What is FHA loan
FHA loan is government-backed home loan that provides 100% insurance to its approved lenders. These low-down payment loans are made by qualified lenders and guaranteed by the Federal Housing Administration. FHA loans are available with low down payment options and lower minimum credit score limits, but you’ll also have to pay mortgage insurance.
FHA Loan Requirements
There are certain requirements borrowers must meet to qualify for an FHA loan:
- The home must be appraised by an FHA-approved appraiser.
- You must occupy the property within 60 days of closing.
- You can only acquire a new FHA loan if the home will be your primary residence and not a second home or an investment property.
- Property inspections must meet the minimum property standards.
How to qualify for an FHA loan
To be eligible for an FHA loan, borrowers must meet the following lending guidelines:
- Fico credit score of 580 or higher require 3.5% minimum down payment.
- Fico credit score of 500 to 579 require 10% down payment.
- Must have verifiable employment history for the last two years.
- Must have verifiable income through pay stubs, federal tax returns and bank statements.
- Borrower must have steady income.
- Have a debt-to-income ratio (mortgage plus all monthly debt payments) of no more than 43 percent of gross monthly income (lenders could allow a ratio up to 50 percent, in some cases).
- Bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage.
- For Chapter 7 bankruptcy, at least two years must have elapsed, and the borrower has either re-established good credit or chosen not to incur new credit obligations.
- For Chapter 13 bankruptcy, you can apply for a new loan after a year from the discharge if, you have made at least 12 bankruptcy payments and have written permission from the bankruptcy court to enter a new mortgage transaction.
- Past foreclosures are not necessarily a roadblock to a new FHA home loan, but it depends on the circumstances. Re-establishing good credit and a solid payment history can help satisfy FHA requirements.
FHA Loan Down Payments
Down payment for FHA loan is a percentage of the purchase price of a home, and it is the upfront amount you put down for the home. These funds must come exclusively from FHA-approved sources, such as your savings account, money saved at home, investments you have cashed in, gift funds.
Gift Fund Requirements
Gifts refer to the contributions of cash or equity with no expectation of repayment. FHA allows 100% of the down payment from Gifts and it may be provided by:
- The borrower’s family Member.
- The borrower’s employer or labor Union.
- A close friend with a clearly defined and documented interest in the borrower.
- A charitable Organization.
- A governmental agency or public Entity that has a program providing homeownership assistance to low or moderate-income families, or first-time homebuyers.
FHA Mortgage Insurance Premium (MIP)
Mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages. FHA requires both upfront and annual mortgage insurance for all borrowers, regardless of the amount of down payment. Mortgage insurance premium is paid for the entire life of the FHA loan, unless a down payment of 10% made, in which case, MIP would only be on the loan for 11 years.
Up-Front Mortgage Insurance Premium (UFMIP)
Conventional loans require the borrower to carry Private Mortgage Insurance if borrowers don’t provide a minimum 20% down payment. FHA mortgages are different and require the payment of an Up-Front Mortgage Insurance Premium and an annual Mortgage Insurance Premium (MIP).
FHA requires UPMIP of 1.75% of the base loan amount due at closing. This applies regardless of the amortization term or LTV ratio. For example: $200,000 loan with a UFMIP of 1.75% would equal to $3500 due at closing, this can be financed into the loan.
FHA Loan Limits
FHA loans have a maximum limit to which to you can borrow on the loan. The limit depends on the county in which the home is located and the size of the home. Colorado has 64 counties with FHA Limits ranging from a low of $420,680 for a 1-bedroom unit in Alamosa County to a high of $1,867,275 for a 4-bedroom unit in Garfield County.