is 7 years. The waiting period is 3 years after a deed in lieu of foreclosure and short sale to qualify for a FHA insured mortgage loan.
Waiting Period After Deed In Lieu And Short Sale To Qualify For Conventional Loan: FANNIE MAE UPDATE EFFECTIVE AUGUST 16, 2014
Effective August 16th, 2014, Fannie Mae will impose new waiting period guidelines for those with a prior deed in lieu of foreclosure or short sale. The new Fannie Mae guidelines effective August 16, 2014 is that the mandatory waiting period is 4 years after a person has had a deed in lieu of foreclosure or short sale to qualify for a conventional mortgage loan with 5% down payment.
Currently, those home buyers who had a prior deed in lieu or short sale qualified for a conventional loan after a 2 year waiting period as long as they had a 20% down payment. This 2 year waiting period after a deed in lieu of foreclosure or short sale will no longer be in effect starting August 15, 2014. Also, currently, those home buyers who only had a 10% down payment can qualify for a conventional loan after a 4 year waiting period after a deed in lieu of foreclosure or short sale. Effective August 16, 2014, those with a deed in lieu of foreclosure or short sale can qualify for a conventional loan with only 5% down payment after a 4 year waiting period after their deed in lieu of foreclosure or short sale. Those with only a 5% down payment after a deed in lieu of foreclosure or short sale had to wait 7 years. This new Fannie Mae guideline on the waiting period after a deed in lieu of foreclosure and short sale will definitely benefit conventional loan borrowers with only a 5% down payment.
Other advantages of a FHA loan is that it permits non-occupant co-borrowers whereas conventional loan programs do not allow this. Those home buyers who cannot document income and/or have high debt to income ratios can have a family member be a non-occupant co-borrower to qualify for a residential mortgage loan with the FHA loan program.
FHA 203k Loan
The FHA 203k Loan program allows homeowners to purchase a home in need of repairs. It is an aquisition and construction loan underwriten at once with one appraisal, as is and as complete. There are two different types of FHA 203k loan programs: The FHA 203k Streamline and the full FHA 203k Loan program. The FHA 203k Streamline mortgage loan program limits the maximum construction budget to $35,000. The full FHA 203k Loan program enables a home buyer unlimited construction funds up to the maximum FHA as completed loan limit in their particular area.
One Year Waiting Period After Bankruptcy And Foreclosure
HUD launched the all new FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program last August 15, 2014 which shortens the waiting period after a bankruptcy, foreclosure, deed in lieu, and short sale to a one year waiting period. To qualify for the FHA Back to Work extenuating circumstances due to an economic event mortgage program, the home buyer needed to have been terminated and/or laid off from their work or the employer needed to have gone out of business and this involuntary termination of the home buyer’s employment was the direct cause of them going through a bankruptcy or having their homes foreclosed upon. The home buyer also needs to show that due to this involuntary termination that they have had a drop of at least a 20% household reduction of income for at least six or more months. The home buyer needs to show that he or she had great credit with timely payment history prior to the economic event. Derogatory credit is expected due to the economic event, however, re-established credit is expected after they have obtained full employment. There cannot be any late payment history after the mortgage loan applicant has gotten a new full time job. A HUD approved housing course and certificate of completion signed by the HUD counselor is required 30 days prior to them to be able to start the mortgage application process.