A Comprehensive Guide to FHA Mortgage Loans

A Comprehensive Guide to FHA Mortgage Loans | Woodland Park CO

Saving up for a large down payment on a residential home can be a financial challenge that prevents first-time homebuyers with minimal savings from ever becoming homeowners. Fortunately, government-backed Federal Housing Administration (FHA) loans can help potential homebuyers who want a home but struggle to save or source a large down payment. In 2018, more than 80% of FHA loans made were to first-time homebuyers, according to the U.S. Department of Housing and Urban Development.

This guide will cover the advantages and disadvantages of using an FHA loan to purchase a home, how homebuyers can begin the process of researching and getting approved for these loans, and how you may be able to utilize and FHA loan for refinance purposes.

What is an FHA Loan?

An FHA loan is a home mortgage insured by the government - specifically, by the Federal Housing Administration. The term “FHA loan” is actually somewhat of a misnomer because the FHA doesn’t actually lend money to would-be homeowners. Rather, it ensures the loans made by private lenders. So while we’ll use the term “FHA loan” for simplicity, an “FHA-backed or insured loan” is more accurate.

An FHA loan aims to put homeownership within reach for many Americans who wouldn’t otherwise qualify for a conventional, non-FHA-backed mortgage. You may be able to get an FHA loan with a lower credit score, lower down payment, and a higher debt-to-income ratio than you could have for a conventional mortgage.

Types of FHA Loans

FHA mortgage loans come in several different configurations depending on your age, assets, income, current home equity, needs, and circumstances.

Fixed-Rate Purchase Loan.

Also known as a 203b mortgage loan, this is the most popular type of FHA purchase loan. Terms can vary, but 15 and 30 years are the most common. Interest rates tend to be lower than comparable conventional mortgages. 203b mortgage loans can be used on one to four-family residential homes.

Adjustable-Rate Purchase Loan (ARM).

Under the Section 251 Adjustable Rate Mortgage Program, the FHA insures ARMs whose interest rates can rise by no more than one percentage point per year and no more than five percentage points over the full term. Borrowers receive notice of pending rate increases at least 25 days prior to the increase.

Condominium Loans.

Known as Section 234c loans, FHA-insured condominium loans are 30-year fixed-rate products that finance the purchase of individual condominium units within developments larger than four units. There’s no strict occupancy requirement, so borrowers can use FHA-backed condo loans to earn rental income. However, in any given development, at least 80% of FHA-insured loans must be made to owner-occupants.

Secure Refinance Loan.

FHA Secure Refinance loans are designed to help borrowers with conventional mortgage loans refinance into fixed-rate, FHA-backed mortgages. Delinquency is not necessarily disqualifying, though it must result from higher monthly payments on a conventional ARM. Non-delinquent borrowers can refinance any type of conventional loan. Standard qualification requirements apply, including steady income, acceptable credit rating, and reasonable debt-to-income ratios.

FHA Streamline Refinance Loan.

An FHA Streamline is a refinance option for homeowners with existing FHA mortgages. This program is “streamlined” because it doesn’t have many of the income and appraisal requirements that are included with standard refinance programs. As a result, the streamlined program provides homeowners with a quick, simple way to make their mortgage more affordable.

The FHA guidelines state that a streamline refinance must provide a benefit to the borrower by either lowering the interest rate or converting the loan from an adjustable-rate mortgage (ARM) to a fixed-rate. The program also allows for higher loan-to-value ratios than many refinance programs, so borrowers who have little or no equity in their home are still eligible.

FHA Loan Requirements

FHA loan down payment

With the FHA, the minimum down payment depends on your credit score. With a credit score of 580 or higher, the minimum down payment is 3.5%. With a score of 500 to 579, the minimum down payment is 10%.

FHA debt-to-income requirements

Lenders pay attention to your debt-to-income ratio, regardless of the type of mortgage you get. The debt-to-income ratio, known as DTI, measures the percentage of your pretax income that you spend on monthly debt payments, including mortgage, credit cards, student loans, and other obligations. You can use a debt-to-income ratio calculator to figure out where you stand.

The FHA requires a debt-to-income ratio of 50% or less, according to Brian Sullivan, public affairs specialist for the U.S. Department of Housing and Urban Development, which runs the FHA.

FHA loan income requirements

There is no minimum or maximum salary you can earn that will qualify you for or prohibit you from getting an FHA-insured mortgage. However, you must:

Have at least two established credit accounts. Examples: a credit card and a car loan.

