FHA loans are mortgages provided with federal assistance and insured by the Federal Housing Administration. Only lenders who are federally qualified are able to issue an FHA loan.
A sharp rise in foreclosures and defaults during the great depression of the 1930’s caused lenders to dramatically tighten there lending standards. The FHA loan program was created to provide lenders with enough insurance to start lending again. While the government did subsidize some programs, the main goal was for the program to run on insurance premiums paid by borrowers thus allowing it to be self-sustaining.
Over time the program has evolved. Once private mortgage insurance (PMI) came about FHA loans began to primarily be used by individuals who were unable to meat the down payment requirements of a conventional loan or who could not qualify. Then in August of 2007 the government responded to the 2007 subprime mortgage crisis by creating a new program called FHA-Secure. This refinancing program was meant to help those borrowers who could not otherwise refinance their mortgage using traditional methods.
Who Qualifies for FHA Loans?
FHA loans are mainly designed to help first time home buyers purchase a home. However, the FHA-Secure program was created to help homeowners at risk of foreclosure with an adjustable rate mortgage refinance into a new loan. No matter if you are refinancing or buying a new home you need the following basic information to start the process.
- Proper ID: Driver’s License or Photo ID in addition to a valid social security number
- Employment History: 2 years preferably in the same field along with W-2 or 1099 and tax returns. (If you were a student the past 2 years you can qualify if you are on the job a minimum of 30 days and have 2 pay stubs)
- Credit Score: You will normally need a minimum credit score of 620 FHA financing or 640 for streamline FHA unless an exception is made. However, all collections (except medical collections) must be paid.
- Debt Ratios: Your debt ratio should be lower than 40% for housing and 45% total debt.
- Bankruptcy: If you have filed a Chapter 7 Bankruptcy you will have to wait 24 months to qualify. In the case of a Chapter 13 you will need to have a perfect pay history for at least the past year.
- Foreclosure: If you have foreclosed a property, finalized a short sale or executed a deed in lieu you will have to wait at least 36 months before you can qualify for a FHA loan.
One of the biggest draws to FHA loans is the low down payment. In most cases you will only need to put 3.5% down. However, should you qualify with a credit score 580 or lowers you will need to have a minimum down payment of 10%.
Is there a limit to the size of mortgage I can get using an FHA loan? Yes, each county in the United States has its own home value limits. An easy what to find out the maximum loan amount you can get is to visit HUD’s FHA mortgage limits page.
Finding a local FHA lender has never been easier. Using our free no-obligation form, we will match you with FHA approved mortgage lenders fast. No matter if you are looking to use a FHA Secure loan to refinance out of an adjustable rate mortgage or looking to buy your new home, take some time now and see if you can qualify today!