Existing Home Sales
There are 2 types of loans for individuals looking to buy a new home. Those are FHA and conventional. Due to the flexibility of FHA loans they are often a good choice for low income or first time home buyers with bad credit. About 40% of all home loans are FHA loans in the United States. Down payment amounts will vary from 3.5% up to 20%+. The primary advantage to conventional loans is the lack of need for private mortgage insurance often referred to as MIP (mortgage insurance premium) or PMI (private mortgage insurance). FHA loans originated after July 3rd, 2013 are subject to new rules governing if and when PMI can be cancelled.
The Federal Housing Administration (FHA) is a government agency created in 1934. Its purpose is to set standards for underwriting loans and construction. Along with that the FHA insures mortgage loans and provides a financing system as a means of stabilizing the mortgage market. There are several advantages to getting a loan through the FHA. First and foremost, the credit score, income, and down payment requirements are easier to qualify for. We will discuss these 3 factors in further detail below. There are also several rules that help qualification such as non-occupying co-signers and co-borrowers are allowed. Also, the downpayment can be a gift from a friend or family member and up to 6% of the closing costs can be paid by the seller to close the home sale. Unfortunately, there are a couple of restrictions like the home must be used as a primary residence, the loan amounts are limited, specific inspection requirements, and the need for private mortgage insurance. The FHA offers 2 terms for fixed mortgages. You can get either a 15 year or 30 year fixed rate mortgage.
FHA Income Requirements
Income requirements for home loans are calculated by something called your debt to income ratio (DTI). This ratio is a comparison of the amount of debt you owe compared to your income. In most circumstances your debt to income ratio must be at 41% or lower to qualify for a loan. To calculate your DTI first you have to add up all your monthly debt obligations (EG: car payment, student loans, credit card payments, etc). Then divide that by your monthly income. For example, lets say you take home $4000 per month. Your debts include a $400 car payment, $250 for student loans, $100 in credit card payments, and an estimated mortgage payment of $850. In this example we have total debt obligations of $1600 ($400 + $250 + $100 + $850). We take that amount and divide it by our income of $4000 and we get a back-end DTI of 40%. Back-end DTI means that the calculation is done including the estimated mortgage payment rather than front-end DTI which makes the calculation without the loan being applied for.
FHA Credit Score Requirements
The FICO score requirements for FHA is usually much more lax than what most lenders will require. The minimum credit score to qualify for a FHA loan is 500. A score between 500 and 579 requires a downpayment of 10% of the purchase amount. If you want to qualify for the 3.5% downpayment then your score will need to be 580 or higher. In 2013 the rules regarding cancelling the mortgage insurance on FHA loans changed. Any loans originated after July 3rd, 2013 are subject to the new rules which state that any loans originated with a downpayment of 10% or more can cancel the PMI once the Loan-to-Value amount reaches 78% or lower. Loans originated with a downpayment of less than 10% are not eligible to cancel their private mortgage insurance. In order to get rid of that extra payment you will be required to refinance out of the loan into a conventinal loan.