FHA Loans

Established in 1934, the Federal Housing Administration (FHA) was created to improve housing standards and provide an affordable home financing system with mortgage insurance. This made it possible for families who might have been excluded from the housing market to finally own a home.

The FHA does not provide loans directly; instead, it insures them. If a borrower defaults, the lender is reimbursed from the insurance fund.

• Purchase a home with just 3.5% down.
• Ideal for first-time homebuyers who can't make large down payments.
• A solid option for those who don’t qualify for traditional loans.
• Down payment assistance programs can be combined with FHA loans to reduce down payments or closing costs.

Your loan approval depends entirely on the documentation you provide during the application process. Be sure to provide accurate information for the following:

Employment Documents:

• Last 2 years of Income Tax Returns
• W-2 & 1099 Statements from the last 2 years
• Pay Stubs from the last 2 months
• Self-employed applicants: Tax Returns and Year-to-Date Profit & Loss Statements for the last 3 years

Savings Documents:

• Bank Statements for all accounts from the last 3 months
• Account Statements for retirement plans, mutual funds, stocks, and other investments

Credit Documents:

• Recent bills and statements showing account numbers and minimum payments
• Landlord information or 12 months of canceled rent checks
• Recent utility bills to support limited credit history
• Bankruptcy and Discharge Papers, if applicable
• 12 months of canceled checks written by someone you co-signed for (mortgage, car, or credit card payments)

Personal Documents:

• Driver's License
• Social Security Card
• Divorce, Alimony, or Child Support papers
• Green Card or Work Permit (if applicable)
• Homeownership documents

For Refinancing or Rental Property:

• Note & Deed from any current loan
• Property Tax Bill
• Homeowners Insurance Policy
• Payment Coupon for Current Mortgage
• Rental Agreements for Multi-Unit Properties

The primary difference between an FHA loan and a Conventional Home Loan is the down payment and credit requirements. FHA loans require a lower down payment and have more flexible credit qualifications. This makes them ideal for buyers with no credit history or minor credit issues. While FHA loans use common sense underwriting and allow for explanations of credit problems, conventional loans rely heavily on credit scores. If your credit score falls below the required threshold, you may not qualify for a conventional loan.

For an FHA loan, your monthly housing costs (including Principal, Interest, Taxes, and Insurance) should not exceed 29% of your gross monthly income. This is often referred to as PITI.

Example: If your monthly income is $3,000, the maximum PITI would be $870 ($3,000 x .29).

Additionally, your total debt (PITI plus long-term debt such as car loans or credit cards) should not exceed 41% of your gross monthly income.

Example: If your monthly income is $3,000, the maximum total debt would be $1,230 ($3,000 x .41). Subtracting the $870 PITI, you’d have $360 available for long-term debt.

FHA loans offer more flexibility than conventional loans, especially with higher debt-to-income ratios.

A bankruptcy generally won’t prevent you from getting an FHA loan. Ideally, you should have re-established your credit with at least two credit accounts (like a car loan or credit card). For a Chapter 7 bankruptcy, you must wait two years after discharge. For a Chapter 13 bankruptcy, you can apply after one year of repayment, with court approval.

You should also have a clean credit record with no late payments, collections, or charge-offs since the bankruptcy. Special exceptions can be made if the bankruptcy was caused by extenuating circumstances, such as a serious medical condition.