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FHA Loan Requirements

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Many Americans, in pursuing their dreams of home ownership, are having a difficult time finding a mortgage. Since the home mortgage meltdown of 2008, credit requirements have become increasingly strict and buyers are looking for any way possible to get a lower interest rate, or to even qualify for a mortgage.

Fortunately, the U.S. Federal Housing Authority (FHA) helps homebuyers throughout the United States by providing mortgage insurance on loans made by FHA-approved lenders. The FHA does not make loans; instead it helps homebuyers by insuring their mortgages against default. FHA mortgage insurance provides the lender with protection against losses, and the lender carries less risk. If the homeowner defaults, FHA pays a claim to the lender.

The FHA offers several loan insurance programs for homebuyers and borrowers, among these are the following four key programs: Insurance for Adjustable Rate Mortgages (Section 251), Mortgage Insurance for One-to-Four Family Homes (Section 203(b)), Single-Family Rehabilitation Mortgage Insurance (Section 203(k)), and Single-Family Mortgage Insurance for Condominium Units (Section 234(c)). They serve different property types, but any borrower can apply to any one of the programs.

FHA Loan Guidelines

A homebuyer with bad credit follows these steps: The borrower goes to an FHA-approved lender such as a bank or mortgage company. The borrower may request to be considered for FHA mortgage insurance, or the lender may ask that the borrower apply for FHA mortgage insurance. Loans must meet FHA guidelines to qualify for insurance. The FHA investigates the borrower's credit and finances, and if the risk is acceptable the FHA insures the lending institution against loss of principal in case the borrower fails to meet the loan obligations.

What Are the FHA Qualification Requirements?

Most homebuyers will be interested in Section 203(b), Mortgage Insurance for One-to-Four Family Homes. In general, the borrower must meet standard FHA qualification requirements. The borrower is eligible for up to 96.5% financing and has the option to pay the upfront mortgage insurance premium with the mortgage payments. The borrower is also responsible for paying an annual premium.

Benefits include down payment requirements as little as 3.5 percent, and FHA rules limit many of the fees that lenders charge in making a mortgage.

However, there are upper limits on the amount that may be insured. Depending on geographic location, FHA mortgage insurance limits for one-unit dwellings range from $271,050 to $729,750. Before you begin shopping for a mortgage, go online to FHA.com and check the limits for your state. Though FHA.com is a source for FHA related information, it is not affiliated with the government agency.

Debt-to-Income Ratio's

FHA loan guidelines require borrowers to qualify according to two set debt-to-income ratios. These ratios determine if the borrower is likely to succeed in paying off the mortgage. The two ratios are as follows:

1.) MORTGAGE PAYMENT EXPENSE TO EFFECTIVE INCOME

The total mortgage payment is divided by the gross monthly income. The maximum ratio to qualify is 29%. For example:

Total amount of new house payment $800
Borrower's gross monthly income (including spouse, if married) $3,200
Divide total house payment by gross monthly income $800/$3,200
Debt to income ratio 25%

In the above example, this borrower would qualify.

2.) TOTAL FIXED PAYMENT TO EFFECTIVE INCOME

The total mortgage payment is added to all recurring monthly debt (this includes credit cards, personal loans, car loans, student loans, etc.). That amount is divided by the gross monthly income. The maximum ratio to qualify is 41%. Let's say the same borrower as in example #1 continues with example #2:

Total amount of new house payment $800
Total amount of monthly recurring debt $975
Total amount of monthly debt $1,775
Borrower's gross monthly income (including spouse, if married) $3,200
Divide total monthly debt by gross monthly income $1,775/$3,200
Debt to income ratio: 55.46%

Unfortunately, this same borrower who qualified in the ratio of mortgage payment expense to effective income has considerable recurring debt. If the proposed new house payment is $800 per month and total monthly recurring debt of $975, the resulting ratio of 55.46% may be too high for the borrower to qualify for an FHA loan program. If this borrower proposed a new house payment of $325 per month, that would yield a total amount of monthly debt of $1,300, and a ratio of 40.6%. Or, the borrower could work to reduce his or her monthly recurring debt.

If you have poor credit, you have nothing to lose by trying to qualify for an FHA loan. See your FHA-approved lender, run the numbers, and see what kind of deal you can get.