FHA Loan Requirements 2021/2022 in Ohio: Everything You Need To Know
This Article Is About FHA Loan in Ohio: Everything You Need To Know About FHA Mortgages
In 2020, the Federal Housing Administration endorsed 1.3 million home mortgage loans. While the FHA’s share of the market decreased since 2019, it still comprises a significant portion of the housing market. FHA loans are the second most popular mortgage program in the United States. Only conventional loans are more popular. FHA loans are very popular for first-time homebuyers, buyers with higher debt to income ratios, and borrowers with less than perfect credit and lower scores. The minimum credit score for a 3.5% down payment home purchase FHA loan is a 580 credit score. HUD, the parent of FHA allows people with credit scores down to a 500 FICO to qualify for an FHA loan. However, if your credit score is under 580 FICO and down to a 500 credit score, you need a 10% versus a 3.5% down payment to qualify for an FHA loan.
FHA Loan in Ohio: Most Popular Loan For First-Time Homebuyers With Bad Credit
Not all home buyers have the ideal credit profile for a mortgage lender. Not all borrowers will qualify for an FHA loan. The government’s role is to partially insure lenders in the event they sustain a loss if and when their borrowers default and/or foreclose on their FHA loan. Due to the government guarantee from HUD, lenders are more than eager to originate and fund FHA loans to people with less than perfect credit and lower credit scores.
FHA loans have empowered working-class Americans to buy homes since 1934. The program provides necessary economic security for at-risk families, and it’s a stabilizing force in communities. If you’re an employed Ohioan, you might wonder if an FHA loan can help you buy a home. Or, perhaps you’ve inherited funds, and you want to put a downpayment on a house through the FHA. HUD’S FHA loan program is very popular for first-time homebuyers, people with prior bad credit, borrowers with lower credit scores, borrowers with outstanding collections, and charge-off accounts. Primary owner-occupant mortgages do not require outstanding collections and/or charged-off accounts to be paid. However, HUD is the most aggressive agency when it comes to accepting outstanding collections, charge-offs, late payments, and other bad credit.
FHA loan Ohio lenders offer federally-backed mortgage payment plans—even if you have poor credit. Learn how FHA loans might enable you to pursue homeownership in Ohio.
FHA Loan in Ohio: What Is An FHA Loan?
FHA loans are federally insured loans. Specifically, they’re loans for Americans attempting to purchase a home. This insurance encourages lenders to extend mortgages to people who risk defaulting at a higher rate. The United States government began the FHA program in 1934. The Great Depression triggered mass unemployment. It was also a time of economic turmoil and fiscal collapse. Subsequently, many Americans defaulted on their mortgages. The banks foreclosed on their homes, leaving citizens vulnerable to homelessness during the economically stressful time.
The FHA program provided insurance to lenders. This mitigated the risk that the lender would be stuck if the homeowner defaulted on the mortgage payments.
This protection enabled lenders to offer loans with a low downpayment. FHA loan lenders also offer mortgages to Americans with lower-than-ideal credit scores. Almost 90 years later, the FHA is still a strong, useful program. It empowers working-class families and prevents homelessness. Broadly, FHA loans stabilize communities through homeownership. This creates a positive snowball effect, which creates a safety buffer during turbulent economic times.
FHA Loan in Ohio: Costs and Benefits On FHA Loans
Are FHA loans right for you? Many working-class Ohio families discover FHA loans let them purchase homes for the first time. Some single individuals also benefit from the mortgage program. But, these loans aren’t right for everyone.
Some people are better served by more conventional home loans. Others wait until they’re in better financial positions before they pursue homeownership by any method. Here are the key pros and cons of FHA loans.
The primary benefit of FHA loans is the myriad of opportunities to pursue homeownership. Low-income, working-class, and middle-class Americans are afforded options through the program.
Even people with a history of bankruptcy have FHA options. Here are six benefits of the FHA program.
Low Credit Score Options
Conventional lenders require recipients to have a credit score of 620 or higher. But, the FHA backs loans to people with credit scores as low as 500.
A borrower with that score can secure an FHA loan if they make a 10% downpayment. Family and friends are allowed to contribute gifts towards this downpayment. This makes it even more achievable.
Low Downpayment Options
Borrowers can secure an FHA loan with a small downpayment. FHA lenders offer mortgages with down payments as low as 3.5%.
That said, the 3.5% option is only for borrowers with a credit score of 580 or higher. Fortunately, as with other options, borrowers can use gifts to meet the low downpayment requirement.
