Federal Housing Administration loans (FHA loans) are government-insured loans that work well for buyers with limited income or limited credit who plan to use the home as their primary residence. The FHA program was established after the defaults and foreclosures that occurred in the 1930s.
FHA Loans and How They Work
FHA loans are available for eligible first time home buyers and in some cases, previous home owners. They fund owner-occupied home purchases and require a lower down payment and credit score. There are generous seller concessions of up to six percent of the purchase price. Down payments can be gifted, and mortgage insurance is required. The size of the loan is also limited and the amount depends on the county in which the property is located.
FHA Loan Requirements
If you want to buy central Florida real estate with an FHA loan, you’ll need to be aware of these requirements, established by the Federal Housing Authority.
- Borrowers must have a steady employment history or worked for the same employer for the past two years.
- Borrowers must have a valid Social Security number, lawful residency in the U.S., and be of legal age to sign a mortgage.
- Borrowers must pay a minimum down payment of 3.5 percent. The money can be gifted by a family member.
- New FHA loans are only available for primary residence occupancy.
- Borrowers must have a property appraisal from a FHA-approved appraiser.
- Borrowers’ front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowners insurance needs to be less than 31 percent of their gross income, typically. You may be able to get approved with as high a percentage as 40 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
- Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of gross income, typically. You may be able to get approved with as high a percentage as 50 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
- Borrowers must have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
- Borrowers must have a minimum credit score of 500-579 for maximum Loan to Value of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
- Typically, borrowers must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
- Typically, borrowers must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
- The property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
FHA Loan Advantages
In addition to lower down payment requirements, there are a few other advantages to using an FHA loan. These loans are assumable, which means that if you want to sell your home, the buyer can assume the loan you have. If you’ve gone through bankruptcy or foreclosure, or you have had some credit problems in the past, you may still qualify for a loan. This is often one of the easiest mortgages to qualify for.