Happy Home Buyers Just Got An FHA Home Mortgage

Many home buyers and home owners are choosing FHA mortgage loans as the way to finance their dream home. It was only a few years ago that FHA was not really an option for many people due to the number of other loan programs – but FHA has become almost the “loan of choice” for many people.

It used to be that FHA loans were just for first time home buyers or for people with less than perfect credit. Today, they have become more “mainstream”. One indication of this was pointed out by HUD Secretary Shaun Donovan in a recent speech to the National Association of Realtors where he pointed out that the average borrower credit score for an FHA loan went from 626 to 678 from Feb 2008 to March 2009. (See Donovan’s prepared speech on HUD.gov)

If you are not familiar with FHA home loans then the rest of this article provides some baseline information you can use to decide if this mortgage loan program is right for you.

FHA Mortgage Loan Highlights Include:

• No prepay penalty on and FHA home loan
• Monthly mortgage insurance is required on all FHA loans (aka PMI and UFMIP)
• Seller-paid closing costs are allowed with FHA loans
• 3.5% down payment required
• Gift funds from relative can be used for down payment and closing costs
• Government down payment assistance programs can be used for 3.5% down payment requirement

FHA Streamline Refinance

For those people who currently have an FHA loan, the FHA streamline refinance is the most popular way to refinance. The FHA streamline program allows you to refinance without having to get an appraisal, show pay stubs, bank statements or most other items that are necessary for most mortgage programs. If you have made your mortgage payment on time for the last 12 months, chances are that you will qualify for the FHA streamline program.

FHA 203k Streamline Program

The FHA 203k streamline loan is designed for people who want to buy a home that is in need of a few repairs.  When you finance a home with the FHA 203k Streamline program, money is set aside for repairs can be paid directly to the contractors. Up to $35,000 can be set aside. 203k streamline loans can be tricky, so be sure to work with a loan officer who has experience helping people finance their home with a FHA 203k streamline loan

FHA 203k Rehabilitation Loan Program

The FHA 203k Rehab Mortgage Program is a great to buy a home that needs more than just the repairs that are covered with the 203k Streamline program. Similar to the regular FHA home purchase mortgage, home buyers using this program are required to have a 3.5% down payment – but in the case of the 203k mortgage – the borrower is also required to put 3.5% of the cost estimate to rehab the house down as well.

The 203k rehab loan can be used for refinancing as well.

FHA 85% Cash Out Program

For people wondering how much of their equity they can access with an FHA loan, the anwer is 85% – as in FHA will allow you to get up to 85% of your home’s value in the form of cash – providing there is not a mortgage on the home already.

Pre Approved Mortgage

If you are looking to buy a home you must go through several steps before you can start your home search. The first few steps are similar but different and require different actions from you. One is called: mortgage prequalification and the other is called mortgage preapproval.

Mortgage Prequalification

A mortgage prequalification is the result of an informal conversation that you have with a mortgage loan officer. During your mortgage prequalification interview you will be asked some general questions about your gross monthly income and your monthly debt. You will also get asked about your credit and credit scores. If you know your credit scores, tell them to your loan officer as you will be a little better prequalification. What you get with your mortgage prequalification is an approximate monthly payment you can afford based on the overview of the information you told the loan officer.

Mortgage Preapproval

A preapproved mortgage, or mortgage pre approval, is a more indepth analysis of your credit report, pay stubs, bank account statements, 401K and IRA statements, money market account statements, other credit documentation, and other pertinent information to your loan application. You will also be required to sign a loan application and various other documents from your mortgage company. All of your information is then presented to an underwriter for their review. The underwriter will underwrite your file and give you either an approval or disapproval.

At this point, since you do not have a property picked out, the approval you get will be subject to finding a home to purchase. Once you find a home to purchase and get a purchase offer accepted there will be more paperwork to submit to the underwriter like the appraisal and sales contract. With your loan approval being subject to finding a home, your loan officer can give you a pre-approval letter. You can take your preapproval letter to your real estate agent and in turn your real estate agent will give your preapproval letter to the listing agent and the home seller when you give them your purchase offer.

Most real estate agents will not work with you until you are pre approved. And most home sellers will not consider a purchase offer from someone who is not preapproved. The last thing a home owner wants to do is take their home off the market for someone who is not preapproved only to find out later that the potential buyer cannot get a mortgage. At least with a preapproval letter there is some level of confidence in the prospective home buyer to be able to get a mortgage.

How To Qualify For A Mortgage

Qualifying for a mortgage is not necessary as easy as it used to be, but in some senses we have gotten back to the basics. A few years ago, you could state your income and with good credit get a mortgage. Today (2009), you must have have proof of what you put into your loan application.

The Basic Information To Qualify For A Mortgage

Good Credit

• You must have credit scores above 620.  If not, you will need to get your credit scores above 620 to allow you to qualify for an FHA home loan. Minor credit problems are ok for an FHA mortgage, but you should show good credit history for the past 12 months. If you have had a problem within the past 12 months you better have a very good reason and be able to prove that you have cleaned up the problem and that it should not return.

