What is an FHA Loan?
The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and conditions and to provide an adequate home financing system through insurance of mortgages. Families that would otherwise be excluded from the housing market were finally able to buy the homes of their dreams.
An FHA loan allows you to buy a house with as little as 3.5% down, instead of the higher percentages required to secure many conventional loans. Taking advantage of the FHA loan program is a great way for first time buyers, or anyone with a shortage of down payment funds, to buy a home.
The FHA does not make home loans--it insures them. If a home buyer defaults, CTC Mortgage is paid from the insurance fund. This is a perfect mortgage solution for those starting out or those having a tough time qualifying for conventional loans.
The main advantage of FHA home loans is that the credit qualifying criteria for a borrower are not as strict as conventional financing. FHA will allow the borrower who has had a few "credit problems" or those without a credit history to buy a home. FHA will require a reasonable explanation of these derogatory items, but will approach a person's credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding bankruptcy that was discharged 2 years ago can work around the credit hurdles they created in their past.
Conventional financing, on the other hand, relies heavily upon credit scoring. Credit scoring is a rating given by a credit bureau (such as Experian, Trans-Union, or Equifax) that ranks you upon your credit profile. For each inquiry, credit derogatory or public record that shows up in your credit report, your score is lowered (even if such items are in error). If your score is below the minimum standard, you will not qualify--end of story.
It is important to understand that the loan approval is 100% dependent on the documentation you provide. To insure a smooth transaction, it is crucial that you have all your documentation in order before the initial application of the loan.
If applicable: If you own another home(s) - see below
If a Refinance or you own Rental Property:
If applicable: If property is multi-unit, need Rental Agreements.
For an FHA loan, your monthly housing costs should not exceed 31% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.
Monthly income X .31 = Maximum PITI
For a monthly income of $3,000, that means $3,000 x .31 = $930 Maximum PITI
Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.
Monthly income x .41 = Maximum Total Monthly Costs
For a monthly income of $3,000, that means $3,000 x .41 = $1230
$1,230 total - $930PITI = $300 allowed for monthly long term debt
The ratios for an FHA loan are more lenient than for a typical conventional loan. For conventional home loans, PITI expense cannot usually exceed 26-28% of your gross monthly income, and total expense should be no more than 33-36%.