The Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development, was made through the Great Depression to help provide mortgages in a time when banks weren’t lending. It insures many different kinds of mortgages, most geared toward low- and moderate-income home buyers. Banks and other private lenders make the loans, but the FHA sets the loan requirements that must be met.
Debt-to-Income Ratios
To make sure borrowers are going to have the ability to satisfy their mortgage obligations, the FHA requires both debt-to-income ratios be met. First, a borrower’s monthly housing costs cannot exceed 29 percent of the monthly gross income. Secondly, the debtor’s total housing costs and recurring monthly debt obligations of different types–such as for credit cards, student loans and car loans–cannot exceed 41 percent of the gross monthly earnings. The only FHA loan that doesn’t require these debt-to-income ratios is the reverse mortgage for elderly homeowners.
Mortgage Insurance
FHA loan applications are self-sustaining. Pay insurance prices. In case the borrower defaults on the loan, then the insurance makes up the loss to the lender. The insurance premiums by the borrowers continue until the loan-to-value ratio of the house reaches 78 percent.
Loan Limits
Because the aim of FHA loans will be to assist low- and moderate-income Americans purchase homes, loans are limited to regional median home values. The values change yearly and vary based on building type–condominium, single-family home, manufactured dwelling or 2 – or four-unit building.
Credit
The greater a debtor’s credit, the more likely she is to be qualified for financing. The FHA requires a credit record of at least 2 lines of charge, although replacement documents –such as for utility bill payment–are permitted. Borrowers using a Chapter 13 bankruptcy may be approved if they have reestablished good credit and have a record of obligations on the bankruptcy. For borrowers who have gone through a Chapter 7 bankruptcy, at least 2 years must have elapsed. For those who have gone through foreclosure, at least three years must have elapsed. No loans will be made to applicants who are delinquent on any federal debt, such as taxes and student loans.
Down Payment
The two most typical FHA mortgages–that the 203(b) and 203 (k)–require a minimal deposit of 3.5 percent of their purchase price. No down payments are required to get a reverse mortgage unless the borrower is purchasing a home; in this case the down payment must be substantial–approximately 50 percent.