What Is FHA Loan And Its Benefits And Mortgage Guidelines

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What Is FHA Loan And Its Benefits And Mortgage Guidelines

This BLOG On What Is FHA Loan And Its Benefits And Mortgage Guidelines Was UPDATED On July 29th, 2018

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:

  • Minimum credit score of 580 for a 3.5% down payment home purchase
  • Borrower with credit scores under 620, the maximum debt to income ratio caps is capped at 43% to get an approve/eligible per automated underwriting system approval (AUS)
  • Borrower with credit scores of at least 620 or higher, then the maximum back end debt to income ratio caps are capped at 56.9% back end and 46.9% front end for AUS Approval
  • These debt to income ratios are the requirements to get an approve/eligible per DU FINDINGS or LP FINDINGS per Automated Underwriting System
  • Minimum 2 years out of Chapter 7 Bankruptcy discharged date
  • Two year waiting period starts from the discharged date of the bankruptcy and not file date
  • 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
  • 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
  • Not the date the keys were turned in to the lender or when the property was surrendered
  • Down payment requirements on FHA Loan Programs:
    • 3.5% down payment with at least a 580 credit score
    • Borrowers with credit scores under 580, 10% down payment is required

What Is FHA Loan And Can I Qualify With Collections?

Many borrowers are often confused on what is FHA Loan and the credit requirements:

  • Medical collection accounts and charge offs do not matter
  • Does not need to be paid off
  • Non-medical collection accounts;
    • Borrowers with under $2,000 in unpaid collection accounts TOTAL, then it does not matter
    • If total collection accounts is over $2,000, then 5% of the unpaid collection account balance will be taken and calculated towards debt to income ratios
    • Treated as a monthly expense even though borrowers do not have to pay for it
    • Borrowers a substantial large unpaid collection account balance, they can make a written payment agreement with the creditor
    • That written agreed payment agreement will be used as a monthly expense to calculate debt to income ratios instead of the 5% of the unpaid collection account balance
    • Cannot have credit disputes during the mortgage process on non-medical collection accounts with balances greater than $1,000 ( aggregate ) and charge offs
    • Can qualify for a FHA Loan with charge off accounts
    • However, cannot have credit disputes on charge off accounts
    • Zero balance derogatory tradelines are permitted
    • Credit disputes on medical collection accounts are permitted as well

Can I Go To Any Lender For A FHA Loan?

The above FHA Loan Requirements are the guidelines imposed by the Federal Housing Administration in order for home loans to be insurable by HUD. Lenders can impose tougher Requirements than the minimum required by HUD. 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 is 580
  • However, a particular lender can have a minimum 640 credit score requirement to qualify with 3.5% down payment with their lending institution
  • This is called a FHA lender overlay this lender has
  • Overlays are additional lending requirement imposed by individual lenders that is above the minimum FHA requirements
  • There are other types of overlays lenders may require such as the following:
    • lower debt to income ratios
    • verification of rent
    • minimum credit tradelines
    • reserves
    • outstanding collections and charged off accounts to be paid off
    • other additional FHA requirements that is above and beyond those set by the Federal Housing Administration.

Home buyers looking for a lender with no overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Borrowers can also email us at gcho@gustancho.com. We are available to answer questions and take mortgage loan application 7 days a week including evenings, weekends, and holidays.

This BLOG On What Is FHA Loan was updated on July 29th, 2018

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