FHA Guidelines:
Blue Print To Secure Your Home Loan
With 3,5% Down

FHA guidelines are set in place with the intent of preventing abuse and insure integrity of the system.

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At same time they give lenders and borrowers a clear path needed to follow to a successful closing.

These guidelines are subject to change from time-to-time but – once adopted they are the same all across the land.

Most of them – if not all – make sense to me. Here are the ones I think are the most notable ones.

(Please be advised that this list is not intended to be exhaustive, there are plenty more but these are perhaps the ones more commonly used)

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Mortgage Insurance

Mortgage Insurance is a requirement for any loan that is financed with a down payment of less than 20% of the purchase price.

Mortgage Insurance will remain in place until such time that you have paid 20% of the loan amount or the loan to value (LTV).

Actually the FHA ratio is more like 78%.

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Owner Occupied ONLY

• FHA Loans are for owner occupied purchase only.
• Are investors allowed to get an FHA mortgage loan?
  
  Yes, as long as they will occupy the home that is FHA financed.
  
  It does not mean that investor cannot sell that home later on ;-)
  However there must be a hiatus of 2 years after the original purchase
• How about second homes?
  
  Yes, as long as the second home becomes the “primary residence.
• Home has to be in “move in” condition.
  

However – as you could see above - FHA guidelines are prone to create different (contradictory) rules so the market place can have flexibility.

Two of such FHA guidelines allow you to buy homes that need repair and give you the flexibility to add additional moneys to the purchase price to repair and rehab the home. (Please see 203K and 203K streamline entries below)

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Appliances Required

• Home has to have the most important kitchen appliance.

TIP: Per one of FHA guidelines they will approve financing for a home without air conditioning – however investors do NOT like that – so chances are that financing will fall through…

So if you come across “such an adorable home that happens not to have air conditioning” please do not set your heart on it and keep looking.

• Carpet and other flooring areas have to be in place and in good shape.
• Roof has to have some 5 to 7 years left on its life – believe me it easy for a trained inspector to tell.

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Income To Debt Ratios

• Borrower debt to credit ratio (How much is your combined line of credits X the percentage of it that you are currently)
  
  This is one the FHA guidelines that will reflect directly on your FICO® scores and will affect all your buying power: I heard you should be a 25 to 30% ratio - which I think it is crazy but unfortunately I do not make the rules…
  
  This percentage may vary here and there but I do not expect it to have a significant variance if your debt ratio goes beyond 40%.
  
  My suggestion would be: Plan well ahead of when you are going to apply for a mortgage loan and lower your debt ratio …And then keep that ratio low until the day after the closing!
• Mortgage loan to income ratio around 28% (How much you make X how much you have to pay to service the mortgage loan)
• Income to housing expenses ratio no more than 38% (How much you make X how much you have to pay to keep the house to include HOA, hazard insurance, property tax)
• Borrower income to debt ration around 36% (Your income X how much you owe)

Note: FHA guidelines tend change these ratios from time to time so use the figures here as a guide to ask your mortgage consultant.

However these ratios are part of the lenders decision process and in the recent past they’ve become “tighter” and I do not expect FHA or the lenders to loosen them up any time soon.

FYI – Lenders tend to be more restrict on their requirements than FHA would.

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FICO ® Credit Scores 620 Minimum

• Borrower has to have good credit history and mid credit scores at or above 620.

TIP: FHA Affordable Program will approve FHA mortgage loans for home buyers with a minimum credit score of 600(*): You just need to search for those lenders!

(*) I even heard from a well informed loan consultant that there is even a program that can finance people with scores in the 580 – but, “it is going to be an uphill battle,” he said.

There will be a lots of red flags and more expensive to attain.

The main reason is that even though FHA guidelines may agree to back such loans, investors are still weary of loans made in the recent past for people in the border line of being able to afford to make mortgage payments or not…

Then the recession hit, jobs got scarce and millions of those folks effectively went into default on their loans – even if the had the good intention honor their commitments.

Consequently – nowadays - practically there is no “secondary market” for loans for buyers with FICO® scores below 620.

However – if your scores happen to be below that range – do not despair: Credit scores go down but they also go up. In any given day your credit scores can vary from a few point to 100 points (up or down)

Please work on it diligently that you soon will be back on the “620+ home buying range” again!

TIP: Talk with your loan consultant – he/she knows all of the FHA guide lines and what you need to shore up your scores to get you able to qualify for the loan you are seeking.

He/she might be able to guide you to the “620+ holly grail” …and he/she has “an interest vested on it.” ;-)

TIP: There are three major credit agencies that all lenders look at to decide on whether or not to grant a loan: Equifax®, Experian® and Transunion®.

Your credit scores will be different for each one of them. So, all lenders will use the “mid score” to base their decision.

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FHA 203(k) Program

If the home needs “some” reasonable repairs – FHA has a program called 203(k) that includes a certain amount for repairs. If approved, this amount is included into the loan.

FHA 203(k) Streamline

This is yet another program that FHA brought to its menu.

This program is available for those who have found a great home that needs “substantial repairs” more like “rehab” the house.

These FHA guidelines, although subject to changes from time to time, will help you to successful attain a “FHA mortgage loan” – please click here for more info

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JC Fagundes, Head Broker
EQUAL SERVICE TO ALL.
Residential. Commercial. Investments.
Ph: 404 801 4141

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