FHA Loan

What is an FHA Loan?

An FHA loan is insured by the Federal Housing Administration. The features of an FHA loan include a low down payment and low closing costs.  A borrower pays a mortgage insurance premium which protects the lender in the event of a default.  An FHA loan allows for better rates and terms. A credit score of at least 580 is required for an FHA loan.

Debt-to-income Ratio FHA Loan

Borrowers with debt higher than the allowed debt-to-income ratio can be approved with compensating factors such as a larger down payment,  good credit history, and cash reserves. Borrowers can qualify for an FHA loan 2 years after a bankruptcy, short sale, or foreclosure, which is shorter than the 4 year waiting period that was once required.

Credit Score for an FHA Loan

Obtaining an FHA loan is pretty straightforward.  Fannie Mae requires a minimum 580 credit score, two years of verifiable and stable employment, one year of verifiable on time rental payments, and a 3.5% down payment.  In some cases we can reach down to a credit score as low as 550 with a 10% down payment.

Low Down payment FHA Loan

An FHA loan is a great loan for a first time home buyer.   In addition to the requirements being more relaxed than a conventional loan, the down payment is lower.  There are many down payment assistance programs out there as well.  Currently, you can obtain a home loan with 1% down.  The lender will cover the other 2% so you will still be credited for having 3% down towards the purchase price.

FHA Employment Requirements

FHA underwriting guidelines require 2 years of verifiable employment history.  If you have changed jobs in the past two years, you can still qualify for an FHA loan provided there are no gaps in your employment history.  If there are gaps in your employment history, most likely can average out your income over the past two years.

Exceptions to FHA Employment Requirements

If you are a student, sometimes, the lender will factor that in to employment history.  For instance, if you were going to school to be an engineer and your time in school is 4 years, and your time with your current employer is at least 6 months, the lender may use your time in school and can count that towards the two years of employment history.  Keep in mind that this is on a case-by-case basis.  You will want to speak to an experienced mortgage loan specialist so that they can provide you with the best possible information regarding your scenario.

Rental History FHA Loan

You will need 12 months of verifiable rental history.  Verifiable rental history includes copies of cancelled checks for the past 12 months.  If you live in a property that is professionally managed, meaning it is not managed by a private owner, you can ask the property management company to write a letter on their company letterhead verifying 12 months of on time payments. If you pay with a money order, be sure that the cash flows through your bank account.  You have to prove that the cash came out of your bank account to buy the money order.

Tax Records for FHA Loan

To get an FHA loan, you will need three of the latest income tax returns.  The lender will want to see all pages and schedules of the tax returns.  You want to be sure that the tax returns are legible, meaning all of the figures are clear and can be read.  SO if you get a copy that is not clear, the lender will ask you to resend the tax returns.

Letter of Explanation Cash Deposit FHA Loan

A lender will want to see at least two months of bank statements.  If you have more than one bank account, you will need to provide those statements as well.  Be prepared to write a letter of explanation for deposits that are out of the ordinary. What is out of the ordinary and what type of deposits will be questioned? Anything that is not usual and regular, such as tax returns, gambling winnings, cash deposits, proceeds from the sale of a property, gift funds, or anything else above and beyond your regular deposits such as paychecks or benefits such as social security, disability, or retirement income.