FHA Loan Defined
FHA Loans are residential mortgage loans that are originated, processed, underwritten, and funded by banks and private mortgage companies who are FHA approved. The Federal Housing Administration, FHA, is a subsidiary of the United States Department of Housing and Urban Development, known by HUD by many. The Federal Housing Administration does not originate nor fund mortgage loans. The function of the Federal Housing Administration is to insure owner occupant residential loans, FHA Loans, to FHA approved lenders such as banks and mortgage companies against borrower’s default. In order for the Federal Housing Administration to insure FHA Loans to FHA approved mortgage lenders, the FHA approved mortgage lenders need to follow FHA mortgage lending guidelines. In the event if the FHA approved mortgage lender made a mistake and did not follow FHA lending guidelines on a particular FHA Loan and that FHA Loan went into default, the Federal Housing Administration will not insure the FHA approved lender against that borrower’s default. That is why mortgage lenders are extremely anal when it comes to underwriting FHA Loans and required complete documentation.
FHA Mortgage Lending Guidelines
The basics of FHA mortgage lending guidelines are as follows:
1. Minimum credit score of 580 FICO for a 3.5% down payment home purchase FHA Loan.
2. If mortgage loan borrower has credit scores under 620 FICO, then the maximum debt to income ratio caps is capped at 43%.
3. If mortgage loan borrower has credit scores of at least 620 FICO credit scores or higher, then the maximum back end debt to income ratio caps are capped at 56.9% and front end debt to income ratio cap is capped at 46.9%. These debt to income ratios are the requirements to get an approve/eligible per DU FINDINGS or LP FINDINGS per Automated Underwriting System.
4. Minimum 2 years out of Chapter 7 Bankruptcy. Two year waiting period starts from the discharged date of the bankruptcy.
5. Minimum 3 years waiting period after short sale. Short sale waiting period starts from the date of the short sale which is reflected on the HUD Settlement Statement.
6. Minimum 3 years after foreclosure and/or deed in lieu of foreclosure. The waiting period after foreclosure and/or deed in lieu of foreclosure starts from the recorded date of the foreclosure and/or deed in lieu of foreclosure and/or date of the sheriff’s sale and not the date the keys were turned in to the mortgage lender.
7. Down payment requirements on FHA Loan Programs: 3.5% down payment if you have at least a 580 FICO credit score. If you have credit scores under 580 FICO credit scores, 10% down payment is required.
8. Medical collection accounts and charge offs do not matter and does not need to be paid off. Non-medical collection accounts; As long as you have under $2,000 in unpaid collection accounts TOTAL, then it does not matter. If your total collection accounts is over $2,000, then 5% of the unpaid collection account balance will be taken and calculated towards your debt to income ratios and be treated as a monthly expense even though you do not have to pay for it. If you have a substantial large unpaid collection account balance, then if you make a written payment agreement with the creditor, that written agreed payment agreement will be used as a monthly expense to calculate your debt to income ratios instead of the 5% of the unpaid collection account balance.
9. You cannot have credit disputes during the mortgage approval process on non-medical collection accounts with balances greater than $1,000 ( aggregate ) and charge offs. You can qualify for a FHA Loan with charge off accounts, however, you cannot have credit disputes on charge off accounts. Zero balance derogatories are permitted and credit disputes on medical collection accounts are permitted as well.
Can I Go To Any FHA Lender For A FHA Loan?
The above FHA Loan Requirements are the FHA mortgage lending guidelines imposed by the Federal Housing Administration in order for the FHA Loan to be insurable. FHA mortgage lenders can impose tougher FHA Loan Requirements than the minimum required by the Federal Housing Administration. The tougher requirements are called FHA mortgage lender overlays . For example, FHA minimum credit scores to qualify for a 3.5% down payment home purchase FHA Loan is 580 FICO. However, a particular FHA mortgage lender can have a minimum 640 FICO credit score requirement to qualify for a FHA Loan with 3.5% down payment with their lending institution. This is called a FHA lender overlay this mortgage lender has, which is above the minimum FHA credit score requirements. There are other types of mortgage lender overlays that a FHA mortgage lender may require such as lower debt to income ratios, verification of rent, minimum credit tradelines, reserves, and other additional FHA requirements that is above and beyond those set by the Federal Housing Administration.
If you are looking for a FHA mortgage lender with no mortgage lender overlays, please contact me at 262-716-8151 or email us at firstname.lastname@example.org. We are available to answer your questions and take your mortgage loan application 7 days a week including evenings, weekends, and holidays.