From 2006-2011, FHA mortgages exploded in
popularity, increasing their portion of the purchase mortgage market by 500%
five short years. derogatory
Not only that, but current
trends indicate that this share will likely increase in the coming years.
To facilitate this shift in
the mortgage market, the FHA is considering a policy change, loosening mortgage
guidelines by waiving the traditional “waiting period” that follows a credit
damaging event. Accordingly, home buyers who have undergone a bankruptcy,
foreclosure, or short sale may be eligible to purchase homes immediately if
this change takes effect.
FHA Loan Requirements
Despite their name, FHA
loans are not issued by the Federal Housing Administration (FHA); instead,
borrowers can secure these loans through any FHA-approved lender, and the FHA
insures the loan. Consequently, if a borrower stops paying his or her mortgage,
the FHA will step in to repay the lender for what is owed on the home mortgage.
With this additional insurance, lenders can offer exceptionally beneficial
rates and terms to borrowers with lower credit scores, as there is no risk of
taking a loss in the event of a default.
In order to acquire an FHA
loan, borrowers must satisfy the Federal Housing
Administration requirements for debt-to-income ratio, down payment, and
credit history. Unlike strict conventional mortgage guidelines, FHA
requirements are particularly lenient and reasonable.
In terms of DTI, borrowers
cannot have a monthly recurring debt that exceeds 45% of gross monthly income.
Home buyers securing an FHA
mortgage must be prepared to pay the minimum down payment of 3.5% of the purchase
price or appraised value, depending on which is lower.
For credit qualifications,
borrowers must have a FICO score of 580 or above to qualify for the maximum
amount of financing and thus the lowest down payment. Borrowers with credit
scores below 580 will be required to make a down payment of at least 10%.
Moreover, borrowers with credit scores under 530 will not be eligible for an
FHA loan.
In addition to the
requirements, FHA mortgages are subject to loan limits set by Fannie Mae and Freddie
Mac. These limits vary from county to county, calculated by the median home prices
in that region. In areas with lower home values, the FHA maximum limit can be
as low as $271,000, while in areas with exceptionally high values, the FHA
maximum limit may be as high as $625,000.
Regardless of a borrower’s
income and credit score, he or she cannot acquire more funding than is allowed
by the FHA limit. Furthermore, FHA loan limits are subject to lender
discretion, and borrowers may not receive the maximum amount of funding if they
do not meet lender expectations and requirements.
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