High Debt-to-Income Options
Lenders evaluate a borrower’s debt-to-income ratio to price a loan. An individual can qualify for an FHA loan if their DTI is 43% or lower. This holds even if their credit score is 580.
In contrast, a conventional lender will only offer a mortgage to someone with a 43% DTI if their credit score were 720 or higher. Debt is not a significant limiting factor for FHA loans.
Few Income Limits or Barriers
There is no minimum or maximum income that disqualifies someone from an FHA loan. A low-income or no-income borrower may qualify for a loan if they have other means to make monthly payments.vLikewise, there is no upper-income limit for FHA loans. Some high-income earners—those whose income falls in the 80th percentile or higher for their region—are barred from specific FHA options. The low downpayment option excludes high-income earners. But, those families still qualify for other FHA mortgage programs.
Borrowers can use FHA loans to pay for many types of houses. These loans can pay for:
- Manufactures homes (i.e. mobile homes)
- Multi-family homes (2-to-4 unit homes)
- Single-family homes
Borrowers who secure multi-family homes may legally rent out other units within the home. This provides another option to meet monthly payment requirements if the borrower is low-income.
Low Monthly Premium Options
FHA mortgage insurance premiums are a flat monthly rate, regardless of your downpayment. This contrasts with conventional loans. Private Mortgage Insurance rates increase if you have bad credit.
FHA loans aren’t for everyone. Some downsides make these loans a poor fit for some borrowers. Consider these costs before you seek out an FHA loan.
It’s easier to qualify for an FHA loan than a privately backed mortgage. But, not everyone meets these qualifications. If your credit score is lower than 500, you may not qualify for an FHA loan. If your credit score is higher than that, you might not qualify for a loan at a downpayment you can afford.
Higher Insurance Costs
You must pay an Upfront Mortgage Insurance Premium of 1.75% on every FHA loan. This holds regardless of your downpayment. In contrast, you will not need mortgage insurance at all with a 20% downpayment—if you have a conventional loan. That can be a better option if you don’t want to pay mortgage insurance for the life of your loan.
Housing Standard Restrictions
Borrows must put FHA loans towards approved houses. An appraiser must evaluate a house before the FHA will finance it. The house must meet health and safety standards. If it doesn’t, the appraiser will reject it. Then, you can’t put the FHA loan towards it. This prevents borrowers from pursuing “fixer-uppers.” FHA loans cannot back homes you intend to flip. Borrowers should pursue an FHA 203k loan to buy a home for rehabilitation.
Low Loan Limits
The FHA sets loan limits by county. High cost of living areas has higher loan limits. FHA loan limits are 65% of a region’s conforming loan limits. These loan limits set the maximum possible value of an FHA loan. You might not secure an FHA loan for your dream house if it’s too expensive.
Applicants can only take out an FHA loan for their primary residence. The purpose of the FHA is to prevent homelessness. It also stabilizes communities. FHA loans are not for real estate businesses. Landlords cannot finance investment properties with FHA loans. Likewise, FHA loans are not for “extra” homes, like vacation homes. They are to empower Americans to secure a safe place to live long-term.
High Monthly Payments for High-Credit Borrowers
FHA loans offer lower monthly payment plans than conventional mortgages. But, that’s (typically) only true for borrowers whose credit score is lower than 720. Many factors impact the monthly mortgage rate. But, for borrowers with high credit scores, conventional mortgages are often a cheaper choice.
FHA Loan Requirements
More people are eligible for FHA loans than conventional mortgages. But, some restrictions still apply.
Your credit history impacts your eligibility. So does your income, debt, and current employment status. And it’s not just individuals who must meet the criteria. To put an FHA loan toward home, the home must be eligible for backing. The FHA outlines five requirements to meet loan qualification standards.
FHA regulates which homes are eligible for these loans. Manufactured homes, single-family homes, multi-family homes with up to four units, and single condominiums are eligible. Motor homes are RVs that are not eligible for FHA loans. Full apartment complexes and condominium buildings are not eligible for FHA loans. And, properties which occupy the 80th percentile of the market or higher, are not eligible. All eligible homes must pass inspection by an appraiser. If an appraiser judges a home to be unsafe, you cannot put an FHA loan towards that home.
Personal Credit Score
To secure an FHA loan, borrowers must meet minimum credit score requirements. You must have a credit score of at least 500 to secure an FHA loan. Certain options, like low-interest-rate options, require a higher credit score. You might consider manual underwriting to determine a more accurate credit score. Manual underwriters can take unusual circumstances into consideration when they evaluate your credit history.
