FINANCIAL ADVICE | BUYING A HOME
Navigating Through FHA Loan Guidelines & Requirements
- You find out the loan limit in your county or the county you want to purchase a home here.
- You may want to get your home inspected by a private home inspector first.
- The ratio is important because your mortgage loan is contingent on it.
What is an FHA loan?
Back in 1934, after the Great Depression, the federal government started insuring mortgages as part of FDR’s New Deal and have been doing so ever since. FHA Loans are issued through the Federal Housing Commission. These loans are mortgage loans backed by the government to help Americans who don’t have the immediate funds to put towards large down payments required by most lenders to secure a home mortgage loan. In order for the government to do this, homebuyers must meet some strict guidelines to qualify. We are going to walk you through the FHA loan guidelines below.
What is mortgage insurance why I do have to pay it?
The primary benefit of an FHA loan is the ability to buy a house with little money down, but in return the government makes you pay a mortgage insurance premium or MIP every month. MIP would cover the government lender if the buyer were ever to default on their loan. This premium usually stays active for the life of the loan (for those who put a down payment less than 10%), but there are ways to get rid of it such as refinancing your mortgage later down the road.
What are the loan limits on an FHA loan?
The US Department of Housing and Urban Development or better known as HUD sets the FHA loan limits typically at 115% off the median home price per each county per state. This limit is intended to provide homebuyers reasonable loans for homes that are modestly priced. FHA loans are not for those buyers who are looking for higher priced homes. Since home prices are varied per county so are the loan limits. You find out the loan limit in your county or the county you want to purchase a home here.
Can I buy a condo with an FHA loan?
You can buy a condo with an FHA loan. FHA Condominium Loans are provided through FHA Section 234(c). The Section 234(c) program insures any creditworthy person who meets FHA loan guidelines with a government backed mortgage loan for 30 years to purchase a unit in a condominium building. For those who are currently renters and are in apartments that are going to be converted into condominiums, this FHA insurance can be a way for those renters to avoid being displaced. However, there are restrictions on buildings that you may want to buy a condominium in such, as it must contain at least four units. Those units can consist of detached or semi-detached units, row houses, walkups, or an elevator structure. More about these loans can be found on the HUD website.
What are back-end and front-end ratios?
Back-end and front-end ratios refer to your DTI or debt-to-income ratio. The ratio is important because your mortgage loan is contingent on it. Your back-end ratio is determined by the sum of all your minimum debt payments divided by how much your monthly gross earnings are from your job, whereas just your housing costs determine the front-end ratio. DTI on FHA loans are currently 31/43; the first number being the front-end limit and second being the back-end limit. In certain cases, these ratios can be higher, but you really want to get that number lower. A low DTI number can mean a lower interest rate.
What is the minimum credit score I need to qualify?
There is both good news and bad news on this front. Due to recent changes in government policy, the minimum credit score to qualify for an FHA loan has gone up putting some first-time homebuyers just out of reach for an FHA loan. The minimum credit score is currently at 580 for FHA loan qualification. With a credit score of 580 or higher, this will enable you to take advantage of a low down payment on a home (currently set at 3.5% as the lowest). The good news is, if you can put down 10% or more, the government will allow you to qualify for an FHA loan with FICO scores lower than the set 580. Check your credit report and see what your FICO score is. You can get a free yearly credit report at AnnualCreditReport.com.
How much of a down payment do I need to put down?
As we mentioned above, for those buyers who qualify with a 580 or better credit score they can secure an FHA loan with a minimum down payment of just 3.5%. Those with lower credit scores have to put down 10% of the total cost of the home to qualify. If you live in Texas, then there are all kinds of possible assistance from the state, county and city levels.
Help and assistance for Texans
If you live in Texas, there are many ways to secure that needed down payment, in the form of a grant.
The Southeast Texas Housing Finance Corporation (SETH) offers different down payment grant programs like
- 5 STAR Texas Advantage Program
- Homeownership Across Texas
- Home Star Program
- The Texas Department of Housing and Community affairs (TDHCA) offers a Texas Mortgage Credit Certificate program called My First Texas Home (MFTH)
- The Texas State Affordable Housing Commission (TSAHC) offers home buyer assistance to teachers, police and correctional officers, fire fighters and EMS personnel through the Homes for Texas Heroes Home Loan Program
Do I need to be employed to qualify?
You either have to show proof of steady employment or proof of steady income through self-employment. If you are employed, you have to be so for at least two years straight. Loan officers like to see that your two plus years of employment have been with the same company, but it’s not a deal breaker as long you’ve had a steady income.
Self-employment requirements are similar; you need to show proof of a two-year steady income. Increases in self-employment income are always good, but if your income has fallen by a considerable amount your application may be declined.
Do I need a property appraisal for an FHA loan?
HUD now requires a HUD-approved appraiser to assess the property you want to buy with your FHA Loan. These appraisers do two things: first, they determine the current market value of the property and then second, they inspect the property to see if it meets the Department of Housing and Urban Development’s health and safety standards.
Even though it’s not required, you may want to get your home inspected by a private home inspector first. They can point out things like loose handrails, fire doors if required, and things like faulty wiring. All of these things would need to be fixed before an FHA loan could be approved, and your loan would be put on hold until they are.
Can I get an FHA loan after a bankruptcy or foreclosure?
The answer is yes. Getting an FHA loan after a chapter 7 bankruptcy discharge requires that you have to wait two years from the date of your discharge before you can qualify, unless you can show the bankruptcy was no fault of your own. If you can prove this, you may reduce the waiting period to a year. With a chapter 13 bankruptcy, it’s a three- to five-year wait. You are also required to show financial responsibility during the "wait" period.
When it comes to foreclosures, getting an FHA Loan is obtainable, but to qualify you usually have to wait at least three years after the foreclosure.
Note: The discharge date isn’t the same as the filing date of bankruptcy. Your discharge paperwork usually comes before your case closes.
What are some other requirements for an FHA loan?
Some other requirements to secure an FHA loan are:
- Applicants must be buying the home with the intent on using it as their primary residence.
- Buyers must be 18 years or older; it is possible to have a non-occupant of the home to cosign the loan such as a parent or other relative.
- Lawful residency in the United States is required as is a valid Social Security number.
When you're ready to apply for your FHA Loan, be sure to talk to the Mortgage Lending Specialists at CUTX who are more than happy to help you out with the process.