- The Federal Housing Administration (FHA) works to make homeownership a possibility for more Americans by making it easier to qualify for FHA Loans because it requires a low down payment (3.5 percent) and you can have less than perfect credit. The FHA doesn’t actually make home loans but is rather an insurer of loans. FHA loans are generally marketed as a first time home buyer program but the truth is anyone can qualify as long as the property being purchased is intended to be your primary residence. The FHA loan limits set forth by the state and county must be met. Chester, Delaware, Montgomery, Bucks, and Philadelphia counties for example have a maximum single-family loan limit of $529,000 for 2023. As long as you meet the credit requirements, can afford the mortgage payments and cash investment you can qualify for an FHA loan. FHA loans are an attractive option, especially for first-time homeowners:
- Generally easier to qualify for than conventional loans
- Cannot exceed statutory loan limits.
- Credit Scores down to 580
- 3.5% Down Payment
- Gifts from an acceptable source can be used for a down payment and closing costs.
- 6% Seller Assist
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FHA Further Analysis (Less than Perfect Credit)
FHA underwriters and the desktop underwriting software places a heavy emphasis on installment debt and revolving debt for the previous 12 months. If you have more than two 30 days lates in the last 24 months you’re going to have a hard time getting your loan approved. Having said that a lender will analyze delinquent accounts to determine if late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances.
FHA Guide to Collection Accounts
A Collection Account refers to a borrower’s loan or debt that has been submitted to a collection agency. This can include credit cards, utilities, cell phone, or other loans. FHA requires that if the cumulative outstanding balance is less than $2,000 then those accounts don’t need to be paid off. We don’t count any medical collection in this equation. If your collections accounts are over $2000 you have some options.
Pay the debt in full at the time or prior to settlement. (If paid at settlement will have to verify an acceptable source of funds)
The borrower can make payment arrangements with the collection company. We will include the payment in debt to income ratio.
If a payment arrangement isn’t available we can calculate the monthly payment by using 5 percent of the outstanding balance and use that in the debt to ratio calculation. For example if you have a $5000 balance multiply at .05 we can use a $250 monthly payment to see if you qualify.
FHA Guide Charge Off Accounts
Charge off accounts refers to the borrowers’ loan or debt that has been written off by the creditor.
We don’t use charge off accounts in the borrowers’ liabilities of debt.
FHA Guide on Federal Debt
If you the borrower has a public record reporting on their credit report or if the Credit Alert Verification Reporting System (CAIVRS) this would disqualify from obtaining an FHA mortgage. Common examples would be student loan debt and previous government mortgage that may have been defaulted on.
My advice to improve your chances of getting approved is to have a strongly written signed explanation letter giving reasons for any late payments along with any corresponding documentation. Documenting a rental or housing history can help. If the funds used for a down payment and closing costs comes from the borrower. Any additional asset or reserve accounts accumulating 1 or more of the new mortgage payment is definitely a plus.
More info HERE from HUD.gov on FHA Loans.
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