Right off the bat, it seems like to me a lot of people think FHA is for folks with terrible credit, or people who will default on their loan—I don’t know, everyone that has asked me questions about FHA seems to have negative feelings about it—and that’s not the case.
FHA is just another loan alternative that helps folks that have the credit and can pay a mortgage, but don’t have a ton of money to put down. Super awesome for first-time homeowners—my husband and I went FHA when we bought our house, and I have zero regrets about it. It just seems like people are misinformed. Keep in mind, I’m not a lender—so for more detailed questions, speak to your lender, and if you don’t know of one, let me help you find a good one 🙂
Okay, ready? Onward!
1) What is FHA?
FHA is the Federal Housing Administration. FHA loans are INSURED by the Federal Housing Administration, however, they are NOT the direct lenders of the mortgages. In order to get an FHA loan, you have to go to an FHA Qualified Lender.
2)What does all that mean?
So, in the most basic of explanations, when you decide to go with an FHA loan, it is subject to a Mortgage Insurance Premium-MIP.
Here’s the deal:
Up front, if you put anything less than a 20% down payment on your loan, you will pay 1.75% in insurance due at closing. So let’s say you were buying a $200,000 home—and you were putting 5% down, so that’s $10,000—which means you’re getting a loan for $190,000. 1.75% of that is $3325—so you’re looking to tack that on up front at closing. And not everyone has this type of cash lying around, which is why they allow it to be rolled into the actual loan.
That’s not all with MIP, thereafter you will have a premium due, which generally will just be tacked onto your monthly mortgage bill. This will depend on how many years your loan is for, generally 15 or 30 year, and it will also depend on your loan to value ratio for the mortgage. Talk to your lender about all your options—but just be aware that there will be MIP on your loan.
3) Are there limits to the amount of loan I can take out with FHA?
Yes, there are indeed lending limits–and it depends on where you live.
In the Austin/Round Rock/Williamson area for example it’s $305,900 for a single family home. In San Francisco it’s something crazy like $600k something-rather. But of course, it’s more expensive to live out that way, so the max limits are adjusted for area.
4) How much do I need for down-payment on an FHA loan?
Down-payments can be pretty low—down to 3.5% minimum. It’s good to know that you should have at least a 580 FICO score to consider doing 3.5% down. You can still get an FHA loan under 580 FICO, put you should look at having a 10% down payment ready. You also want to make sure any unpaid accounts on your credit score are up to date.
To go along with that, unlike other loans, your down payment for FHA can be gifted without a penalty. Just in case you have some super generous family members….
5) How much debt can I have to apply?
With FHA your debt to income ratio can be higher, and usually you loan will be considered with a 43% debt-to-income ratio. Here, we’re looking at your gross-pre-tax income. So, say you make $40k a year before taxes, divide by 12 and we get your monthly income, $3333.33. From there figure out your monthly recurring debt—all bills you pay. So let’s say credit cards, car payment, phone bill, ect—you pay about $600 a month.
Then you look at your possible new house payment, let’s say you’re looking at a $800 payment on your new home.
Add the 800 and 600 together. $1400. Divide that number by your monthly pre-tax income and you get 42%. In this case, it’s close, but you’d still be eligible for the loan.
6) My credit report isn’t great–what are the restrictions concerning credit?
See the latter half of question 4–Adding to that–For this next part—I’m not a lawyer—but I was asked about this and here are the most basic facts I have in terms of Credit:
-As far as credit goes, you should have 2 lines of credit open.
-You can still apply for FHA with a Chap 13 bankruptcy, as long as payments have been made and verified for one year. You’ll also need the court trustee’s written approval to proceed with the loan. The borrower should also be ready to give a full explanation for bankruptcy with loan application, reestablished good credit, and good job stability.
-For Chap 7 bankruptcy, you have to have at least 2 years past from the discharge date. From there everything else from a Chap 13 bankruptcy application.
-If you have any questions or concerns-ask a lawyer. It is harder to get a loan out of bankruptcy but it happens.
-Late payments are looked at by a loan underwriter along with past patterns of payment. If there is a good pattern of payment, and there was a period of late-payments, your loan may still be considered.
-For forclosures, FHA generally isn’t available-unless there were extenuating circumstances. Again, talk to your lender or a lawyer here.
-Collections SHOULD be paid off—but minor issues may not disqualify—though I think you’re best bet is to have everything paid up.
-Judgements have to be paid in full.
-Any federal debt-tax leins or student loans that are delinquent are not eligible for FHA.
So, I know that’s a lot to swallow—but FHA is a great option for a lot of folks who don’t have a ton of cash they are sitting on top of but are financially able to pay for a home loan.
Make sure you check out my guide “How the heck do I buy I house?”, especially Part I, when you are looking to get pre-approved for a loan—you’ll find a great list of everything you’ll need to prep for the mortgage lender. Seriously, be prepared—it’ll make it much less stressful for you!
AGAIN-KEEP IN MIND, GUYS–I am not a lender, nor to I try to pretend to be. Feel free to ask more questions, obviously, if I have the answer I’ll give it, but if I don’t–I know EXACTLY where to go.
Peace, Love, and House Keys,
Alright, so we’ve gone through it all to get to here–The Closing.
1) Go to closing!
If everything went relatively smoothly-you will end up here at the closing table with whomever you’re buying the property with and generally you’re Realtor. If you’re wary of any of the paperwork, and you can afford an attorney to go through and triple-check it–I would do it. I will say, most folks do opt out of this.
Basically, what’s going to go on here is that you and the home’s seller are going to sit down (sometimes at different times) on the date you agreed upon in the contract and ‘sign your life away.’ It’s a giant stack of paper that the title company has put together–it includes the mortgage documents, title paperwork (to make sure there are no other claims against the property), insurance, home warranties—it’s a lot.
You’ll want to bring a certified bank check–this would be for the down payment. If your closing costs weren’t rolled into the loan/mortgage-you’ll want to bring a second bank check for those costs, as well.
For the mortgage, you can get with your mortgage lender and let them know they can wire the major funds to the chosen title company–that way you’re not carrying around a check for hundreds of thousands of dollars and a target on your back 😉
2) Get keys!
After you sign all the paperwork–they will slide you the keys. It is at this point you might get heart palpitations, sweat, bounce in your seat or make inaudible high-pitched squeals. You can totally do that. 🙂
3) Go to your new home, unlock the doors, and run around the entire living square footage.
I’ll tell you what we did, we stopped got a bottle of wine and a loaf of Italian stick bread (a Sicilian tradition when you buy a new house)–went to the house, took silly pictures of us around the house, and then jumped in the pool. No furniture moved in, but we wanted to stay in the new home so badly we broke out a blow-up mattress and a cooler for milk 🙂
And that’s it–I know-it seems like a long road, but once you’re enjoying your home a few months out, smiling coming through the door for what you’re working your butt off for, you’ll find home ownership is SOOOO worth it.