FHA Loan Requirements And Mortgage Lending Guidelines
This Article Is About The FHA Loan Requirements And Mortgage Lending Guidelines
FHA Loans are the most popular loan programs today in the United States. The United States Department of Housing and Urban Development is the parent of the Federal Housing Administration, which is commonly known as FHA by many. FHA is not a mortgage lender. The agency has nothing to do with the origination, processing, underwriting, funding, and servicing of FHA Loans. FHA’s main function is insuring residential mortgage loans that is originated and funded by lenders such as banks and mortgage companies. Private lenders such as banks and mortgage companies need to be approved by HUD. They need to follow FHA mortgage guidelines in order for loans they originate and fund to be insured by the Federal Housing Administration.
HUD, the parent of FHA, insures lenders in the event borrowers defaults on their Loans.
2021 HUD UPDATED FHA Guidelines
FHA Loan Requirements has been updated with regards to the following:
- credit scores
- credit requirements
- down payment requirements
- loan limits
- debt to income ratio requirements
- collection accounts
- charge offs
- disputed credit accounts
In this article, we will discuss and cover FHA Loan Requirements And Mortgage Lending Guidelines.
Down Payment FHA Loan Requirements
There are FHA Loan Requirements with regards to the minimum down payment on home purchases. If the home buyer has credit scores of 580 or higher, FHA requires a 3.5% down payment on a home purchase. If the home buyer’s credit scores are 579 or lower, then the minimum down payment required is a 10% down payment. Down payments on FHA Loans can be gifted by a family member and/or relatives. 100% of the down payment can be gifted.
However, the donor of the gift needs to sign a gift letter stating the following:
- gift for the down payment and/or closing costs is only a gift
- the gift is not a loan
- the gift will not be paid back after closing
- the donor needs to complete a gift letter form provided by the lender
- 30 days of bank statement of donor needs to be provided showing funds has been seasoned 30 days
Gift funds can be used for the down payment on a home purchase and closing costs. Gift funds cannot be used for reserves.
FHA Loan Requirements On Types Of Properties
FHA Loan Requirements on the types of properties a home buyer can qualify are that the home needs to be a one to four-unit residential property. FHA Loans are for owner-occupant property financing only. A home buyer cannot qualify for a second home or investment property with FHA Home Loans. Any residential one to four-unit can qualify for an FHA Loan. However, condominiums are different.
For a condominium home buyer to qualify for an FHA loan on a condominium purchase, the condominium complex needs to be HUD condo approved. More and more condominium complexes are not renewing their FHA condominium approved list certifications. Many condominium home buyers cannot purchase condominiums due to the condominium complex not being FHA condominium approved. Before shopping for a condominium with an FHA Loan, please make sure that the condominium complex is FHA condo approved.
FHA Loan Requirements On Two To Four Unit Properties
Homebuyers can purchase a two to four-unit property with a 3.5% down payment FHA Loan. Borrowers can use 85% of the potential rental income on the rental units as qualified income:
- Minimum FHA Loan Requirements on credit scores to purchase a 2 to 4 unit property is 580
- However, there are three months of reserves required on three to four-unit properties
- Reserves are one month of principal, interest, taxes, and insurance also known as PITI
- Reserves cannot be gifted
- Needs to be the home buyer’s own funds
- Reserves do not have to be in cash
The following types of accounts can be used to meet reserve requirements:
- Stock and investment accounts
- IRAs, 401k
- Other liquid assets can be used to meet FHA Loan Requirements with regards to meeting reserves.
FHA Loan Requirements On Debt To Income Ratios
FHA requires a minimum credit score of 580 in order for borrowers to qualify for a 3.5% down payment home loan. However, if credit scores are under 620 credit scores, the debt to income ratios are capped at 43% to get AUS Approval. If credit scores are 620 or higher, then back-end debt to income ratios can go as high as 56.9% to get automated underwriting system approval. The front-end debt to income ratios will be capped at 46.9% for borrowers with credit scores higher than 620 to get AUS Approval.
Front end debt to income ratios for borrowers with credit scores under 620 is capped at 43% back end to get an approve/eligible per Automated Underwriting System Approval. There is no front-end debt to income ratio requirements.
FHA Loan Requirements On Collection And Derogatory Items
FHA does not require borrowers to pay off unpaid collection accounts in order to qualify for FHA Home Loans. However, there are certain FHA Loan Requirements with regards to collection accounts. Unpaid collection accounts that total over $2,000 on non-medical collections, FHA requires that 5% of the unpaid collection account balance be used to calculate debt to income ratios.
For example, here is a case scenario:
- unpaid collection balance of $10,000
- FHA does not require to pay off the $10,000
- borrowers can still qualify for an FHA Loan
However, FHA does require that 5% of the unpaid $10,000 or $500 be used to calculate debt to income ratios:
- If the $500 will disqualify borrowers due to the high monthly payment used to calculate their debt to income ratios, then the borrower can enter into a written payment agreement with the creditor
- The borrower can make a written payment agreement for a lesser minimum monthly payment amount
- That amount will be used to calculate the monthly payment used to calculate the debt to income ratios
- There is no seasoning requirement on the FHA Loan Requirement
- The day both the debtor and creditor signs the written payment agreement, it will go into effect
With medical collections, this rule does not apply. Medical collections are exempt from the unpaid collection account debt to income ratio calculations.
With regards to charge offs, charge offs are exempt and do not matter with FHA Loans.
FHA Loan After Bankruptcy And Foreclosure
FHA is extremely generous and lenient when it comes to derogatory accounts. A home buyer can qualify for an FHA loan two years after the Chapter 7 bankruptcy discharged date. The waiting period starts from the discharge date of the Chapter 7 Bankruptcy. HUD allows a home buyer to qualify for an FHA Loan one year into a Chapter 13 Bankruptcy with the approval of the bankruptcy trustee.
There is no waiting period after the Chapter 13 Bankruptcy discharged date. All FHA Loans during and after Chapter 13 Bankruptcy discharged date not seasoned for at least two years, it is downgraded to a manual underwrite. Buyers can purchase a home with an FHA Loan three years after a foreclosure, deed in lieu of foreclosure, short sale. The waiting period starts three years from the recorded date after foreclosure or deed in lieu of foreclosure. The waiting period is three years from the short sale date which is reflected from the HUD Settlement Statement.
About The Author
Alex Carlucci is a contributing writer for Gustan Cho Associates Mortgage News and a Senior Vice President of Mortgage Banking at GCA Mortgage Group. Alexander Thomas Carlucci is a 25 year veteran of the mortgage industry and has a national five-star reputation for being able to originate and close government and conforming loans other lenders cannot. This is due to Gustan Cho Associates, headquartered in Lombard Illinois, and headed by Gustan Cho, being a national lender with no overlays on government and conventional loans. Alex Carlucci has his own team of loan officer assistants, mortgage processors, and mortgage underwriters in-house. Alex is hands on with all of his files and prides himself on not being able to close 100% of all of his pre-approvals but closing them on time. Alex Carlucci and his team at Gustan Cho Associates Mortgage Group are available 7 days a week, evenings, weekends, and holidays.