The FHA mortgage is a great way for Illinois residents to buy a home. Whether it is their first home or 6th home, getting an FHA loan makes it possible to achieve homeownership with several advantages.
Take a look at the following FHA loan requirements to learn more about FHA-insured loans.
FHA Loans Offer Lenient Credit Requirements
Generally speaking, the credit requirements for obtaining an FHA loan are less strict than the conventional loan rules. This allows people with limited credit history, or even some past blemishes, to qualify for a mortgage. While a conventional home loan will often require a minimum credit score requirement of 740 or higher to qualify for the best terms, FHA home loans can be approved with scores of 500 or above.
In the eyes of FHA, the most important aspect of a person’s credit history is the most recent 12-month payment record. If the last 12 months show that a person can meet all of their obligations on time without resorting to borrowing more money, that is usually a sign that the person is ready to take on homeownership.
Since the federal government guaranteed the FHA mortgage, you can expect a fair share of documentation requirements. For people that receive a W-2 form each year, the following list represents what will be required of you to prove your income
- Your pay stubs from your employer. You must have pay stubs covering at least the last 30 calendar days. Additional paystubs could be requested depending on how far out the closing date is.
- Your W-2 forms from at least the past 2 years
- Your federal income tax returns for the last 2 years with all schedules
If you are self-employed or receive income in other forms, you will need the following:
- Your federal tax returns for the last 2 years
- Your business federal tax returns for the last 2 years
- Profit and Loss statement from the 1st of the year through the application date
Depending on your specific situation your loan officer may ask you for more information. Be prepared to promptly show any of your financial documents to the lender to keep the loan process moving along.
Besides showing your actual income, the lender will verify employment to make sure that you have been consistently employed for the last 2 years. While it is ok to change jobs, make sure that you are bettering yourself with a new employer and that there are no unexplained gaps in your work record.
Primary Residence Only
The Illinois FHA home loan is designed for people that will live in the home as their primary residence. FHA does not loan money for vacation homes or rental properties.
However, the Illinois FHA mortgage program is flexible about the type of property that you buy. While a stick-built, single-family home is the most common property financed through an FHA-insured mortgage, there are other types of properties eligible for financing. The following list shows the kind of homes that FHA will consider financing:
- Single-family home
- Duplex (you must live in one section. You may choose to rent out the other section)
- Three-unit (you must live in one section. You may choose to rent out the other sections)
- Four-unit (you must live in one section. You may choose to rent out the other sections)
While a condo can be approved for an FHA mortgage, it takes a bit more paperwork. Depending on whether it is a newly constructed condo or a pre-existing condo will dictate which guidelines have to be met. Your loan officer can walk you through these guidelines and help you find out if the condo is approved for an FHA mortgage.
Documenting Your Down Payment
The Illinois FHA rules state that a person buying a home must pay as little as 3.5%* of the home’s purchase price as a down payment. This means, for example, that a person buying a home priced at $200,000 would need to pay $7,000 at the closing for the down payment.
As long as it is properly documented, the money for the down payment can come from a variety of sources.
- Personal bank accounts (checking and savings) or money market account: if your most recent two months bank statement shows that you have had the down payment money for the entire 60 days, you may use that money
- Retirement accounts: if you are allowed to access money from your retirement account either by withdrawal or a loan and the last 2 months’ statement shows a balance above the amount for the down payment, you can use the retirement account funds
Gift Money Used For the Low Down Payment Requirement
FHA also has a generous feature that helps a lot of first time homebuyers. The money used for the down payment can be a gift from a relative or significant other. For the gift to be allowed, you and the relative will need to produce copies of your bank accounts. A 60-day paper trail showing where the funds have been withdrawn from and deposited will be required. You will also need to write a brief letter explaining that the money is a gift and not expected to be repaid.
Be sure to watch out for these no down payment mistakes!
Non-Occupying Co-Borrower is Available Too!
One item that seems to block people from buying a home is their debt-to-income ratio. For one reason or another, a person appears to have too much debt on paper to be considered a good risk for a mortgage. The non-occupying co-borrower option helps remove this barrier.
FHA will allow a person to co-sign on a mortgage without requiring the person to live in the home. This allows a family member with a solid income to help out a younger relative in their quest to purchase a home.
FHA will allow this scenario so long as there is a direct family relation involved. Most examples involve a parent or grandparent helping out their child or grandchild. Siblings can also help other siblings.
So long as the main borrowers and the non-occupying co-borrowers meet the credit guidelines and debt-to-income ratios as a combined group, there should be no issue getting the loan approved.
2023 FHA Loan Limits
There are upper limits on the maximum loan amount available for FHA mortgages. Homes priced at or below the limits can be eligible for financing. Certain areas of the state used to have higher limits due to the overall economic health of the area. However, this year there are no higher limits in any county for the state.
All counties in Illinois have an FHA loan limit of $472,030 for a 1-unit home
View additional program details on our FHA page.
Current FHA mortgage insurance costs.
- Important Disclosure
*3.5% down payment based on $193,000, 4.125% / 5.713% APR, 30-year fixed interest rate mortgage. Private Mortgage insurance is required. Rates subject to change. Subject to credit approval.