Is the FHA Loan Program Right For Me?

The Federal Housing Administration (FHA) loan is a great program for first time homebuyers, borrowers with low credit scores, and those needing down payment assistance. You do not need to meet all of the three criteria to qualify for the loan but it’s good if you at least meet one of them. The interest rate is very competitive and the loan process is similar to as that for a conforming loan.

In answer to a request from the North Phoenix Agent, I have attempted to provide a basic overview of how the FHA loan qualification is done, and a few distinct features of the FHA loan program. This should help you understand who the FHA loan is for and how what the lender considers when approving a FHA loan.

As in all loan approval processes the FHA loan looks at four elements of the borrower. I call it the four corners of a mortgage. The four corners model can be understand to understand what you as the borrower need to do in order to qualify for the FHA loan program. It is as follows:

Credit – This is the first corner. FHA is not a credit score driven system. It is very forgiving when it comes to medical debt and student loans. In many instances medical debt is not counted and if your student loan is deferred for at least 12 months then it is completely ignored.

If I were to put a credit score limit, in my experience I have found 580 to be the lower limit. However, if you have a co-borrower with a higher score, I’ve seen lower scores be approved as well. Having said that it’s better to have no credit than to have very bad credit. I’ve explained this elsewhere so I will not go into this much further.

Employment/Income – The length and stability of employment is rather important to FHA. Regular W2 employees with at least two years of consistent income are the best candidates. However, we can still work with self-employed individuals as well. At the very minimum two years of personal tax returns will be required, and in other cases FHA may even request two years of business tax returns.

Remember if you are a 1099 employee you will be treated as self-employed. Again, I have covered this elsewhere and will not go into details here.

Assets – A reasonable amount of savings in the bank will always help your case. If you can demonstrate you have two months of mortgage payments saved up then you’ll be gold. So, for example if your mortgage payment is $1000 a month, then $2000 in the bank would be reasonable. This money needs to have been in your bank account for at least two months.

You do not need down payment money, as FHA allows down payment assistance from non-profit organizations. While this program is under scrutiny and litigation, there are still programs that can be utilized.

Property – This is also a very important corner. Most single-family homes and condo’s qualify for the program. One distinguishing feature is that FHA allows for manufactured homes. The main requirement is that the home needs to have a stem wall. Only FHA qualified appraisers can be used to perform the appraisal as the appraisal needs to meet certain FHA requirements.

Let’s now review some distinct features of the FHA loan program. You need to be aware that FHA charges a 1.5% mortgage insurance premium (MIP). This is a one time upfront charge payable at time of close. It is usually wrapped into the loan. MIP is refundable if you sell your home or refinance the FHA loan within the first seven years.

While MIP is a one-time charge, the borrower still needs to pay monthly mortgage insurance (MI) equivalent to 0.5% of the loan amount. If you are doing a 15-year FHA loan and putting more than 10% down, then you do not need to pay the monthly mortgage insurance. I have addressed MIP and MI in more detail elsewhere so I will not go into more details here.

FHA does have a loan limit, and this limit varies depending on the county. The HUD website has a neat tool to help you determine the loan limit in your county. In Maricopa and Pinal counties (my market) the single family loan limit is $263,150. This loan limit will remain unchanged through 2008.

Finally, FHA offers one year, three year and five year ARMs (Adjustable Rate Mortgages) as well as the regular 30-year and 15-year fixed loans. So, there is a degree of choice depending on your particular needs. Also, FHA allows purchase loans, rate and term refinances and cash out refinances.

Remember, not all lenders are FHA approved. If you feel you qualify for a FHA loan but the loan officer doesn’t present that to you as a financing option then make sure you ask why it is not on the table. It would be worth your effort to then contact a FHA approved lender.

Additional information on FHA loans can be found on the HUD website.

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