Some Credit History

• At a minimum, you need to be able to prove some credit history. If not on your credit report you will need to be able to show some history with a cell phone, rent payments, utility company payments. Cancelled checks are a great way to prove credit history. You should have at least 3, preferably 4, credit accounts that you can show history with. Also, you want to shoot for having at least 6 months of history that you can prove.

Low Debt To Income Ratios

• You want to have some credit if at all possible like a credit card account or a car loan. But you do not want too much. Having some debt helps to prove that you can handle your credit responsibly. Too much debt can point to a problem with you not being able to handle your debt. Also, some credit will help to improve your credit scores as long as you are paying your bills on time. You will want to make sure that your debt to income ratio is under 45%.

Employed With A Paycheck

• To qualify for a mortgage you will need a source of income. For most of us, that means having a job. Unless you are self-employed you will need to have a job that pays you with a pay stub and a W-2. Under the table jobs are not acceptable. You will need at least 30 days worth of pay stubs with year to date totals and your most recent W-2. You may also be asked to provide your last three years worth of tax returns and W-2’s as many programs now ask for this much income documentation.

Self-Employed

• If you work for yourself, the days of the stated income or no income loans are over. You will need to prove income for yourself. This means tax returns where you show income – not everything written off. Do not let your accountant get crazy with your income so that you show very little if you want to qualify for a mortgage. Also, you will need to be self-employed for at least 2 years before you can get a mortgage. Also, be prepared to submit both your personal and your business tax returns for at least the last 2 years if not 3.  You will also be asked to supply a current year profit and loss statement and possibly a personal financial statement as well as bank statements. Bottom line here – be prepared to show everything you have to prove that you are making money.

Money In The Bank

• Just about every mortgage requires some form of down payment and closing costs. Unless you are a Vet or are applying for a rural housing loan you better have some cash in the bank. FHA requires that you have 3.5% of the purchase price and some conventional mortgages require 3.0%-5.0%. Money can come from several places like a gift from a relative, or a down payment assistance program, or a short term tax credit bridge loan from either your approved FHA lender or a state sponsored program.

Getting Your First Set of House Keys

First time home buyer programs are often confused with down payment assistance programs. While different they often work together when buying a home.

First time home buyer programs have to do with the mortgage program that you qualify for. Loan parameters included in a first time home buyer program will be the type of mortgage – is it a conventional loan, an FHA home loan, a USDA mortgage – interest rates, fixed or adjustable rates, amount of down payment required.

Every year, the Office of Housing and Urban Development – HUD – provides guidelines and the US Treasury Department sets aside money for first time home buyer programs nationwide. These programs have been going on for years. HUD and the Treasury rely on individual state governments to administer this federal program. As a result all states have some form of first time home buyer program as well as down payment assistance program for respective residents to purchase homes. State housing agencies often refer to these programs as Mortgage Revenue Bond mortgages.

Typical Guidelines For First Time Home Buyer Programs

While each state can set their exact first time home buyer program guidelines the following is a general list of guidelines:

• Home buyers must be first time home buyers. A first time buyer is defined as anyone who has not had a homeownership interest in the past three years.
• Qualified applicants will typically be low to medium income and will not be allowed to have their income surpass certain income caps. Income caps are generally based on the location of the home per county or census tract.
• Qualified properties will typically be priced under certain price caps based on the location of the home per county or census tract.
• In cases where the home buyer is buying in certain federally designated area economic development areas income cap and purchase price caps may be waived, as well as the first time home buyer requirement.
• If you are interested in a state administered first time home buyer program you will need to apply for it generally through an approved mortgage lender or HUD approved non-profit housing counseling agency.
• You must intend to live in the home. Except in very limited cases, investment properties are not permitted.

Special Loan Characteristics of First Time Home Buyer Programs

• Interest rates for most first time home buyer programs are often at least 1% below market. For example, if the going rate is 5.5%, your interest rate in a first time home buyer program may be 4.5%.
• There typically no pre-payment penalties. This means that if you pay your mortgage off early you can do so without penalty.
• Generally, credit underwriting is a little more lenient with less than perfect credit home buyers as the home buyer must in many cases attend home buyer education classes.
• Mortgage programs are a little more lenient on the source of the down payment and closing costs but almost all require the home buyer to have at least $100-$1000 of their own money to participate and qualify for the program.

Special First Time Home Buyer Programs

Many states have additional home buyer programs for those home buyers who have special needs or needs that fit outside a normal mortgage program.

• Veterans and spouses of deceased Vets
• Disabled home buyers or home buyers with a disabled person in their care. This program can include additional loan money to make physical changes to the home to accommodate the needs of the disable person.
• Public servants like police, fire fighters, EMT’s, Teachers
• City employees who live within certain distances of their workplace
• Rehabilitation loans for homes that need physical repair or upgrade
• Homes located in rural areas
• Energy efficient upgrades to made during or shortly after the home is purchased

Beyond these programs, you may live in a metropolitan area that has additional first time home buyer programs. Be sure to check with your loan officer at your state approved mortgage lender about specific programs in your area.