FHA Loans

FHA home loans are like special mortgages backed up by the government to make them safer for banks. They work for both regular houses and apartment buildings. Because of this government support, banks can lend money more easily without worrying too much about people not being able to pay back.

The government doesn't actually give out the loans or decide how much interest you pay. It just promises to help out if someone can't pay back their loan.

These loans are good for people who might not qualify for a normal mortgage, especially if they're buying a home for the first time. They have perks like needing a smaller amount of money upfront, not being too strict about your credit history, and being okay with different income situations.

Documents Needed for FHA Loans

Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:

Employment

  • Complete Income Tax Returns for past 2-years

  • W-2 & 1099 Statements for past 2-years

  • Pay-Check Stubs for past 2-months.

  • Self-Employed Income Tax Returns and YTD Profit & Loss

  • Statements for past 3-years for self-employed borrowers

Savings

  • Complete bank statements for all accounts for past 3- months

  • Recent account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc.

Credit

  • Recent bills & statements indicating account numbers and minimum payments.

  • Landlord's name, address, telephone number, or 12- months cancelled rent checks.

  • Recent utility bills to supplement thin credit.

  • Bankruptcy & Discharge Papers if applicable

  • 12-months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card; this indicates that you are not the one making the payments.

Personal

  • Driver's License

  • Social Security Card

  • Any Divorce, Palimony or Alimony or Child Support papers

  • Green Card or Work Permit if applicable

  • Any homeownership papers.

Refinancing or Own Rental Property

  • Note & Deed from any Current Loan

  • Property Tax Bill

  • Hazard Homeowners Insurance Policy

  • A Payment Coupon for Current Mortgage

  • Rental Agreements for a Multi-Unit Property

What Can I Afford

Make sure that the money you spend on your home every month is not more than 29% of how much you earn before taxes for an FHA Loan. All the costs related to your home, like the loan amount, interest, property taxes, and insurance, are called PITI.

Here's a quick example: If you earn $3,000 a month, the most you should spend on PITI is $870.

Your overall monthly expenses, including PITI and any other long-term debts like car loans or credit card payments, should not be more than 41% of your earnings before taxes.

For instance, if you make $3,000 a month, the most you should spend on everything is $1,230. Subtracting the maximum PITI ($870) from this, you're left with $360 that you can use for other long-term debts.

FHA Loan rules are more flexible compared to regular loans from banks.

Bankruptcy and FHA Loan

Having a bankruptcy in the past doesn't stop someone from getting an FHA Loan. The best situation is if the person has fixed their credit by having at least two credit accounts, like a car loan or credit card. After a Chapter 7 bankruptcy, it's good to wait for two years, and for a Chapter 13, either two years after discharge or one year with permission from the courts and proof of making payments. Also, it's important that there haven't been any credit issues like late payments, collections, or unpaid debts since the bankruptcy. There can be special considerations if the person went through something really tough, like a serious illness, that led to the bankruptcy.

FHA Loan compared to Conventional Loan

The main difference between an FHA Loan and a Conventional Home Loan is that an FHA loan lets you put down a smaller amount of money, and it's not as strict about your credit history. This makes it easier for people with little or not-so-great credit to buy a home. While FHA does want an explanation for any credit issues, they use common sense when looking at your credit. For example, if you had a bankruptcy three years ago, they might still approve you if there were good reasons for it.

On the other hand, traditional home loans really care about your credit score, which is a rating from credit bureaus like Experian, Trans-Union, or Equifax. If your score is too low, you might not qualify for a conventional loan.

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Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from Andela Financial Services and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.