FHA Loans

What is an FHA loan?

The National Housing Act of 1934 created the Federal Housing Administration (opens in a new window) (FHA), which was established primarily to increase home construction, reduce unemployment, and operate various loan insurance programs. It exists to help keep stable funds available to the mortgage market for borrowers with little or no money for a down payment and who may have had previous credit issues they are recovering from. The FHA makes no loans, nor does it plan or build houses – it simply provides insurance to Direct Lenders who are approved to offer the program to its clients.

Getting Pre-approved for an FHA Loan

FHA home loans were designed to help Americans fulfill their dream of homeownership and are therefore the easiest type of real estate mortgage loan to qualify for. Among the home loan options available that require a minimal down payment, FHA loans are the most popular. In fact, the FHA loan is the most flexible type of home mortgage loan to qualify for.

The Essentials

  • Steady employment history, at least two years with the same employer.
  • Consistent or increasing income over the past two years.
  • Credit report should be in good standing with less than two thirty day late payments in the past two years.
  • Any bankruptcy on record must be at least two years old with good credit for the two consecutive years.
  • Any foreclosure must be at least three years old with good credit for the past three years.
  • Mortgage payment qualified for must be approximately 30 percent of your total monthly gross income.
  • If you can answer YES to these statements you should have no problem qualifying for an FHA home mortgage loan.

Getting Pre-approved before you look at the house of your dreams will help you know your borrowing power and what you can afford in terms of a monthly mortgage payment. This will save time, money, and stress in your home-buying experience.

More Questions and Answers in Regards to FHA financing:

The goal of the FHA loan program is performed by a lender who is approved by HUD to be able to get government insurance for a person to purchase or refinance a principle residence. The lender has to follow HUD guidelines in order to be eligible to get the loan insured. Be expected to provide the following during your loan process so that we can approve your loan.

  • Last two years of information for both your work and living history
  • Paystubs and other income verification information
  • W2’s and tax returns if you receive commission or self-employed income
  • 60 days worth of bank statements
  • Proof of any recently paid judgments or collections
  • A letter of explanation for any recent bankruptcies or credit delinquencies

Depending upon your unique situation, additional information may be asked for in order to get your loan approved. An appraisal of the property you are purchasing will be ordered and completed by a 3rd party appraiser who will verify the property’s value for us as the lender and make sure the property doesn’t have any repairs needed before it can meet FHA’s guidelines.

Once your loan is fully approved we schedule your closing for you with a local settlement company so that you can become a new homeowner.

This entire process can take as little as 30 days from your application date with us if you provide us the information we need in a timely manner.

Yes, you’re eligible for an FHA mortgage if you’ve filed for bankruptcy protection.

For a Chapter 7 bankruptcy, FHA will require 2 years has elapsed between the date of the bankruptcy discharge and FHA Case Number Assignment date. FHA Guidelines specifically reflect: A Chapter 7 bankruptcy (liquidation) does not disqualify a Borrower from obtaining an FHA-insured Mortgage if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge. 

Exceptions can be made against this two-year moratorium. Per FHA Guidelines, an elapsed period of less than two years, but not less than 12 months, may be acceptable, if the Borrower:

  • can show that the bankruptcy was caused by extenuating circumstances beyond the Borrower’s control AND
  • has since exhibited a documented ability to manage their financial affairs in a responsible manner.

For a Chapter 13 bankruptcy filing, the Federal Housing Administration will want to see that the mortgage applicant has made payments to creditors on time for a period of at least one year, and will want the written approval of the court-appointed trustee.

Furthermore, the agency will want the applicant to provide a letter of explanation for the bankruptcy filing and to show that satisfactory credit has since been re-established.

Yes, you can be approved for an FHA mortgage if you’ve missed a mortgage or rent payment. The FHA adheres to strict payment history guidelines for its FHA Streamline Refinance program, but for its purchase money loans, guidelines are more flexible — especially if there’s a substantiated reason why payment(s) were missed.

