Getting an FHA mortgage is a great way to buy a home or refinance an existing mortgage. The FHA program has been around for many years and is a popular mortgage for first time home buyers.
About FHA Mortgages
The acronym FHA stands for the Federal Housing Authority. This organization began in the year 1934. At that time America was suffering through the end of the Great Depression and many citizens were still renters.
Before FHA, the terms for buying a home were much more burdensome. The down payment requirement was 50% of the home’s price. The terms were only 5 years, at the most. However, the entire balance did not have to be paid back within 5 years. Instead, the large balance that was outstanding at the end of the term was considered a balloon payment. Buyers had the option of paying the large amount at once or signing up for a new mortgage, with a 5-year term, and a big balance due at the end.
The government reasoned that if the number of homeowners could increase, more neighborhoods would stabilize, families would be started and the overall economy would improve.
Mortgage Insurance Information
The main feature of the FHA program was the Mortgage Insurance Premium. This fee would be charged on all loans in two ways; (1) as an upfront fee at the beginning of the mortgage and (2) as a small monthly amount. This Premium would allow FHA to provide funds for future mortgages and also protect lenders against loss in case some homeowners were not able to make their payments.
With the guaranty of the loan being covered through the Premium, banks felt more comfortable offering this mortgage. Rates dropped, terms lengthened and the number of homeowners rose over time.
Getting FHA financing can be accomplished by meeting several requirements. The good thing is that banks, credit unions, and mortgage lenders have the ability to offer FHA loans. This means that borrowers are not relying on the federal government to handle and approve the application.
Here are the basic loan requirements for getting approved for FHA.
As little as 3.5% of the home’s price as a down payment is required. The money may come from traditional sources such as checking, savings, retirement, CD, stock or bond investments, and other financial institution accounts.
The money is also allowed to come in the form of a gift from a relative.
Proof of Income
In order to get approved for a loan, the borrower will need to supply proof of their income. For a person that is not self-employed, the requirements are usually the following:
- Most recent pay stubs covering the last 60 days of employment
- The past 2 years W-2 forms from all jobs
- In some cases, the loan officer may request personal income returns from the past 2 years
For people that are self-employed, the requirements will usually be:
- Business tax returns for the last 2 years
- Personal tax returns for the last 2 years
Although it is not required to be a full citizen of the United States in order to qualify for FHA, you will be required to prove how you are in the country on a legal basis and that your status as a legal immigrant will likely continue for the foreseeable future.
Each lender will have its own requirements for the minimum credit score that they will approve. The nice thing about this program’s guidelines is that people with less than perfect credit can be approved for a loan.
A word about Overlays
As the previous point mentioned, each lender will have its own requirements concerning the credit score. In addition, the lender may have some additional requirements that are not dictated by FHA. These additional requirements are called mortgage overlays and they are unique to each lender. If the lender approves you for a loan and explains the requirements to you, you will have to meet those requirements in order to close the loan.
Since this loan is backed/guaranteed by the federal government, there is one step of the loan that is the same for all borrowers. All borrowers must clear a CAIVRS check in order to get loan approval.
CAIVRS is another acronym. This one stands for Credit Alert Interactive Voice Response System. CAIVRS is a database that lists any person that has failed to either repay federal student loans or federal taxes. If a person’s name turns up on this list then they cannot move forward with the mortgage.
In order to get approval from a Minnesota-approved lender, you will need to complete an FHA application. The application is a form that the loan officer will help you complete. The form asks for basic information such as your name, date of birth, social security number, current address, work history, income, assets, and liabilities.
Along with the application, you will also need to provide the following types of information.
If you intend to use your own money for the down payment and associated closing costs, the loan officer will need to verify that you have access to the money.
Depending on the type of account, you may be asked to provide some or all of the following
- Most recent two months savings account statements
- Most recent two months checking account statements
- Most recent quarterly statement from retirement accounts
- Most recent quarterly statement from CD, Stocks, Bonds, or other accounts
As mentioned before, you will need to show the loan officer your documents that detail how much money you make in a year and how often you are paid. The loan officer will use this information to calculate the monthly gross income for you and your household.
Other forms of Income
If you do not earn money from a job or a self-employed company, you may be asked to provide other documentation.
For example, a person who receives a monthly pension may be asked to provide the last 2 month’s payout statement as well as a letter explaining how long the pension will continue.
People who earn part or all of their money from rental income on investment properties will need to produce copies of lease agreements, the previous 2 year’s personal tax returns, and possibly a cash flow statement for the properties.
Proof of Gift
If you are receiving a gift to be used for the down payment, there will be a requirement of documents to show that the money is a true gift.
Typically, the borrower will need to have copies of their own account showing the deposit of the gift as well as copies of the statement showing where the gift came from. If the money was provided via a check, a copy of the check will also be needed. Lastly, a statement signed by the borrower and the giver showing that the money is a gift will be needed.
In some cases, grants can be used for the down payment. Although rules around this have changed over the years, it is still possible. Check with your lender to see what their specific requirements are.
Along with the previously mentioned information, there are even more facts to know about the FHA program.
FHA offers mortgages on multiple types of properties. The following list represents the most common type of homes that can be approved for FHA financing
- Single-family home
- 3-unit home
- 4-unit home
- Condo (must be part of an approved condo building)
Getting a Rehab Loan
There is also a separate program that can be used as a type of rehab loan for fixer-uppers. This program is called the FHA 203k. Space here will not allow a sufficient explanation of the program, but a brief summary will cover the major points.
The 203k loan comes in two forms. One is a streamlined version that limits the amount of money that can be borrowed and how the money can be used for repairs or improvements on an existing home.
The second form of the 203k loan allows for bigger loan amounts and much more extensive work to be done in the form of pure repair work or major improvements.
The beauty of the 203k program is that borrowers are allowed to receive one loan, with one interest rate, without the need for a second loan designated just for the repairs and improvements.
Quick and Easy Refinance
If interest rates should drop after you receive your loan, there is a possibility of getting approved for a refinance mortgage called the streamline refinance. This loan does not require any proof of income, a new credit report, and no new appraisal. The main requirement is that the borrower must currently have an FHA loan and that they have made the last 12 payments on time.
The refinance must also result in a net tangible benefit to the borrower. The definition of net tangible benefit for simplistic matters is an overall payment savings of 5% equally comparing your current payment to the proposed. The definition varies from there depending on if you’re going from an ARM to a Fixed-rate, an ARM to an ARM or even changing the term from 30 years to 15 years. Ask your Mortgage Loan Officer for more details if your scenario falls in any of those categories.
Summing Up The Minnesota FHA Mortgage
The FHA program has a long track record of being committed to assisting people in becoming homeowners. With the low down payment option, flexible credit approval rules, and excellent interest rates, the FHA program is a great way for Minnesotans to buy a home at an affordable price.
- Important Disclosure
*3.5% down payment on $193,000, 4.125% / 5.713% APR, 30-year fixed-rate mortgage. Mortgage insurance is required. Rates subject to change. Subject to credit approval.
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