FHA Guidelines: How to Qualify for a 3.5% Down Loan
FHA doesn't actually lend people money; they only insure the loan with lenders against loss. FHA guidelines dictate that these loans are given to consumers through FHA-approved lenders who lend money to consumers who have FHA insurance for the loans. FHA loans are meant to help people who may have less-than-perfect credit, have lower down payments to offer, or have short-sold their home or been foreclosed on in the past.
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Lenders are excited to loan money under FHA guidelines because FHA ensures that if the loans default, then the lender gets repaid out of the FHA insurance fund. The FHA loan program was initially developed in the 1930s as a way to help the housing market get on its feet, and since its launch, it has helped millions of families who would have otherwise not qualified for traditional financing get into a home.
Advantages of FHA Loans
FHA loans have risen in popularity in recent years because lenders have increased requirements for other loans. When compared to other types of loans, FHA loans are generally easier to qualify for due to flexible FHA guidelines and lower down payment requirements. FHA loans also have a lower credit score requirement than conventional loans. FHA loans can be assumable, which means in the future, it would be possible for someone to assume an FHA loan from the original borrower.
FHA Guidelines: How to Qualify for an FHA Loan
The first step to qualifying for an FHA loan is to work with a loan officer at an FHA approved lender. General FHA guidelines that the loan officer will discuss with you include:
- Documenting an employment history over the last two years. FHA guidelines consider the last two years of employment and look at a steady pay history or employment with the same employer.
- Providing a valid social security number and proof that you’re a resident of the United States. There are exceptions for resident aliens, but these exceptions will vary by lender.
- Producing the necessary down payment. FHA loans require a minimum down payment of 3.5% when buying a home — but the down payment may be a gift under certain conditions.
- Performing the necessary due diligence. The property will need to be inspected by an FHA appraiser and an FHA approved appraisal must be done.
- Assessing how much you can afford. Although there is some flexibility, the total monthly mortgage payment generally should not exceed 30-32% of your gross monthly income.
Assessing your level of debt. Your total debt should not be more than 43% of your gross monthly income. Again, there is some flexibility with this number, but this is a good guideline.
- Note from mortgage professional, Albert Bui, “the 43% DTI to income is mainly a guideline max for many loans out on the market to comply with certain qualified mortgages (QM) guidelines however in reality the max on FHA I’ve seen is 46.99% on the front ratio (housing payment only) and 56.99% on the backend when factoring in all other obligations. So this means you can borrow up to 46.99% on the front ratio for your housing payment but it doesn’t mean the borrower should max it out, rather they “can.”
Knowing your credit score. Minimum credit scores now apply with FHA loans and can vary by lender. A credit score of 580 and above requires a 3.5% down payment, and a credit score of 500-579 requires a 10% down payment. Credit score requirements will vary by lender.
- According to Mr. Bui, "a 3.5% down payment is the min however there are many down payment assistance (DPA) programs that will either grant you the 3.5% for free with no repayment's, offer the borrower a 3.5% community 2nd loan that is silent (no payment) and may be forgivable after a certain period of time, or a 2nd that has a silent payment but is due at a certain period of time or payoff in the future. So you can bring in as little as $0.00 with qualifying income or additional requirements."
- Disclosing prior bankruptcies. If you have had a bankruptcy that has been discharged, the waiting period is 2 years.
- Disclosing prior foreclosures. If you have had a foreclosure, the waiting period is 3 years, and you must have good credit.
Mortgage Insurance For FHA Loans: FHA UFMIP
FHA guidelines require all loans of this type to have mortgage insurance — both in upfront mortgage insurance (UFMIP), as well as monthly mortgage insurance.
Up-front mortgage insurance premium (UFMIP or MIP) is an insurance premium that is collected at time of closing and is paid directly to FHA. It is financed into the loan and is 1.75% of the loan amount, regardless of their credit score.
So, as an example, for a $300,000 loan, you would pay 1.75% of the total loan amount, or $5,250.
Annual MIP/Monthly MIP is actually an annual premium but is collected monthly. This amount of insurance premium depends on the loan-to-value ratio and length of loan. The FHA monthly MI factor is .85% for LTV greater than 95% and .80% for LTV 95% and below. In the past it was .90% but at that time the upfront MIP or UFMIP was 2.25%.
As an example for a loan to value that is less than 95%, a $300,000 loan multiplied by .008 is $2,400 in annual premium that will be paid at the rate of $200 each month.
MIP and UFMIP can be difficult to understand, and many times FHA will change the guidelines on what they require to be paid for both MIP and UFMIP, so be sure to ask your loan officer about the UFMIP and MIP requirements on FHA loans.
Investors: Do you use FHA loans to build your portfolio? Any questions about FHA guidelines?
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