Income and Employment
HUD, the parent of HUD, requires borrowers to meet income and employment standards. But, these standards are somewhat flexible.fThe FHA does not set minimum income requirements. This gives lenders room to pursue risks within their comfort zone. Lenders may lower income requirements for less expensive homes. Typically, borrowers must have an employment history of at least two years. A self-employed borrower must provide two years’ worth of tax returns. They must also submit profit-and-loss statements prepared by a tax professional. LLCs, sole proprietorships, and partnerships qualify as employment by FHA rules. If you’ve worked in your field for less than two years, you’ll need additional documentation. This can be proof of relevant training, education, or military enlistment.
If you have employment gaps due to disability or maternity leave, you may still meet employment requirements. But, you must document proof of your right and intent to return to work. If you were unemployed for six months or more, you need proof of current employment. You’ll also need proof of employment stability.
Your debt-to-income ratio shows how much of your pre-tax income you spend on debts. This includes credit card debts, student loans, child support payments, and medical debt. DTI is presented as a fraction of a percentage. So, if you have $2400 debt payments every month, and you make $5000 per month pre-tax, your DTI is 2400/5000. That’s 12/25, or 48%. The FHA requires borrowers to have a DTI of 50% or lower. In practice, most lenders only offer FHA loans to people with a DTI of 43% or lower. You can secure an FHA loan with a higher DTI if you can compensate for the risk. To do this, you must have additional cash not counted as income. This cash must cover at least three months’ mortgage payments. With cash reserves, you may be able to secure an FHA loan with a DTI of over 50%. But, this is unwise. It’s safer to pay down your debt first than pursue a home loan.
Mortgage Insurance Premium (MIP)
FHA loans require borrowers to pay a Mortgage Insurance Premium (MIP). This is distinct from the Private Mortgage Insurance mandated with conventional loans.
Regardless of your down payment, you must pay part of the MIP upfront. The upfront payment is 1.75% of the total value of the loan. You continue to pay MIP premiums annually for the life of your loan.
Lenders calculate the loan to value ratio to determine risk. The higher the LTV, the greater the risk. FHA loans can fund mortgages with a 96.5% LTV ratio. This means borrowers can take out mortgages for as little as 3.5% down.
But, this is risky for lenders. So, borrowers must also pay a MIP. The MIP lasts for the life of the loan.
If a borrower contributes a greater downpayment, their MIP payments will be lower. But, a borrower must pay part of the MIP upfront, even if they contribute a high initial downpayment on the home.
FHA Loan Ohio Policies and Programs
The FHA is a federal program. But, many states strengthen FHA options with their own programs. Ohio has multiple policies, programs, and agencies in place to empower FHA applicants.
Some of these programs are region-specific. That is, only residents of specific counties are eligible for certain programs. You must be a U.S. Citizen and Ohio resident for over two years to qualify for these programs.
Ohio Housing Finance Agency
The Ohio Housing Finance Agency helps Ohioans pursue homeownership. This agency offers housing assistance resources. It also promotes housing counselor services. The OhioHousing Finance Agency protects Ohioans’ rights under the Fair Housing Act. It can improve applicants’ chances of fairly qualifying for FHA loans. The agency launched a new program, Save the Dream Ohio, in 2021. This program provides relief grants to homeowners struggling to make mortgage payments.
Office of Housing and Community Partnerships
Ohio’s Department of Development sponsored multiple Affordable Housing Programs. These programs include:
- Community Development Block Grant Programs
- Ohio Housing Trust Fund
- Ohio Consolidated Community Development Plan
- Housing Assistance Grant Program
Each of these programs offers paths to homeownership. Some are direct paths to home loan assistance. Others are project grants that develop communities. Some programs focus on improving family income stability. This can improve a family’s eligibility for an FHA loan. Each program is worth looking into.
Community and Economic Development Programs
The Ohio CDC Association funds community and economic development programs. This group cultivates individual development accounts. It also empowers community projects through grants. It works in partnership with the CareSource Foundation. The Ohio CDC Association offers training and technical assistance to Ohioans applying for FHA loans. It also sponsored the Social Enterprise Incubation Program. These programs empower Ohioans to meet personal finance requirements. Thus, they enable more Ohioans to qualify for FHA loans.
HUD Homeowner’s Assistance: Ohio
HUD is the U.S. Department of Housing and Urban Development. The FHA is part of HUD. HUD funds multiple programs to promote homeownership. HUD programs also facilitate rent assistance to prevent homelessness. In Ohio, HUD sponsored the Section 8 Housing Choice Voucher Program. Low-income Ohioans can use Section 8 vouchers to pay part of their FHA loans. You can also use vouchers to meet downpayment requirements. HUD also sponsors local and regional housing programs in Ohio. This HUD website page lists regional housing assistance programs in Ohio. Explore programs available in your city or county.