The FHA gives banks limited latitude to make common sense decisions. If a borrower’s credit history indicate one or several late or missed payments within a small window of time, followed by perfect payment histories across all creditor accounts, a well-written letter of explanation (LOX) may be all that’s needed to get that FHA home loan approval.

Yes, you can get an FHA mortgage if you’ve had a foreclosure. The Federal Housing Administration frowns upon foreclosures, instituting a three-year lockout period for homeowners who have been foreclosed upon, or who have received a deed-in-lieu of foreclosure.

However, in situations when the foreclosure was the result of extenuating circumstances, and where satisfactory credit has since been re-established, an exception to the 3-year waiting period may be granted.

In regards to collections there are some dollar limits for items in collection on an FHA mortgage applicant’s credit report that are not related to medical bills.  However, there is additional flexibility afforded to applicants who have set up payment plans on their outstanding collections.

Applicants with outstanding judgments and/or federal tax liens, however, won’t have much luck. The agency requires that all judgments be paid-in-full and that all federal tax liens be resolved prior to closing on an FHA-insured mortgage.

If you’re applying for a first-time FHA home loan, you’re likely wondering how long your mortgage will be and what kinds of options you might have for shorter or longer loans, early payoff or what happens if you just pay the monthly mortgage minimum.

You can get a fixed rate loan for either 15 or 30 years or you can get an adjustable rate mortgage that is amortized over 30 years but that is fixed for a specific time period like 5 years and then will “reset” once that 5 year period is up. The advantage to the adjustable rate loan is that it starts with a lower initial interest rate than the fixed rate loan, but we only recommend that loan to someone who is very confident that they will be selling or moving in a 5 to 7 year period.

Regardless of whether or not you refinance, the actual length of time you would be obligated to pay on the original mortgage changes when you pay more than the minimum mortgage payment due each month-paying more every month can shorten the loan term. So pay more principle each month when you send in your monthly mortgage payment and you can end up paying your loan off a lot earlier than you thought.

Some of the most frequently asked questions about making a new home purchase using an FHA guaranteed mortgage loan involve the issue of the down payment.

One such question we get goes something like this:

“I am thinking about purchasing a home. If a house costs $200,000 is it possible to be approved for a home loan with no money down? If not, how much down payment is required to be approved for the loan?”

The “no money down” issue sometimes comes up because borrowers confuse the FHA loan program with the Department of Veterans Affairs loan guaranty program or the USDA loan program which features a no down payment option.

FHA does require only a 3.5% minimum down payment-borrowers are free to pay more money down, there is no prepayment penalty. The 3.5% down payment can be a gift from a family member or from a local non-profit grant. There are many local non-profit organizations offering grants in your area for FHA down payments and often a local lender like ourselves can help you find them. Since sellers are allowed to pay your closing costs you can often times get your Agent to structure your sales contract so that you don’t have to bring any more than the 3.5% downpayment to closing.

If you are putting the 3.5% down payment down it’s important to note that we will have to “season” the funds in yours or your co-borrowers account to show that they have been in your account for at least 60 days. If you are saving for your down payment and don’t have a lot to put down yet, you can feel free to call us to see how much money you will really need based upon the house you are looking for and your budget.

Borrowers who have experienced financial trouble and wind up selling their property in a short sale arrangement often recover from their difficulties and feel ready to become homeowners once more. When you are ready to fill out an FHA loan application in the wake of a short sale, what do the FHA loan rules say about having such a transaction on your record?

Generally, a person who has had a Short Sale is not eligible for an FHA mortgage until 3 years from the date that their short sale took place.

However, if that default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long-term uninsured illness, and a review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default—then the borrower may be deemed eligible within the 3 year period.

Keep in mind that lenders will pull information from HUD/FHA to make sure the borrower doesn’t owe any additional funds from their short-sale which would prevent them from getting a new loan.

If we didn’t address your FHA question here or if you would like to talk more about your specific circumstances, we’d love to help answer your questions. Please visit our Contact Us page to find several ways to reach out to us, there is never any obligation.