Not have delinquent federal debt or judgments tax-related or otherwise or debt associated with past FHA-insured mortgages.

Account for cash gifts that help with the down payment. These gifts must be verified in writing, signed and dated by the donor.

Checklist of Required FHA Loan Documents

Blank checklist with space for ticks on pad on office desk. Checklist for office worker, manager, businessman, chief on dark wooden background top view.

Individual mortgage lenders have different paperwork requirements. After all, they are different companies with different business models and procedures. But when it comes to FHA loans, there are certain documents borrowers must provide regardless of which mortgage company they are working with.

According to the Department of Housing and Urban Development (HUD), the government agency that manages this program: “The mortgage loan application package must contain all documentation that supports the lender’s decision to approve the loan.” This includes a wide variety of documents relating to the borrower’s financial situation, as well as those pertaining to the property being purchased.

Common FHA documents include, but are not limited to, the following:

  • Loan Application
  • Form HUD-92900-A
  • SSN Verification
  • Credit Report
  • Verification of Employment
  • Tax Returns
  • Sales Contract
  • FHA Amendatory Clause
  • Real Estate Certification
  • Appraisal Report

It’s also worth noting that mortgage lenders cannot have borrowers sign blank documents to be “filled in later.” This is a violation of FHA documentation requirements and guidelines. The HUD handbook states this clearly enough: “Lenders may not have borrowers sign incomplete documents … or blank sheets of paper.” These reasons for this rule are fairly obvious — you need to know what you’re signing!

Pros and Cons of FHA Loans

Portrait Of Smiling Family Standing In Front Of Their Home

What are the advantages of an FHA loan?

One of the main advantages is that you don't need to make a very big down-payment (which can be as low as 3.5% of the purchase price) for an FHA-insured loan. Most traditional loans require an initial payment of 20% of the property cost. College graduates, newlyweds, first-time homeowners and people with low income generally cannot afford a 20% down-payment.

Since an FHA-insured loan requires only a minimum cash investment, it is ideal for people who haven't been able to save enough money for the purchase. First-time home buyers and people who may have been denied for a conventional loan will definitely benefit from an FHA-insured loan. Also, if you can't apply for conventional loans because of bankruptcy or foreclosure, you may still be able to qualify for an FHA loan.

FHA loans are very popular since they allow greater flexibility in calculating payment ratios and household income. In general, to be eligible for an FHA loan, you must have a valid social security number, be a US resident, and old enough to get a mortgage in your state.

FHA loans - What's the catch?

First of all, the properties have to be appraised by an FHA-approved appraiser, and they must meet certain conditions. However, the biggest disadvantage is the mortgage insurance premium (MIP). There are two kinds of MIPS, and both are required: one is the upfront mortgage insurance premium (UFMIP), which is financed into the mortgage (it increased from 1% to 1.75% in 2012), and the other is the annual MIP (which is actually paid monthly).

As of June 2013, mortgage insurance premiums must be paid for 11 years in loans which the original loan-to-value (LTV) is 90% or less. If the loan's starting balance is higher than 90% of the appraised value, the MIP will last the lifetime of a loan.

What are the disadvantages of an FHA loan?

Since an FHA has a very low down-payment (which can be as low as 3.5%), you will end up paying more interest than if you had a conventional loan with a 20% down-payment. This is a very important factor to consider when looking for a mortgage. If you are financially capable of paying 20% for a down-payment, then you should strongly consider opting for a conventional mortgage since it will save you a lot of money in the long run.

Plus, on top of the 1.75% upfront that you'll have to pay in insurance, you can't cancel the annual mortgage insurance premium, like you could before June 2013. In contrast, conventional loans let you cancel the insurance policy when you have enough equity.

How does an FHA loan differ from a conventional mortgage?

An FHA loan is different from a conventional mortgage in important ways. A conventional mortgage is not insured by the FHA, so it’s harder for you to qualify if you’re not the type of ideal buyer lenders look for.

Some of the key differences between an FHA loan and a conventional mortgage include the following:

FHA loans have different down payment requirements. You can get an FHA loan with a down payment as low as 3.5%. Most conventional lenders require you to put at least 5% down, although a few lenders will let you get a mortgage with just 3% down.

You can get more down payment help with an FHA loan. The FHA permits financial gifts or down-payment assistance from an approved source to provide up to 100% of the down payment, while some conventional lenders restrict the amount of your down payment that can come from a gift.

You can qualify for an FHA loan with a lower credit score. Many lenders require credit scores of 640 or higher to obtain a loan, while the FHA allows loans with credit scores as low as 500.

