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FHA Loans

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First Time Home Buyer

Established in 1934, the Federal Housing Administration (FHA) aims to enhance housing standards, ensure adequate home financing, and broaden access to the housing market through mortgage insurance. This initiative has enabled families previously excluded from homeownership to realize their dream of owning a home.

An FHA loan permits purchasing a house with a minimal down payment, as low as 3.5%, compared to the higher percentages typically required for conventional loans. Utilizing the FHA loan program presents an excellent opportunity for first-time buyers or individuals seeking low down payment options to achieve homeownership.

It's important to note that the FHA does not originate home loans; instead, it insures them, similar to how VA loans are guaranteed by the Department of Veteran Affairs. In the event of borrower default, the FHA reimburses the lender. This arrangement provides lenders with the confidence to offer this mortgage option to homebuyers who may face challenges with higher down payments or have lower credit scores.

FHA Loans vs. Conventional Home Loans

The Federal Housing Administration (FHA) operates under the Department of Housing and Urban Development (HUD), overseeing fair housing practices in the United States. Through insurance of loan products provided by private lenders, the FHA aims to broaden access to quality loans with affordable rates, thereby facilitating homeownership for more Americans. This accessibility is reflected in the lower interest rates associated with FHA loans.

A primary advantage of FHA home loans lies in their less stringent credit qualifying criteria compared to conventional financing. Lenders backed by the FHA are more accommodating towards borrowers with limited credit histories or occasional credit issues, enabling them to pursue homeownership opportunities.

Note: Except in extenuating circumstances, a minimum of two years must have elapsed since any bankruptcy event.

Conversely, Conventional Home Loans place a significant emphasis on a borrower's credit score, which serves as a measure of their creditworthiness as assessed by credit bureaus like Experian, TransUnion, or Equifax. Individuals with spottier repayment histories often have lower credit scores, posing challenges in securing financing through conventional means.

FHA-backed mortgages provide lenders with assurance, even in cases where borrowers have lower credit scores, thereby simplifying the loan approval process for such individuals.

Fixed-Rate vs. Adjustable-Rate FHA Loan

Similar to conventional mortgages, FHA loans offer options for both fixed and adjustable interest rates. Fixed-rate loans maintain a consistent interest rate for the entire loan term, unless refinanced into an adjustable-rate loan. On the other hand, adjustable-rate loans start with a fixed interest rate for a predetermined period, after which the rate may vary based on the lender's discretion and market conditions.

Do You Qualify?

Qualification standards for FHA loans are determined by individual lenders, as these loans are provided through private lenders rather than directly by the FHA. However, the FHA does establish guidelines for lenders to adhere to, including:

- A minimum FICO score of 500 for a down payment of 10%, or a score of 580 and above for a down payment of 3.5%

- A minimum of two years' employment history, supported by pay stubs and tax returns

- The property must serve as the borrower's primary residence

- Approval through an FHA-approved inspection process

- Monthly mortgage payments should not exceed 31% of the borrower's monthly income

- A minimum of two years should have elapsed since the borrower's last bankruptcy

At FyzL Group, we prioritize accessibility to FHA loans by providing flexible underwriting terms through our trusted network of lenders.

Determining Your Affordable FHA Loan Size

For an FHA loan through FyzL Group, we require that your monthly housing expenses do not surpass 29% of your gross monthly income. These expenses encompass mortgage principal and interest, property taxes, and insurance, commonly known as PITI.

Example:

Monthly income X .29 = Maximum PITI

For instance, if your monthly income is $3,000, the calculation would be $3,000 x .29 = $870 Maximum PITI

Your total monthly costs, including PITI and long-term debt, should not exceed 41% of your gross monthly income. Long-term debt includes obligations like car loans and credit card balances.

Example:

Monthly income x .41 = Maximum Total Monthly Costs

For a monthly income of $3,000, the calculation would be $3,000 x .41 = $1230

$1,230 total - $870 PITI = $360 allocated for monthly long-term debt

The ratios for FHA loans are more forgiving compared to conventional loans. With conventional home loans, PITI expenses typically cannot exceed 26-28% of your gross monthly income, and total expenses should be no more than 33-36%.

As of 2024, the FHA national low-cost area loan limit for one-unit properties is $498,257. You can verify additional FHA mortgage limits here.

Required Documentation for an FHA Loan

Understanding that loan approval hinges on the documentation you provide, it's essential to have all necessary paperwork organized before initiating your loan application for a seamless process.

Employment Details

Complete tax returns for the past two years with all schedules

W-2s, 1099s, or similar forms for the past two years

Recent pay stubs covering a one-month period

For self-employed individuals: Three years of tax returns and year-to-date (YTD) profit & loss statement

Savings Information

Bank statements for all accounts for the past three months, including all pages

Statements from retirement accounts, 401ks, mutual funds, stocks, etc.

Credit Details

Recent statements from bills, displaying minimum payments and account numbers

Landlord's name, address, and phone number or 12 months of canceled rent checks

If no credit history: Copies of recent utility bills may be required