FHA Loans

In 1934, the Federal Housing Administration (FHA) was created to improve housing standards and provide a reliable home financing system through mortgage insurance. This allowed families who might have been left out of the housing market to finally buy their dream homes.

How FHA Loans Work

FHA doesn’t lend money directly; it insures loans. If a homebuyer defaults, the lender gets paid from the insurance fund, reducing their risk.

Key Benefits of FHA Loans

1. Low Down Payment: You can buy a house with as little as 3.5% down.
2. Ideal for First-Time Buyers: Perfect for those who can’t make larger down payments.
3. Accessible Financing: Great for those who may not qualify for conventional loans.
4. Additional Assistance: Down payment assistance programs can be added to save even more on down payments and closing costs.

FHA loans are designed to make homeownership possible for more people, offering flexible options and added financial security.

Getting your FHA loan approved depends entirely on the documentation you provide during the application. You need to submit accurate information for the following areas:

Employment Documentation

1. Income Tax Returns: Complete returns for the past 2 years.
2. W-2 & 1099 Statements: Statements for the past 2 years.
3. Pay-Check Stubs: Stubs from the past 2 months.
4. Self-Employed Documentation: Tax returns and year-to-date profit & loss statements for the past 3 years.

Savings Documentation

1. Bank Statements: Complete statements for all accounts for the past 3 months.
2. Account Statements: Recent statements for retirement accounts, 401k, mutual funds, money market accounts, stocks, etc.

Credit Documentation

1. Recent Bills & Statements: Bills and statements showing account numbers and minimum payments.
2. Landlord Information: Landlord’s name, address, phone number, or 12 months of cancelled rent checks.
3. Utility Bills: Recent utility bills to supplement thin credit.
4. Bankruptcy & Discharge Papers: If applicable.
5. Cancelled Checks: 12 months of cancelled checks for any payments made by someone you co-signed for, like a mortgage, car, or credit card, showing you aren’t the one making the payments.

Personal Documentation

1. Driver’s License
2. Social Security Card
3. Divorce or Support Papers: Any divorce, palimony, alimony, or child support documents.
4. Green Card or Work Permit: If applicable.
5. Homeownership Papers: Any documents related to homeownership.

Refinancing or Rental Property Documentation

1. Current Loan Note & Deed
2. Property Tax Bill
3. Homeowners Insurance Policy
4. Mortgage Payment Coupon: For current mortgage.
5. Rental Agreements: For multi-unit properties.

Having all these documents ready will help ensure a smooth and quick loan approval process.

The biggest difference between an FHA (Federal Housing Administration) loan and a conventional home loan is the down payment requirement and credit criteria. FHA loans need a lower down payment and have less strict credit qualifications. This makes it easier for those without a credit history or with minor credit issues to buy a home.

Why Choose FHA?

1. Lower Down Payment: FHA loans require less money upfront.
2. Flexible Credit Requirements: Even with minor credit problems, you can still qualify.
3. Common Sense Underwriting: FHA uses a practical approach to credit issues. For example, borrowers with a bankruptcy discharged 3 years ago can still qualify if they explain the situation.

Conventional Loans and Credit Scores

Conventional loans, on the other hand, rely heavily on credit scores from agencies like Experian, TransUnion, or Equifax. If your score falls below their minimum standard, you might not qualify. This makes conventional loans harder to get for those with past credit problems.

Summary

FHA loans offer more flexibility for first-time homebuyers and those with less-than-perfect credit, while conventional loans are more dependent on high credit scores. Choose the option that best fits your financial situation and home buying goals.

When considering an FHA (Federal Housing Administration) loan, your monthly housing costs shouldn’t exceed 29% of your gross monthly income. These costs are often grouped together and referred to as PITI:

• P = Principal
• I = Interest
• T = Taxes
• I = Insurance

Calculating Your Maximum PITI

To find out your maximum PITI, multiply your monthly income by 0.29. For example:

• Monthly Income: $3,000
• Calculation: $3,000 x 0.29 = $870
• Maximum PITI: $870

Total Monthly Costs

Your total monthly costs, including PITI and long-term debts like car loans or credit cards, should not exceed 41% of your gross monthly income. Here’s how to calculate it:

• Monthly Income: $3,000
• Calculation: $3,000 x 0.41 = $1,230
• Maximum Total Monthly Costs: $1,230

From this total, subtract your maximum PITI to find out how much you can spend on other long-term debts:

• Calculation: $1,230 – $870 = $360
• Allowed for Monthly Long-Term Debt: $360

Lenient Ratios

FHA loan ratios are more lenient than those for typical conventional loans, making it easier for more people to qualify.

Generally, bankruptcy won’t stop you from getting an FHA (Federal Housing Administration) loan. Here’s what you need to know:

Re-Establishing Credit

After bankruptcy, it’s important to rebuild your credit. You should have at least two new credit accounts, like a car loan or a credit card.

Waiting Periods

• Chapter 7 Bankruptcy: Wait 2 years after discharge.
• Chapter 13 Bankruptcy: Wait at least 1 year of repayment and get court permission.

Credit Requirements

After bankruptcy, you shouldn’t have any new credit issues, such as late payments, collections, or charge-offs.

Special Exceptions

If you went through extenuating circumstances, like a serious medical condition that led to high medical bills, exceptions can be made.

Summary

While bankruptcy affects your ability to get loans, FHA loans offer more flexibility. By re-establishing credit and meeting specific conditions, you can still qualify for an FHA loan even after bankruptcy.