Loan Programs - FHA Loans - Barrett Financial Group, LLC

Who FHA Loans are for

FHA Loans are for buyers who can afford the monthly payment but don’t fit the Conventional mold. Maybe you have limited savings for a down payment, a past credit problem, more debt than a conventional underwriter would accept, or not enough credit history yet to get a reliable score.

A much smaller down payment than conventional financing has traditionally required. Your loan officer will tell you the current minimum for your situation.
Lower credit requirements than conventional financing. Underwriters will read your explanation and won’t just look at a score.
Room for a higher debt-to-income ratio than most conventional programs allow.
Gift money from family or an approved source can cover the entire down payment.
It works with most down payment assistance programs, which can lower what you need at closing even more.
The loan is assumable. That can matter a lot to a future buyer if rates have gone up by the time you sell.

You have to plan to live in the home. FHA loans aren’t for second homes or investment properties. A two to four-unit building qualifies if you live in one of the units.

The Mortgage Insurance Premium

This is what the program costs you, so understand it before you decide.

FHA charges two premiums. The upfront premium is a percentage of the Loan amount. It’s usually added to your Loan balance instead of being paid at closing. The annual premium is collected monthly as part of your payment.

Here’s what a lot of people aren’t told. On a Loan made at the minimum down payment, the annual premium stays for as long as you have the loan. It doesn’t drop off at 20% equity like Private Mortgage Insurance on a Conventional Loan does. If you put 10% or more down, it ends after eleven years. Many borrowers get out of it by refinancing into a Conventional Loan once they have enough Equity. That’s a normal plan. Just make sure you know about it going in.

HUD sets the premium rates and changes them from time to time. Ask us for the current ones when you apply, and ask to see an FHA quote and a Conventional quote side by side. Which is cheaper depends on your credit score, your down payment, and how long you expect to keep the Loan. It isn’t always the one you’d expect.

FHA or Conventional

Each one fits different borrowers, so compare them carefully.

FHA usually comes out ahead when your credit score is modest, when there’s a recent problem on your credit you need to explain, or when your debt ratio is high. FHA pricing changes much less with your credit score. Conventional pricing gets more expensive quickly as scores drop.

Conventional usually comes out ahead when your credit is strong. The Mortgage Insurance costs less, and you can cancel it. It comes off once you reach the Equity threshold, and it ends automatically later on. Conventional Loans also have a competitive down payment option for eligible first-time buyers, so the gap between the two is smaller than most people expect.

There’s no one answer for everybody. A Loan Officer can figure out the answer for you in about ten minutes.

What you can borrow

Two limits apply, and you have to fit within both.

The FHA loan limit. HUD sets a maximum loan amount it will insure. It varies by county and by the number of units. High-cost areas have much higher limits than the national minimum. You can look up the current limit for any county with HUD’s lookup.

What your income supports. Underwriters compare your housing payment to your gross monthly income. They also compare all your monthly debts to that same income. FHA publishes benchmark ratios, but most loans go through an automated system instead of being held to those numbers. Approvals above the benchmarks are common when the rest of your application is strong. That can mean savings in reserves, a long history of paying similar rent, a stable job, or a larger down payment.

Treat any ratio you read online as a rough guide. It isn’t a hard cutoff. The number that counts is the one you get from a real pre-qualification.

After bankruptcy or foreclosure

For most borrowers, FHA is the most practical way back to owning a home. The waiting periods are shorter than most people think.

Chapter 7. Generally two years from discharge, as long as you’ve re-established credit and have no new problems. It can be as little as one year if the bankruptcy was caused by documented extenuating circumstances outside your control.
Chapter 13. You may be eligible twelve months into the repayment plan if you’ve made every payment on time and have the trustee’s written permission.
Foreclosure or deed in lieu. Generally three years, again with exceptions for extenuating circumstances.

Underwriters want to see that you’ve recovered. That means a couple of accounts paid perfectly since, no new negative marks, and a clear written explanation of what happened. A serious illness with the medical bills now paid looks very different from a pattern of overspending, and FHA underwriters are allowed to take that into account.

What to have ready

You’ll need about the same documents for an FHA loan as for any Mortgage. See the full application checklist. In short, you’ll need two years of tax returns and W-2s, 30 days of pay stubs, three months of statements for every account, photo ID, and your Social Security number. You’ll also need paperwork for anything unusual in your history, like a bankruptcy discharge, a divorce decree, or a gap in employment.

If you don’t have much credit history, FHA underwriters can look at payments that don’t usually show up on a credit report. That includes twelve months of canceled rent checks, utility accounts in your name, and insurance premiums. Let us know early, because gathering those takes longer than pulling a credit report.