The Federal Housing Administration (FHA) is a branch of government that insures mortgages from approved lenders. These loans are often attractive to borrowers because FHA guidelines may be easier to meet than those imposed by conventional loan programs. Some of the areas in which the FHA imposes regulations include seller concessions, applicants’ credit scores and collections or bankruptcy proceedings. FHA guidelines further stipulate requirements for down payments, as determined by credit scores, and income documentation.
The Federal Housing Administration (FHA) is a government agency created by the United States Congress in 1934. During that time, the housing industry was in a severe decline with strict mortgage loan terms and millions of construction workers unemployed. The goal of the FHA, therefore, was to promote home ownership and stimulate the economy.
In 1965, the FHA became part of the Department of Housing and Urban Development (HUD). Today, this agency insures single- and multi-family home mortgages from approved lenders in all 50 states and each U.S. territory. Such insurance protects lenders against potential losses if a homeowner defaults on his or her loan. In such an event, the FHA pays a financial claim to the lender, thereby encouraging approval for applicants who may not qualify for conventional loans.
Part of the appeal with this type of home loan is visible in the FHA mortgage approval process. In general, FHA guidelines for approval are less stringent than conventional programs. Certain criteria must still be met, however, for applicants to receive FHA loan acceptance.
In 2010, the FHA reduced allowable seller concessions from six to three percent. These concessions are often used as bargaining tools in a home purchase and generally go toward closing fees. Insurance and lender fees, as well as home owner insurance costs and annual property taxes, may be included in the amount necessary to guarantee the loan. Thus, using seller concessions often reduces the out-of-pocket expenses for new home buyers.
Applicants’ credit stores are also woven into overall FHA guidelines. Any applicant with a credit score above 580 is eligible for maximum financing, whereas one with a score between 500 and 579 usually receives a maximum of 90 percent loan-to-value (LTV) amount. The LTV is usually based on a home or property’s assessed value. People with a credit score below 500 are not eligible for FHA financing. It is important to note, however, that individual lenders may impose their own criteria regarding credit scores, and many housing industry experts suggest applicants need scores above 620.
If an applicant shows collection accounts on his or her credit, the FHA is likely to examine each case individually. Those accounts do not need to be paid in full as a condition for loan approval in some instances. Court-ordered judgments, on the other hand, often do need to be satisfied before funding is granted.
Chapter 7 or 13 bankruptcy does not preclude a borrower from acquiring an FHA loan. According to FHA guidelines, people who have successfully completed or are completing proceedings may still be eligible for loan approval. In many instances, the borrower needs to demonstrate re-established credit and the ability to manage finances.
The minimum down payment required by a borrower is likely to be determined by his or her credit score. Those individuals with scores of 580 or higher often need a 3.5 percent down payment for loan approval. People whose scores are below 580, however, are likely to need a 10 percent down payment.
Providing income documentation is likely to be a crucial part of the FHA application process. A borrower’s current income usually determines his or her ability to fulfill the loan according to agreed-upon terms. Thus, the borrower is likely to need documented W-2s or 1099s from present employers as well as tax returns for the previous year. Income must also be sufficient to meet or exceed minimum debt-to-income ratios established by FHA guidelines. The house payment should not exceed 31 percent of the borrower’s monthly income, and his or her total expenses should not exceed 43 percent.