The guidelines for FHA loans have changed quite a bit over the last few years, so we thought we’d put together a quick overview of the major points that buyers and agents should know about FHA loans.

In the current mortgage market, there are very few options for buyers who are looking to purchase a home with less than a 20% down payment. One such option is to get a conventional mortgage plus conventional mortgage insurance (MI); conventional MI in theory can allow up to 100% financing, but in practice right now in the DC area it tops out at around a 90% loan-to-value ratio (LTV), and for LTVs above 85% it’s usually not a very good deal. For borrowers looking to make purchases above 85%, then, one option to seriously consider are FHA loans, which allow LTVs as high as 96.5% (i.e. for a purchase, a down payment of just 3.5% of the purchase price).

Do you qualify for an FHA mortgage? Contrary to what many believe, FHA loans aren’t intended for low-income borrowers; they’re actually primarily targeted at first-time buyers (who tend to have the least cash available to use for a down payment), and are generally open to be used by most borrowers who intend to live in the property that the mortgage will be secured by. Some specific requirements that FHA loans have include:

• No official minimum credit score requirement. Note that many lenders do add their own overlays to the official requirements, and as a result most lenders currently want a minimum FICO score of 620; at Ethical Homes, our wide array of wholesale lenders means that we can help borrowers get FHA loans if their credit scores are as low as 500, or even if they don’t have a credit score at all. (As always, though, your entire scenario does need to make sense–we never let our clients get into mortgages that didn’t make sense for them even during the credit boom of the early 2000s, when the only requirement for a loan was to have a pulse, and we work just as hard now to make sure that our clients don’t get in over their heads with their mortgages. If your credit scores are below 600, we’ll definitely want to talk to you in some detail about how they got there, and why they wouldn’t reflect your ability to pay your mortgage moving forward, as we’ll have to convince an underwriter of that fact on your behalf.)
• Your credit report should typically not show more than 2 late payments on non-mortgage accounts in the last 12 months.
• Your credit report should typically not show more than 1 late payment on a mortgage account in the last 12 months.
• You would generally need to be able to show two years of steady employment in the same field, with income over those two years steady or increasing. (Recent college graduates can often use their college enrollment in lieu of work experience if their degree is in the field in which they are currently working.)
• If you’ve declared bankruptcy previously, your bankruptcy discharge date should be at least two years ago, and your credit history since then should be very good.
• If you’ve previously been foreclosed on or had to go through a short sale, those process should have been finished at least 3 years ago, and your credit history since then should be very good.

The maximum amount that a borrower can get an FHA loan for varies by year and by location; in 2009, the national maximum loan amount is $417k, and in the Metro DC area, borrowers are allowed to go as high as $729k with FHA loans. (Note, however, that “high-balance” loans in that $417k-$729k range will have slightly higher rates.)

Have a question about an FHA loan, or want to set up an appointment for one of our free, no-obligation 2-hour mortgage consultation sessions to review your scenario and find out what your options are? Contact us and we’d be glad to help you out.

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