FHA Loan in Ohio: How To Apply For a Loan (FHA Ohio)
Applying for an FHA loan can be daunting. But, you can break the process down into nine steps.
When in doubt, seek financial counseling. Non-profits and public programs offer counseling services free of charge. If you’re a member of a bank or credit union, you might seek counseling at that institution.
Make Sure You’re Qualified
Check the minimum requirements to qualify for an FHA loan. Then, evaluate your finances. Remember, to get a loan, the FHA requires:
- A Debt-to-Income ratio of 43% or lower
- Proof of two years of employment
- Documents validating employment gaps
- A FICO score of 500 or higher
- A Minimum loan downpayment of 3.5%
- A MIP upfront payment of 1.75%
- A prospective home eligible for an FHA loan
If you qualify, move on to the next step. If not, consult a counselor or agency to determine how to meet qualifications. Or, consider whether a conventional mortgage suits your needs better.
Research and Compare FHA Loan Lenders
The FHA does not lend directly. Instead, research FHA-approved lenders. HUD maintains a database of approved FHA lenders. You can use their search tool to find a lender that meets your requirements. HUD also maintains the site “FHA Connection.” This index empowers lenders to strengthen their ability to bear risk. It connects lenders to grants and other resources, so they can offer more to homebuyers. Groups like Gustan Cho Associates can also help loan-seekers. As a qualified lender, we empower applicants from a wide range of backgrounds. Our FHA loan guide outlines current HUD regulations. And, expert associates can lead the way to the best lender for you.
Consult With Assistance Services
Local and regional groups provide financial assistance. This can be financial counseling. And, it can also be grants or funds that enable down payments. Assistance services might encourage you to seek loans you’d otherwise overlook. Find an expert you trust to navigate this process with you.
Gather Basic Information for Inquiry
You’ll want to inquire about loan options from many lenders. This lets you streamline application and comparison processes.
To do this, you must consolidate basic personal information. You will need:
- Your Social Security Number
- Your driver’s license or state ID
- Current income information
- Proof of employment history
- The prospective home’s address
- The prospective house’s purchase price
- The downpayment amount
This is the basic information. Note that there is some variation for self-employed applicants. These are only basic documents for initial contact. You will supply additional documents later in the process. These additional documents validate your financial state.
Contact Lenders and Compare Offers
Once you’ve gathered together basic information, submit it to lenders. Lenders will quote initial offers. Note that these offers are not final. They are contingent on additional information. They may be subject to change. Still, the initial offers give you a starting point for comparison. This lets you discard lenders who offer poor terms. You can also ignore lenders who reject your overture outright.
Organize Financial Documents to Submit Applications
At this stage, organize additional documents. These documents validate your general financial state.
Final application documents note your savings, debts, assets, and income. Examples of these documents include:
- Tax returns
- Bank statements
- Investment account statements
- Proof of non-employment income (like SSDI payments)
- Paycheck stubs
- Previous employer names and addresses
- Year-to-Date P&L statements (for self-employed applicants)
An underwriter may request additional information beyond these documents. For instance, if you intend to pay some of your downpayment with a gift, the lender may request a gift letter.
Compare Loan Estimates
Lenders will provide you with a loan estimate within three days. Loan Estimates are supplied on standards forms. This makes them easy to compare. Loan estimates note loan type and term. This lets you compare a 15-year mortgage offer with a 30-year loan offer easily.
Schedule Home Inspection With Purchase Agreement
When you secure a purchase agreement, schedule a home inspection. The appraiser must approve of the home’s quality and safety. If the appraiser does not approve, you have two options. You can determine repair costs. Or, you can seek out a different house.
Close Within 45 Days of Application
You can close an FHA loan deal within 45 days of your application. This is the maximum window most lenders allow. They may not hold the loan offer for longer than that. If you can’t close within 45 days, that’s okay. There’s no penalty for applying for FHA loans multiple times.
FHA Loan in Ohio: Find the Perfect Mortgage
At Gustan Cho Associates, we’ve paved many paths to homeownership. No matter who you are, or where you’re from, our experts can find the loan that suits your needs.
Compare rates from multiple FHA loan Ohio lenders. Or, structure mortgage refinancing plans that fit your changing needs. Fill out our free quote, and discover what you qualify for in five minutes or less.
Pursue homeownership on your own path. Our associates are ready to help at every step.