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Home Ownership Preparation :: FHA Loan Requirements
FHA Loan Requirements:
An Overview of Basic FHA Home Loan Requirements
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FHA loan requirements aren’t as tricky to navigate as you might think. Before you can obtain an FHA home loan, you and/or your mortgage must meet the following requirements:
Mortgage Insurance
Loans that are backed by the FHA must have mortgage insurance to protect lenders against losses in the event of a defect.
FHA mortgage insurance is available on most of their loans and is often offered at an FHA mortgage rate that’s either significantly less than private mortgage insurance (0.5%) or free (0%).
Without mortgage insurance, you and your mortgage are not eligible for an FHA-backed loan.
Lower Than Area Lending Limits
To meet FHA loan requirements, a mortgage must be less than an area’s lending limits. These are maximum lending amounts that vary depending on the region.
For example, a family in New York City can obtain an FHA home loan of up to close to three-quarters of a million dollars while a family in Dallas is subject to a limit of closer to quarter of a million dollars.
Allowable Closing Costs
As part of the FHA loan requirements, only certain closing costs are eligible and loans or mortgages charging unapproved closing costs will not be eligible for FHA-backing. These allowable fees include:
- Origination fees from the lender
- Deposit verification
- Attorney costs
- Appraisal or inspection fees
- Title insurance
- Title examination
- Third party document preparation
- Land and property surveys
- Credit report
- Transfer fees or transfer taxes
- Certification or test fees
- Home inspection fees (up to a $200 maximum)
In an attempt to stop mortgages from being issued to buyers who simply can’t afford the payments, the FHA has strict debt to income ratio requirements that must be met before a loan can be issued. These ratios are used to figure out if a home buyer and their spouse can actually afford the loan.
There are two ratios used, these include the mortgage payment expense to income ratio and the total fixed rate to effective income ratio.
In the mortgage payment expense to income ratio, the total mortgage payment is divided by the gross monthly income. The maximum ratio should not exceed 29 percent.
In the total fixed rate to effective income ratio, the total mortgage payments and total debt payments are added together and divided by the monthly gross income. The maximum ratio in this instance should not exceed 41 percent.
Credit Performance
The last FHA loan requirements demand that a home buyer must meet basic credit performance standards including a track record that demonstrates timely payments of bills and expenses.
To meet FHA loan requirements, the buyer must have at least two lines of credit history, no bankruptcies in the last two years (some Chapter 13 bankruptcies are eligible) and a solid pattern of on-time payment history with no foreclosures or outstanding collections or judgments.
See also:
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Home-Ownership-Preparation.com :: FHA Loan Requirements