FHA Loan Requirements And Mortgage Lending Guidelines

6

FHA Loan Requirements And Mortgage Lending Guidelines

This BLOG On FHA Loan Requirements And Mortgage Lending Guidelines Was Written By Alexander Thomas Carlucci of Gustan Cho Associates

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 know as FHA by many
  • FHA is not a mortgage lender
  • The agency has nothing to do with the origination, processing, underwriting, funding, and servicing 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
  • FHA insures lenders in the event borrowers defaults on their Loans
  • 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

Down Payment FHA Loan Requirements

There are FHA Loan Requirements with regards with 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, than the minimum down payment required is 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 down payment and/or closing costs is only a gift
    • gift is not a loan
    • gift will not be paid back after closing
    • donor needs to complete a gift letter form provided by 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 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 a FHA Loan
  • However, with condominiums are different
  • For a condominium home buyer to qualify for a 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 a FHA Loan, please make sure that the condominium complex is FHA condo approved

FHA Loan Requirements On Two To Four Unit Properties

Home buyers 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 is a 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 does 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 a 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 borrower due to the high monthly payment used to calculate their debt to income ratios, then borrower can enter into a written payment agreement with creditor
  • 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 does 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 a FHA Loan two years after 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 a FHA Loan one year into a Chapter 13 Bankruptcy with the approval of the bankruptcy trustee
  • There is no waiting period after 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 a 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
  • Waiting period is three years from the short sale date which is reflected from the HUD Settlement Statement

About The Author Of FHA Loan Requirements And Mortgage Lending Guidelines

Alex Carlucci is a contributing writer for Gustan Cho Associates Mortgage News and a Senior Vice President of Mortgage Banking at Loan Cabin Inc. 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 Loan Cabin, headquartered in Lombard Illinois and headed by CEO Massimo Ressa, being a direct 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 all of his files and prides himself with 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 is available 7 days a week, evenings, weekends, and holidays.

  1. Gustan Cho, NMLS 873293 says

    HUD, the parent of FHA, is not a lender. The United States Department of Housing and Urban Development created FHA. Many people think FHA is a lender. FHA does not originate, fund, nor service home loans. FHA role is to promote home ownership by insuring private lenders against if borrowers default on their FHA Loans. In order for FHA to insure FHA Home Mortgages, private lenders need to follow all HUD Guidelines. FHA will then insure and partially guarantee the loss sustained by the lender if borrowers were to default on their home mortgages and the property forecloses. Due to this government guarantee, lenders are able to only require 3.5% down payment at very low mortgage rates. FHA is the most popular mortgage loan program in the United States.

  2. ALEX CARLUCCI says

    TO GET APPROVED AT A HIGHER DTI AND YOUR SCORE IS LOW WE RECOMEND YOU GET YOUR CREDIT SCORE UP. THERE ARE MANY WAYS TO DO THIS. PAYING DEBT DOWN BELOW 20 PERCENT OF CREDIT LIMIT IS ONE WAY. ANOTHER WAY IS TO NEGOITATE COLLECTIONS TO BE REMOVED COMPLETELY IF YOU PAY THEM OFF. PAYING COLLECTIONS GENERALLY DO NOT BOOST SCORE. REMOVING THE COLLECTION COMPLETELY DOES. ANOTHER WAY IS TO OPEN CERTAIN CREDIT CARDS, THIS CAN GIVE YOU A BOOST. GUSTAN HAS LISTED A JEWELRY COMPANY ON THIS SITE THAT HAS A CREDIT CARD THAT INCREASES YOUR SCORE BY OPENING IT AND BUYING A SMALL ITEM.

    1. Gustan Cho, NMLS 873293 says

      Great information Alex Carlucci. If you pay down credit cards to 10% or below of limit, it raises credit scores more.

  3. Gustan Cho, NMLS 873293 says

    HUD does not require charged off accounts and collections accounts to be paid off. Borrowers can qualify for FHA loans with outstanding collections and charged off accounts.

  4. Gustan Cho, NMLS 873293 says

    HUD increased FHA LOAN LIMITS to $294,515 for 2018 due to increased home values year after year.

Leave A Reply

Your email address will not be published.

CALL NOW