FHA loans typically have lower interest rates. When interest rates are lower, your loan can cost less over time.

FHA loans have different insurance requirements. Borrowers who get an FHA loan must pay an upfront mortgage insurance premium and annual mortgage insurance premiums. With a conventional loan, private mortgage insurance is typically required if a borrower puts less than 20% down — but there’s just one premium paid on a monthly basis. There are also different rules for when you can stop paying insurance, and you usually have to pay insurance for longer with an FHA loan.

Sellers can help with closing costs for an FHA loan. The FHA allows home sellers to pay up to 6% of the closing costs for a loan. Many conventional lenders cap a seller’s contribution at 3% of closing costs, although some allow sellers to pay up to 6%.

Begin the application process.

If you believe you qualify for an FHA loan and are ready to apply, the first step is to get pre-approved with your lender of choice.

Get pre-approved for an FHA loan online now »

As you have read above there are many options to the versatile FHA loan. There are pros and cons of choosing an FHA mortgage. To help you navigate the FHA landscape and perhaps other loan options, we suggest you contact one of our mortgage advisors to answer all your questions. There is no fee nor obligation to do so. We are here to serve you and consult with you with complete transparency and your best interest in mind. Call us today!

10 Documents Needed for a VA Loan (for Fast Approval!)

documents needed for a va loan

Getting approved for a loan is a stressful process. It often feels like the bank is digging into your personal life. Which they are, but for good reasons.

But the good reasons don’t assuage the need for more documents than you ever need for any other life situation. And while the VA loan process is less stringent than your typical loan process, it still requires a stack of papers.

If you can have your stack of papers ready before you even apply, the process will go that much faster. That’s why we’ve put together a comprehensive list of the documents needed for a VA loan.

Scroll onward to read the list.

The Always Necessary Documents Needed for a VA Loan

While your record of service is probably stored in a filing system somewhere, your bank won’t have access to it. You need to prove you’re a U.S. Veteran with documentation.

Certificate of Eligibility

This certificate is the formal document declaring your loan entitlement. Most lenders can actually obtain this for you. But some won’t.

You can find the certificate of eligibility at the va.gov website.

Proof of Income

The bank needs to know you’re getting paid. If you’re not getting paid, you can’t pay your mortgage.

Find two-three months worth of paystubs. If you are self-employed, you may need more proof of income than two months as your income might not be the same month to month.

Estimated Monthly Debt

Your debt-to-income ratio is exactly how it sounds. It’s all your credit card and other loan debt you have to pay each month compared to your income each month.

If you have multiple credit cards, be sure to track down each one and find out how much you owe each month. And you will need to provide other debt information such as student loans, car payments, and child support.

Credit Report

Most people just authorize the bank to run a credit report. But if you’ve had multiple credit checks, you might want to take advantage of your free credit checks assigned to each person each year.

This will also show your current debt to the lender.

Recent Bank Statements

With online banking, you no longer need to go to the bank in person to get your bank statements. But be sure you print your statements and not the summary shown on your online banking first page.

It’s good to have the last six months of your bank statements in hand when applying for a loan.

W-2 Statements

Most lenders want to see your annual income as well. They do this because they want to know your income is steady.

W-2 statement will also clue a lender into whether you retain jobs. If they didn’t ask for W-2 statements, they would have to rely on your word or have to call around for employment references.

Not Always Necessary Documents Needed for a VA Loan

Only one document may not be necessary for a VA loan application. And that’s your bankruptcy history.

If you’ve never filed for bankruptcy, then this document isn’t necessary.

If you need a mortgage today gather your documents needed for a VA loan and apply now for our VA mortgage program.

5 Things That Can Affect Your Housing Loan

housing loanEvery year, the number of new homeowners dwindles.

There are several reasons why. It could be due to outlying student debt or diminished general appeal. Or maybe it’s simply the daunting task of trying to get a housing loan.

Becoming eligible for a loan can seem difficult, but no home seeker should let that stop them. We’re here to help you learn the things that can affect the approval of your loan.

Let’s get into it.

Credit Score

Banks and other lenders will take a look at your credit score to know whether giving you a loan will be a risky investment on their part or not. The amount of income you make doesn’t have much of a say on this. You could make a lot of money and still have a bad credit score.

Your credit score can have an effect on how much of a loan you can get, as well as the interest rate.

Take some time to find out your own credit score before approaching any lenders. Be certain to check your credit report for errors or flaws. You don’t want any wrong information to affect your rates or chance to secure a loan.

