What is a FHA Loan?
Established in 1934, the Federal Housing Administration (FHA) aimed to enhance housing standards and provide a sufficient home financing system with mortgage insurance. This initiative enabled families who were previously excluded from the housing market to finally realize their dream of owning a home.
Rather than offering home loans, the FHA insures loans. If a homebuyer defaults on their loan, the lender is compensated from the insurance fund.
With FHA loans, it is possible to buy a house with as little as a 3.5% down payment. This is particularly beneficial for first-time homebuyers who may struggle to make larger down payments. Additionally, for those who do not qualify for a traditional loan, an FHA loan can be the right mortgage solution.
Moreover, down payment assistance programs can be combined with an FHA loan to provide further savings on down payments and/or closing costs.
Documents you’ll need for a FHA Loan
Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:
Complete Income Tax Returns for past 2-years
W-2 & 1099 Statements for past 2-years
Pay-Check Stubs for past 2-months
Self-Employed Income Tax Returns and YTD Profit & Loss Statements for past 3-years for self-employed borrowers
Complete bank statements for all accounts for past 3-months
Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.
Recent bills & statements indicating account numbers and minimum payments
Landlord’s name, address, telephone number, or 12- months cancelled rent checks
Recent utility bills to supplement thin credit
Bankruptcy & Discharge Papers if applicable
12-months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card, this indicates that you are not the one making the payments.
Social Security Card
Any Divorce, Palimony or Alimony or Child Support papers
Green Card or Work Permit if applicable
Any homeownership papers
Refinancing or Own Rental Property
Note & Deed from any Current Loan
Property Tax Bill
Hazard Homeowners Insurance Policy
A Payment Coupon for Current Mortgage
Rental Agreements for a Multi-Unit Property
What can you afford?
Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.
P = Principal
I = Interest
T = Taxes
I = Insurance
Monthly Income x .29 = Maximum PITI
$4,000 x .29 = $1,160 Maximum PITI
Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.
Monthly Income x .41 = Maximum Total Monthly Costs
$4,000 x .41 = $1,640
$1,640 total – $1,160 PITI = $480 Allowed for Monthly Long Term Debt
FHA Loan ratios are more lenient than a typical conventional loan.
Bankruptcy with a FHA Loan
In general, filing for bankruptcy does not necessarily disqualify a borrower from obtaining an FHA loan. However, it is important for the borrower to have re-established their credit with at least two credit accounts, such as a car loan or credit card. Additionally, they should wait for two years since the discharge of a Chapter 7 bankruptcy or have completed at least one year of repayment for a Chapter 13 bankruptcy (with the court’s permission). It is also important that the borrower does not have any other credit issues, such as late payments, collections, or credit charge-offs, since the bankruptcy.
Special exceptions may be made if the borrower has experienced extenuating circumstances, such as dealing with a serious medical condition and having to declare bankruptcy because of high medical bills.