Indiana FHA Loan Requirements
If you are planning to buy a home in Indiana, a government-backed mortgage from the FHA is one of the options that you should consider. The Federal Housing Administration insures loans from approved lenders that offer many advantages to buyers.
We look at some of the basic features of an FHA loan that could help home buyers buy an Indiana home.
The Advantages of an FHA Loan
Flexible Guidelines
Entering the property market can be a difficult hurdle for many people to overcome, but an FHA loan offers buyers a better chance of being approved. If your credit score is lower than would be acceptable for a conventional loan, you might find that you still qualify for an FHA loan.
Lower Down Payments
Saving for a large down payment is not going to be easy when you still have rent to pay. With a loan backed by the FHA, you can avoid the requirement to save 10% or 20% of the purchase price of your home that might be required by the lender. The FHA allows small down payments as low as 3.5%.
Even if you don’t have enough money for a 3.5% down payment, the FHA allows gifting from friends or family. There are also non-profits that gift buyers, that meet their requirements, money for their down payment.
Having money for a down payment isn’t the only cost the buyer needs to account for when getting a mortgage. There are also closing costs, which can include the cost of the home inspection, appraisal, title search, home insurance, and property taxes.
These expenses can be a problem for home buyers, especially first-time home buyers but the FHA allows help from a surprising source. The seller of the home is allowed to give the buyer up to 6% of the purchase price to assist them in completing their purchase. An arrangement like this can be negotiated with the seller as required.
Properties that can be Purchased Using an FHA Mortgage
If you want to buy an investment property or a vacation home, an FHA loan isn’t the right type of loan. FHA loans are only for owners who intend to live in the property as their primary residence.
If you are buying a single-family home or condo unit, you can use an FHA loan. You can also purchase multifamily homes up to a quadplex with this type of mortgage.
Indiana FHA Loan Limits for 2024
The FHA will only allow lenders to provide up to a certain amount when purchasing a property in Indiana. Even if you have a high credit score or a good income, there is a maximum loan amount that can depend on the Indiana county the home is located. However, in 2024 the FHA limits in Indiana are the same across every county in the state.
If you are buying a single-family property, the maximum loan limit for Indiana is $498,257. This limit increases for multifamily homes, with a maximum of $958,350 available when buying a quadplex.
Qualifying for an FHA Loan
To be approved for a mortgage backed by the FHA you will need to supply proof of income and assets. You will need your pay stubs from your employment over the last 60 days. W-2 tax forms for the last two years can also be used to prove your income.
If you are self-employed, you will need to have personal and business tax returns for two years to document your income.
You are also required to give proof of funds for down payments and closing costs. If you are using your own money, you will need to provide bank statements showing you have the money in your account. If you are using money from an investment account you will need a statement proving funds or showing the value of your stocks and bonds.
Income and Debt
Before your FHA loan is approved, your lender will look at your debt and income. Your debt-to-income (DTI) ratio is an important guide for the lender when assessing the mortgage they will offer you.
Lenders might use two types of DTI ratios when assessing a borrower’s ability to repay the loan. There is the front-end DTI which doesn’t include the potential mortgage payments and the back-end DTI which does include the new mortgage payments.
Exact requirements for DTI ratios can vary, but generally, you can expect to be required to have a front-end ratio at or below 28%, and a back-end ratio of 41%. Even if you aren’t within these DTI ratios exactly, it can still be possible to be approved for an FHA loan.
Let’s look at an example:
A couple with a combined gross income of $90,000 per year, or $7,500 per month, and debts of $2,000 per month, would have a front-end ratio that looks like this:
$2,000 / $7,500 = 0.2667 or 26.7%, just below the recommended 28%.
If their payments for their mortgage on the home they want to buy come to $1,200 per month, their back-end ratio will look like this:
$2,000 + $1,200 = $3,200
$3,200 / $7,500 = 0.4267 or 42.7% and just above the recommended back-end ratio.
While they might still get approved for an FHA loan from their lender, they might want to consider a cheaper home.
Problems in Your Financial Past
While an FHA loan can be more forgiving, there are still things in your credit history that can make your mortgage approval more difficult.
Bankruptcy
If you have gone through a Chapter 13 bankruptcy, you will be able to apply for a mortgage after it has been discharged. If you have filed for a Chapter 7 bankruptcy, you will need to wait a minimum of two years after it has been discharged to apply for an FHA loan.
Taxes
If you owe money to the federal government for unpaid taxes, the lender is not allowed to approve your application. To qualify for an FHA-backed loan, you will need to pay off the debt or agree to a repayment plan.
Student Debt
If you have outstanding student loans, this debt will be accounted for in your debt-to-income ratio. The FHA will use 0.5% of the total student loan debt when calculating your debt-to-income ratios.
Child Support Payments
If you are behind on child support, you will have to catch up on your payments to qualify for the FHA program.
Refinance in Indiana
If you currently own a property in Indiana, the FHA offers you a few options for refinancing.
FHA Streamline Refinance
If you currently have an FHA loan, a streamlined refinance is an easier way to lower your mortgage interest rate. This allows you to avoid the normal loan application process and paperwork usually required by lenders.
If you have a history of making your payments on time, this could be a straightforward way of reducing your monthly mortgage payments.
In addition to already having an FHA loan, there are some other requirements you will need to meet:
- You must continue to use the home as your primary residence
- You are allowed just one 30-day late payment in the last 12 months
- Verification of your income isn’t required
- An appraisal is not usually needed
FHA Mortgage Rate and Term Refinance
If you want to benefit from a better interest rate or change the term, an FHA rate and term refi is an option. If you have the option of lower interest rates you could make a great saving on the amount of interest you will pay on your home loan.
If the current interest rate on your loan is 7%, and you have more than 20 years left to pay, you could take advantage of a lower interest rate and reduce the term on your loan. You might be able to refinance to a 15-year fixed-rate FHA loan at a lower interest rate, considerably reducing the overall cost of the mortgage.
FHA Cash-Out Refinance
If you have equity in your home that you want to access, a cash-out refinance loan could be the answer. This loan will pay off your current mortgage, release equity that you can use as you want, and could also reduce your monthly payments.
Perhaps you want to take a long vacation, help a child buy their first home, or pay off debts, whatever you want to do with the money is up to you.
FHA 203(k) Rehab Mortgage
If you want to purchase a home that requires repairs and rehabilitation, the FHA has a loan option. The 203(k) rehab loan can be used to buy and repair a home or make minor repairs and improvements.
There are two options available; the FHA 203(k) Streamline loan, and the standard 203(k) loan. The streamline version of the loan allows for minor repairs and home improvements up to $35,000.
If a home needs more extensive renovations, the standard 203(k) is more suitable. This will require a certified home contractor to be used, and other rules need to be met.
Summing Up the FHA Loan in Indiana
When you are buying a home in Indiana, there are many reasons to consider an FHA loan. If you are purchasing your first home, want to refinance, or a lower down payment is attractive, an FHA loan is a great option for many borrowers.
