FHA Mortgage Loan Requirements Guide

September 24, 2009 by Jim

arm3.static.flickr.com/2083/2099063930_df0aa6d3d0_m.jpg" alt="Gingerbread House" class="r">When I was reading Dale Siegel’s The New Rules of Mortgages, was struck by the sheer number of available mortgage options available to Americans. I knew about your standard vanilla varieties (30 year fixed, 15 year fixed), even the trickier ones (ARMs, Option ARMs), but I knew very little about the various government sponsored programs designed to help low to moderate income or first time hombuyer families get a piece of homeownership.

One of these programs is the FHA, or Federal Housing Administration, mortgage insurance program. It’s part of the U.S. Department of Housing and Urban Development (HUD) and the FHA provides mortgage insurance on loans made by FHA-approved lenders. The logic behind the program is that low and moderate income families and first time homebuyers, especially in these economic times, may need a little extra help in the homeownership process. This help comes by way of an insurance program, that the borrowers will pay for at least five years of the loan, offered by the government.

About the FHA Program

The Federal Housing Administration was created in 1934 and was integrated into the Department of Housing and Urban Development’s Office of Housing in 1965. When the FHA was created, the economy looked a lot like it does today – “flat on its back” according to the website. While our economy today is still reeling, we certainly haven’t reached the depths seen in 1934.

According to the FHA website, the FHA program is entirely funded by its own revenue and uses no taxpayer funding. I think that’s pretty amazing, especially after the pain the housing industry has seen in recent years.

One warning, I’m not a mortgage expert, I hope that everything I’ve written is correct and accurate but I recommend you speak to a professional before making any decisions.

Cost of an FHA Loan

FHA loans offer rates that are comparable to conventional loans but are slightly more expensive because of the up front costs and the insurance component. The estimate is that the up front cost is 1.75% plus a 0.5% annual insurance premium, the FHA insurance, for at least five years. The 0.5% insurance fee goes away when you reach a loan-to-value of 78%. (Fortunately, FHA rules allow the seller to pay for closing costs up to 6% of the home’s appraised value).

The trade-off for added cost is that right now one of the easiest ways you can get a loan with only a little money down is with an FHA loan. With the credit crunch, most conventional loans will require at least 10% down before they’ll talk. It’s estimated that FHA loans make up 25% of the mortgage market.

FHA Mortgage Requirements

The FHA mortgage insurance program has a series of requirements you need to fulfill in order to qualify. The basic requirements are the same but the specific numbers will vary based on the lender and the state you’re in. I’ve included the most general figures here. If you are interested, it’s best you speak to an FHA approved lender to get the specific figures:

  • Type of residence: The program covers single family homes, 2-unit, 3-unit, 4-unit properties, as well as condominiums.
  • Maximum FHA mortgage loan limits: The amount of the mortgage loan must not exceed statutory limits, which you can look up on the HUD FHA mortgage limits page. FOr example, the limit for Howard County for a single family home is $560,000 as of February 2009.
  • Minimal cash investment: One of the big benefits of the FHA program is that you can own a home with a minimal cash investment. The maximum loan-to-value ratio is 97%, meaning you may only need to put down 3% to qualify for an FHA insured loan.
  • Income requirements: You must have at least two years of steady employment with increasing income, your mortgage payment may also not exceed 30% of your gross pre-tax income.
  • Minimum FICO score: The borrower must have a minimum FICO score of between 580 and 620, depending on the lender, as well as less than two 30-day late payments. If you have a foreclosure or bankruptcy, it must be at least three (foreclosure) or two (bankruptcy) years old with perfect credit since.
  • Appraisal requirement: Your future home will require a appraisal from a government-approved appraiser. Small problems, like a missing handrail, won’t be an issue but they will want larger systemic problems, like a leaky roof, will need to be repaired. FHA appraisals of a property are on record for 6 months.

If you’re looking for an FHA approved lender, you can use the search tool on the HUD website.

If anything on this page is incorrect, please let me know and I will correct it immediately!

(Photo: terren in Virginia)

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