My sister recently purchased a home. She was able to get a low mortgage rate and a great deal on the home such that her mortgage payment is less than the rent she was paying. And the home loan was an FHA mortgage. So I thought it would be a good time to cover FHA mortgages.
The FHA (Federal Housing Administration) provides mortgage insurance for buyers without huge sums to use for initial down payments. FHA-insured mortgages can be financed with as little as 3.5% down. While the FHA allows home-buyers to purchase homes with little money down, the loans aren’t given out to just anybody. If you happen to be in the market for a home and are looking to qualify for an FHA loan, you’ll need to have the following:
- A steady employment history. This means having been with the same employer for at least two years. Staying with the same employer shows stability, which is exactly why it’s a criterion for FHA-backed loans.
- Your income over the last two years must have stayed the same or improved. Because the maximum amount of an FHA-backed loan is based on your income, you must document that your wages are steady or rising.
- FHA loans recommend a good credit score of 620 or better, which generally means that your credit for the past two years must have less than two thirty-day late payments and a solid credit history.
- If you have an unfortunate bankruptcy on your record, it must be two years old, and you must have good credit for the last two years.
- If you’ve had a foreclosure in the past, it must be at least three years old, and your credit for the past three years must be solid.
- The mortgage payment that you qualify for must be approximately 30 percent or less of your total monthly gross income. For example, if you earn $50,000 per year ($4,166 per month), your mortgage payment could be at most approximately $1,250.
- State tax liens must be paid by the time you apply for a loan. If you have a federal lien, you must be able to show that you’ll be able to pay the tax lien payment and the mortgage payment.
If you meet these criteria, chances are you’ll be able to qualify for an FHA-backed loan. The next step is finding a lender to work with within your area. In fact, you’ll want to check rates and fees from multiple lenders to find the best deal.
Once you have lenders in mind, you’ll want to gather documents regarding your income, employment, savings, and credit. Here’s a list of the documents you’ll need to complete the loan process:
- Complete tax returns from the last two years
- W-2 and 1099 forms from the last two years
- Pay stubs covering at least the most recent month
- Self-employed borrowers will want three years of tax returns and a profit and loss statement covering the year to date
- Bank statements covering the most recent three months
- The newest statement available from any investments: mutual funds, 401(k), retirement accounts, money market accounts, etc.
- Recent bill statements indicating account numbers
- Name, address, and contact information for your current landlord
- If you have no credit, you’ll need recent utility bills
- If you’ve had a bankruptcy, you’ll need a copy of the complete discharge paperwork
- Copies of driver’s license and social security card
- If you’re divorced, you’ll need copies of divorce papers and papers related to alimony
Quite a list, isn’t it? It gets better–you may have to provide additional documents on a case-by-case basis. Luckily, your lender will be available to answer any questions about the documentation process.
So, if you’re looking to qualify for an FHA insured loan, here’s what you’ll need to do:
- Save at least 3.5% of the purchase price of the home you’re interested in buying. (Remember: your mortgage payment must be approximately 30% of your monthly gross income.)
- Keep steady employment. If you’re considering leaving your current job or switching careers, doing so could mean waiting until you’ve held your new job for two years.
- Keep on top of your bills. More than two thirty-day late payments in the past two years will probably spell doom for your FHA application.
- Pay down any state tax liens.
- If you’ve had a bankruptcy or foreclosure, you’ll just have to wait out the required two or three years. Make sure you keep your credit solid in the meantime!
After that, it’s all a matter of finding a lender in your area, finding an appropriate home, and applying for a loan. Check the Housing and Urban Development site for a lender in your area.