FHA Loans

In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and provide a robust home financing system with mortgage insurance. This initiative enabled families, who might have otherwise been excluded from the housing market, to finally buy their dream homes.

• Loan Insurance: The FHA does not make home loans; instead, it insures the loan. If a homebuyer defaults, the lender is compensated from the insurance fund.
• Low Down Payments: You can buy a house with as little as 3.5% down.
• First-Time Homebuyers: Ideal for first-time homebuyers who are unable to make larger down payments.
• Alternative to Conventional Loans: An excellent solution for those who may not qualify for conventional loans.
• Down Payment Assistance: Down payment assistance programs can be added to an FHA Loan for additional savings on down payments and/or closing costs.

Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:

Employment

• Complete Income Tax Returns for the past 2 years
• W-2 & 1099 Statements for the past 2 years
• Pay-Check Stubs for the past 2 months
• Self-Employed: Income Tax Returns and YTD Profit & Loss Statements for the past 3 years

Savings

• Complete bank statements for all accounts for the past 3 months
• Recent account statements for retirement accounts (401k, Mutual Funds, Money Market, Stocks, etc.)

Credit

• Recent bills & statements indicating account numbers and minimum payments
• Landlord's name, address, and telephone number or 12 months of cancelled rent checks
• Recent utility bills (to supplement thin credit)
• Bankruptcy & Discharge Papers (if applicable)
• 12 months of cancelled checks for any co-signed loans, indicating you are not the one making the payments

Personal

• Driver's License
• Social Security Card
• Divorce, Palimony, Alimony, or Child Support papers (if applicable)
• Green Card or Work Permit (if applicable)
• Homeownership papers

Refinancing or Own Rental Property

• Note & Deed from any Current Loan
• Property Tax Bill
• Hazard Homeowners Insurance Policy
• A Payment Coupon for Current Mortgage
• Rental Agreements for a Multi-Unit Property

The main difference between a FHA Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home.   

FHA Loans:

• Lower Down Payment: FHA loans require a lower down payment, making them more accessible to first-time homebuyers and those with limited savings.
• Flexible Credit Requirements: The credit qualifying criteria for FHA loans are less stringent. This means individuals without a credit history or with minor credit issues can still buy a home.
• Common Sense Underwriting: FHA loans require a reasonable explanation for any derogatory items on your credit report and use a more lenient approach to credit underwriting. Borrowers with extenuating circumstances, such as a bankruptcy discharged three years ago, may still qualify.
• Government-Backed: The Federal Housing Administration insures these loans, providing lenders with more security.

Conventional Loans:

• Higher Credit Standards: Conventional financing relies heavily on credit scoring, which is a rating given by credit bureaus like Experian, TransUnion, or Equifax. A lower credit score might disqualify you from obtaining a conventional loan.
• Private Financing: These loans are not insured by the government, which typically means stricter credit and financial requirements.
• Flexible Terms: While conventional loans can offer more flexible terms and lower interest rates for well-qualified borrowers, they can be more difficult to obtain if your credit score doesn't meet the minimum standards.

Understanding these differences can help you determine which type of loan is best suited for your financial situation

Your monthly costs should not exceed 29% of your gross monthly income for a FHA Loan. Total housing costs often lumped together are referred to as PITI.

P = Principal

I = Interest

T = Taxes

I = Insurance

Examples:

Monthly Income x .29 = Maximum PITI
$3,000 x .29 = $870 Maximum PITI

Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.

Monthly Income x .41 = Maximum Total Monthly Costs
$3,000 x .41 = $1230
$1,230 total - $870 PITI = $360 Allowed for Monthly Long Term Debt

FHA Loan ratios are more lenient than a typical conventional loan.

Yes, generally a bankruptcy won't preclude a borrower from obtaining a FHA Loan. Ideally, a borrower should have re-established their credit. Here are the key points to consider:

1. Re-establishing Credit: The borrower should have re-established their credit with at least two credit accounts, such as a car loan or credit card.
2. Waiting Period:
   • For Chapter 7 bankruptcy, the borrower should wait two years from the discharge date.
   • For Chapter 13 bankruptcy, the borrower should have a minimum of one year of repayment and must seek court permission.
3. Post-Bankruptcy Credit Issues: The borrower should not have any new credit issues like late payments, collections, or credit charge-offs since the bankruptcy.
4. Special Exceptions: Exceptions can be made for borrowers who have faced extenuating circumstances, such as high medical bills due to a serious medical condition, which led to bankruptcy.

These guidelines ensure that borrowers have taken steps to improve their financial situation and demonstrate reliability, making it possible to qualify for an FHA loan even after bankruptcy.