Being Self-Employed Can Deny You a Housing Loan

Regardless of how much you make in a year through your self-employment endeavors, the fact remains that it can look poorly to banks and other lenders. Self-employment can look far too variable in their eyes and can make you seem like a risky investment.

Unfortunately, there isn’t much you can do about this, but it is good to know about so that there aren’t any surprises coming your way.

A good thing would be to bring any pay stubs with you when meeting with your potential lenders. This could help you get a quicker approval.

Never Had a Loan

Strange as it may sound, sometimes being loan-free can be a bad thing. Because you’ve never taken a loan before, banks and other lenders can’t easily decide if you are a trustworthy client or not.

Are you the type of person to pay on time? They have no way of knowing and it’s likely they aren’t willing to take that risk.

One way around this predicament is to take out a small personal loan or credit card a year or two before. If you make the payments on time or are able to pay the loan back, you will build up your credit score and show banks that you can be trusted.

Debt to Income Ratio

A lot of the time, people will try to get a loan for far more than they can actually afford. This will, in turn, plummet their credit score and end up being more trouble than it needs to be.

Knowing your Debt to Income Ratio is a good way to figure out how to make a loan’s payment reliably with your monthly income, all while factoring in all of your other due payments as well.

Take a moment to look at your numbers before deciding how much to ask for your housing loan.

Being Dishonest

It could be tempting to try and hide a particular debt in order to get a housing loan, or maybe make a bad set of debt seem a little better. But honesty is definitely the best policy when it comes to dealing with banks and lenders.

Being dishonest in any of this will risk you being charged with fraud, and it will make it much more difficult to ever find a bank or lender that will want to work with you in the future.

Conclusion

We hope that this has helped you understand more about the process and that you’ll find it easier to expect what will affect your loan. We wish you all the luck in the world for the future.

The feeling of owning that perfect house is way too precious. And we want to help you!

If you have any questions or concerns, please feel free to contact us!

Your First Home: Should You Get a New House?

new house

When you make the decision to buy that first new house, it’s a big deal. Like, “keep you up at night thinking about it” big deal.

If you’ve been paying rent for a while, buying a new home could seem like the cheaper choice. And there are plenty of benefits for first time home buyers.

Here’s one big piece of advice though.

When buying a new house, know what to expect.

Of course, you can never fully know what to expect. With buying a house, there are always going to be unforeseen obstacles.

But there are expected payments and fees that you can be sure will be part of the process. So it’s best to get familiar with them before you take the plunge.

Down Payments

You want a good interest rate. But in order to get that rate, you’ll need to make a down payment on the house. You can expect at least 10%. So, for instance, on a $170,000 home, this will be $17,000.

And if you want to avoid private mortgage insurance (insurance that protects the bank in case you’re unable to pay your loan), it will need to be at least 20%. So now that $170,000 house will need a $34,000 down payment.

Homeowner’s Insurance

Maybe you had renter’s insurance, so this isn’t entirely new to you. But homeowner’s insurance is usually going to run you considerably more than renter’s insurance.

And it’s required before you take possession of your home. So once you’ve gotten mortgage approval and done all the footwork to get your new house, you’ll need to shop around insurance companies to find the best rate.

The good news is, you can lump your car insurance with your homeowner’s insurance and possibly get a discounted rate.

Property Taxes

This one often catches new homeowners by surprise.

If you’re folding your property taxes into your mortgage payment, that’s going to be an extra bundle of money you’ll need to pay each month.

For example, if you’ve been paying $1000 per month in rent and the mortgage payment on your new house will be around that amount, you might think you’re good to go.

But, if your yearly property taxes are $2400, then you’re looking at adding another $200 per month. So when you budget for your monthly payments, don’t forget to figure in your property taxes divided over 12 months.

Payments and Interest

Obviously, you have to pay your mortgage principal.

At the beginning though, much of your mortgage payments will be going toward paying just the interest. So you want to be sure you’re getting the best interest rate possible.

In the long run, a great fixed rate could end up saving you thousands of dollars.

And that’s just the beginning

On top of the above-listed considerations, there are other things like the fees tied up with escrow, tax services, as well as getting credit reports and a home inspection.

Still, there’s nothing quite too exciting as getting that new house for the first time. It doesn’t have to be scary. If you approach the experience armed with some knowledge, you’ll end up with a place you can truly call home.

Do you have any other helpful tips for those looking to buy a new home? We’d love your input!