General FHA Home Mortgage Information, Knowledge and Facts
FHA Mortgage Insurance
Mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages. FHA loans require mortgage insurance primarily for borrowers making a down payment of less than 20 percent, or if refinancing a property when the loan to value is greater than 80 percent.
Mortgage insurance is charged to the homeowner each month at the rate of .5 percent per year of the total loan amount. FHA also charges an up front mortgage insurance premium of 1.5 percent.
FHA's monthly mortgage insurance payments will be automatically terminated when these conditions occur:
1) For mortgages with terms 15 years and less and with Loan to Value ratios 90 percent and greater, annual premiums will be cancelled when the Loan to Value ratio reaches 78 percent regardless of the amount of time the mortgagor has paid the premiums.
2) For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years.
3) Mortgages with terms 15 years and less and with Loan to Value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.
Your FHA Loan Checklist
Before you start your FHA loan process whether buying or refinancing, here is a brief list of some of the items you may need to gather upon request from your broker.
1) Address to your place of residence (past two years)
2) Social Security numbers
3) Names and location of your employers (past two years)
4) Gross monthly salary at your current job(s)
5) Pertinent information for all checking and savings accounts
6) Pertinent information for all open loans
7) Complete information for other real estate you own
8) Approximate value of all personal property
9) Certificate of Eligibility and DD-214 (for veterans only)
10) Current check stubs and your W-2 forms (past two years)
11) Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals.
In addition, you will need to pay for a credit report and appraisal of the property.
FHA Closing Costs
While FHA defines which closing costs are allowable as charges to the borrower, the specific costs and amounts that are deemed reasonable and customary are determined by each local FHA office. All other costs are generally not allowed and are usually paid by the seller when buying a new home, or paid by the lender when refinancing your existing FHA loan.
The following are some of the fees that are considered allowable:
1) Deposit verification fees
2) Attorney's fees
3) The appraisal fee and any inspection fees
4) Lender's origination fee
5) Cost of title insurance and title examination
6) Document preparation (by a third party)
7) Property survey
8) Credit reports (actual costs)
9) Transfer stamps, recording fees, and taxes
10) Test and certification fees
11) Home inspection fees up to $200
FHA Loan Debt to Income Ratios
In order to prevent home buyers from getting into a home they cannot afford, FHA guidelines have been set in place requiring borrowers and/or their spouse to qualify according to set debt to income ratios. These ratios are used to calculate whether or not the potential borrower is in a financial position that would allow them to meet the demands that are often included in owning a home. This information is very useful and will hopefully allow borrowers to understand what they can and can't afford. The following is a mathematical example on calculating your income for loan approval:
1) Mortgage payment principal and interest ' $925.00
2) Real Estate taxes per month ' $225.00
3) Homeowners Insurance per month ' $75.00
4) Borrowers monthly household income ' $3,122.00
Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.). Then, take that amount and divide it by the gross monthly income. In this case the debt to income ratio is 39.2%. Just based on income this borrower would qualify for the loan. There is no maximum on your debt to income ratio however in most cases the maximum debt to income ratio is approximately 45%. One way to get around having a higher debt to income ratio is presenting your lender/broker with compensating factors. Some compensating factors may be the amount of equity you have in the home, years on the job, years in the house, and also assets you could show. These things can all be factors when the bank decides on issuing a commitment.
FHA Loan Credit Issues
Before approving a loan, the lender analyzes the integrity of the borrower's past credit performance. Those who have a good credit history demonstrated by a solid track record of timely payments will likely be eligible for a loan. Potential borrower's whose credit history is marred by slow payments, poor financial judgment and delinquent accounts are not a good candidate for a loan approval.
Two lines of credit are necessary to apply for an FHA loan. However, in the event a borrower does not have sufficient credit on their credit report the FHA will allow substitute forms. Substitute trade lines may consist of a phone bill, electric bill, cable bill…ect
FHA will consider approving a borrower who is still paying on a Chapter 13 Bankruptcy if those payments have been satisfactorily made and verified for a period of one year. The court trustee's written approval will also be needed in order to proceed with the loan. The borrower will have to give a full explanation of the bankruptcy with the loan application and must also have re-established good credit, qualify financially and have good job stability.
At least two years must have elapsed since the discharge date of the borrower and / or spouse's Chapter 7 Bankruptcy, according to FHA guidelines. This is not to be confused with the bankruptcy filing date. A full explanation will be required with the loan application. In order to qualify for an FHA loan, the borrower must qualify financially, have re-established good credit, and have a stable job.
During an underwriter analysis of borrower credit, the overall pattern of credit behavior is being reviewed rather than isolated cases of slow payments. If a good payment pattern has been maintained, regardless of a specific period of financial difficulty preceded it, the borrower may escape disqualification.
FHA insured mortgages are generally not available to borrowers whose property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years. However, if the foreclosure of the borrower's main residence was the result of extenuating circumstances, an exception may be granted if they have since established good credit. This does not include the inability to sell a home when transferring from one area to another.
A collection is minor in nature usually does not need to be paid off as a condition for loan approval. It is stated as such in FHA guidelines. Any judgments will have to be paid in full prior to closing. Borrowers who are delinquent on any federal debt, such as tax liens, student loans, etc., are not eligible.
These are some of the major credit factors that are closely examined when determining a mortgage loan for approval.
