Michigan FHA Loan
When you are purchasing a home in Michigan, an FHA loan may offer some advantages. Whether you are purchasing your first property, or even if you have owned many homes, a loan backed by the FHA (Federal Housing Administration) could meet your requirements.
Benefits of FHA Mortgage Loans
If you have had credit issues in the past, or perhaps you don’t have much credit history, being approved for a home loan can be difficult. The FHA offers more flexible requirements when compared to conventional loans.
The FHA requires a good recent credit history, so even if you had financial issues in the past, it shouldn’t stop you from getting an FHA-insured mortgage.
There is also a lower credit score requirement than with conventional mortgages. You might be required to have a credit score of over 700 to get better terms when applying for a conventional mortgage, but the FHA requirements mean that a loan is generally easier to qualify for.
Qualifying for an FHA Loan in Michigan
When a lender provides a loan to a home buyer there is a risk that they will not keep to their payment schedule and default. With an FHA loan, this loan is insured by the government. This means lenders can offer loans to buyers who may not meet the requirements for conventional mortgages.
Even though it can be easier to qualify for an FHA mortgage, they do have requirements that any buyer has to meet. When meeting the requirements for an FHA loan, you must show a steady income and no serious problems in your payment history over the last two years.
Credit Score Requirements
While it is possible to qualify for an FHA loan with a credit score as low as 500 when you have a 10% down payment, lenders can set their own minimum score requirements. If you want to qualify for a 3.5% down payment the minimum FHA score is 580.
If your score isn’t at least 580 there are things you can do to improve your credit. There could be an error in your credit report that is dragging down your score. Late payments have the biggest effect on your score, so consistently paying your bills on time will gradually improve your credit.
Down Payment Requirements
Even if you meet the low down payment requirement as low as 3.5 percent, it can be difficult to save enough when paying rent and other bills. The FHA allows down payment gifts from relatives to make buying your first home easier.
If you receive cash to help with your down payment, you have to document where this money came from. The lender will need to see a paper trail that includes the gift letter that states that the money doesn’t have to be repaid. The relative also needs to provide copies of their account statement showing the balance before and after withdrawal.
The home buyer may also have to provide deposit slips, and statements showing the balance of their account before and after the deposit. If multiple gifts are provided, these should be separate deposits with the process repeated for all.
Instead of going through this process, it might be better for the relative to become a co-borrower.
Non-Occupant Co-Borrower
Buying your first home in MI when you don’t have the finances or a great credit profile can be very difficult. If you don’t have much credit history, buying a home for the first-time won’t be easy. However, getting help from a family member who will become a co-borrower when applying for an FHA home loan is possible.
As long as the relative isn’t going to be living in the home, and has a two-year history of employment, credit, and residence, they could become a co-borrower. Other requirements include:
- They must have a valid social security number
- They cannot have an interest in the home, like being the seller
- They can’t be ineligible for an FHA loan or have been foreclosed in the last 3 years
- They can’t have federal debts or liens against their property
When they become co-borrowers, they will have joint liability and have to sign loan documents and take title to the home.
A non-occupant co-buyer can also help with debt-to-income ratio eligibility. Someone who has student loans can find qualifying for a mortgage loan more difficult thanks to their increased monthly payments. If the non-occupant has low debts compared to their income, it can help the borrower meet the bank’s requirements for DTI.
Mortgage Insurance
FHA loans require the borrower to pay mortgage insurance premiums (MIP). This premium is similar to private mortgage insurance required with conventional loans but it includes an upfront payment as well as annual payments.
The upfront payment will cost 1.75% of the loan amount. There is also an annual payment that ranges between 0.15% to 0.70% depending on the mortgage term and the loan-to-value (LTV) percentage. This annual fee is divided by 12 and added to monthly payments.
In many cases, this annual premium can be removed after 11 years, though not if the LTV is higher than 90%. With a lower down payment, this annual premium will remain for the life of the mortgage.
FHA Appraisals
If you choose the FHA loan program, the home will have to be appraised by an FHA appraiser. The appraiser will judge the value of the home, using comparable sales data, and ensure the home meets the Housing and Urban Development (HUD) guidelines.
Having the home appraised ensures that the borrower isn’t buying a home that has serious issues. The bank is also protected, making sure that they don’t lend more than the home is worth.
The appraiser will check the following features of the home to ensure they meet the HUD guidelines:
- While issues with foundations could be very serious, they can often be fixed to allow the FHA loan to proceed.
- The appraiser will look for issues in the basement that could affect the foundation and problems like moisture.
- Crawl spaces. The appraiser should be able to access the crawl space and they will check ventilation and for signs of standing water.
- Inspecting the attic will allow the appraiser to ensure the roof and the rafters are in good condition.
- As well as looking at the condition of the roof and chimneys, the appraiser will assess how long it should last before replacement.
- The appraiser will check to make sure there is enough hot and cold water supplied to different parts of the home as well as checking for leaks.
- The electrical wiring in the home should be sufficient to deal with everyday requirements and not show signs of damage.
- If appliances are included in the sale, the appraiser will check that they are in working condition.
- Heating, air conditioning, and ventilation must function to allow the home to be a comfortable place to live.
- Problems with the gutter system or the grading of the yard can lead to water damaging the home.
- The appraiser will be on the lookout for any signs of termites within the home. If there are any signs of termites a specialist inspection may be required followed by treatment of the infestation.
- Lead paint. Homes constructed before 1978 could have been painted with lead paint. The appraiser will check for peeling or cracking which could reveal older coats of paint containing lead.
- An assessment will be made of the local area that could affect the safety of the inhabitants of the home. This might include busy roads and pollution from local factories.
If problems are found, these issues will need to be dealt with before the loan will be available to purchase property. While this will be a concern to the homebuyer, many issues can be very minor. More major issues, however, could be very costly and require negotiation with the seller. They may be willing to make repairs or renegotiate the price of the home to cover the cost.
Streamline Refinance an FHA Loan
When interest rates drop, you could find you are paying a lot more in interest than you need to. The FHA offers a streamlined refinance option that can help you avoid a lot of the paperwork and a new appraisal on the home.
You can be eligible for this if you are up to date on your FHA loan without missed payments in the last 12 months. The FHA Streamline Refi can help you more easily reduce your monthly payments, and reduce the overall interest paid over the loan term.
You cannot do a cash-out refi with this program.
Summing up FHA Loan Requirements
If you are looking for more flexible terms, with a lower down payment, but still low-interest rates, the FHA is worth considering when buying your home in Michigan. If you can’t meet the requirements of a conventional home loan, the FHA’s easier requirements can still help you buy your home with attractive loan terms.
