Qualify for an FHA Loan in Virginia
You’ve probably heard of FHA loans when thinking about buying a home in Virginia, but is it the best option for you? It is a popular choice, not only for first-time home buyers, and there are many reasons to seriously consider this type of mortgage.
We look at what you need to know before choosing an FHA loan in Virginia.
Virginia FHA Loan Basics
The Federal Housing Administration created the FHA Loans program to help more people become homeowners, and improve neighborhoods, and the overall economy. At the end of the great depression most people were tenants, the FHA was created to address this situation.
Before FHA loans, homebuyers would need a substantial down payment with mortgage terms of just 5 years. At the end of the term, the borrower hadn’t even repaid the balance, with a balloon payment required or a new mortgage.
The creation of the FHA loan program has been successful in increasing the number of homeowners since its founding in 1934. The FHA insures the loan, reducing the risk to the lender should the borrower default. With more access to financing, more people have become homeowners.
Why Choose an FHA Home Loan?
The type of loan you choose is an important decision that will affect your finances for many years. Choosing an FHA loan will be a better option for many Virginians. Let’s look at the reasons why.
Credit Requirements
It is usually easier to meet the credit requirements for an FHA loan than a conventional mortgage. So even if you have some credit mistakes in your past, you could qualify when it might not be possible with a conventional home loan.
You might have missed some payments and have a lower credit score as a result. When applying for a conventional loan, lower credit is more of a problem, with some FHA lenders requiring scores of over 700 to get better terms on the loan. The FHA has a minimum credit score requirement of 500, though individual lenders can set their own minimums.
Down Payments
Saving for a down payment can be easier with an FHA loan. As long as your credit score is 580 and above you can buy a home with a down payment of 3.5%. For borrowers with a credit score of between 500 and 579, a down payment of 10% will need to be saved.
The FHA allows buyers to use gift funds from family members or friends to help fund the down payment. Buyers can use money from accounts like 401Ks and IRAs, along with savings accounts, of course.
If you are getting help with your down payment from a relative, a gift letter has to be written to show where the money is from and that there isn’t an expectation of repayment. The lender will also want to see account information from the gifter showing before and after the money left their account.
Property Types
You can use an FHA loan to purchase many types of homes. This includes single-family homes and two-, three-, or four-unit properties as long as you live in one of the units. This type of mortgage can also be used to buy a condo in Virginia, though the condo development has to be approved.
FHA Non-Occupant Co-Borrowers
It can be very difficult to qualify for your first home loan. But if you choose an FHA-backed mortgage, a relative could help you qualify.
While members of your family can help with gifts to cover the down payment, sometimes that isn’t enough. If your credit isn’t great or you have debts that consume much of your monthly income, buying a home might seem impossible.
A family member could become a non-occupying co-borrower, allowing you to buy a home much sooner. As long as they have good credit and meet other requirements, they could help you be approved for an FHA loan.
For FHA loan applications involving non-occupying co-borrowers, maximum loan financing is available to applicants who share a familial or legal relationship. These relationships encompass, but are not limited to:
- Spouses
- Parents
- Offspring
- Siblings
- Stepchildren
- Aunts and Uncles
- Nieces and Nephews
The non-occupying co-borrower has to meet certain requirements:
- They cannot live in the home
- Their main residence has to be in the United States
- They have to have a valid social security number
- They need two years history of employment, credit, and residence
- They will need to sign the mortgage documents and take title to the property at closing
- They cannot be the seller or the builder of the home
- They can’t have had an FHA foreclosure in the past three years
- They have to be eligible for an FHA loan
- They will have joint liability for repaying the mortgage
When applying for an FHA loan, the lender will take the lower credit score of the applicants. Even if the non-occupying co-borrower has a good credit score, the borrower needs a credit score of at least 500 and preferably 580 when applying. If there are more than two applicants, the lender will take the median score.
The non-occupying co-borrower’s income and debt will be used during the application. So if the borrower has a debt-to-income ratio higher than is acceptable by the lender, the non-occupying co-borrower can help bring this down if they have low debts and good income.
When a non-occupying co-borrower is used to purchase a home, it is sometimes required that the occupying buyer has to provide a 5% down payment. This down payment may not be eligible if it includes gifts or grants.
While buying a home with a non-occupying co-borrower can solve many problems first-time buyers face, it isn’t for everyone. You might want your first home to give you more independence from your parents, but if they still, at least partly, own the roof over your head, this might not seem like a great arrangement.
Despite this problem, using a non-occupying co-borrower can make a lot of sense, particularly if you have student debt that limits your ability to qualify for a mortgage. You might be just at the start of your career when earnings are their lowest, and this allows you to buy instead of rent.
Eligibility for an FHA Loan in Virginia
If you choose an FHA loan, it won’t be the federal government’s job to approve your application. Banks, credit unions, and other lenders will process your application and assess your eligibility.
Income
When applying for a loan, you will be required to provide evidence of your income. If you are employed this could mean:
- Pay stubs for the last two months
- W-2 forms for the last two years
- Sometimes, income tax returns for the past two years will be requested
If you are self-employed, you will need to supply business and personal tax returns for the last two years, and they might also need your profit and loss statement for the current year.
Debt-to-Income Ratio
When the lender is underwriting your loan application they will look at your debt-to-income ratio. This means that the lender will want to see documentation that shows your income and your debts.
Income can include pre-tax wages, dividends, and interest income. Your debts could also include your new house payments, HOA fees, property taxes, and homeowners insurance. Any other loans and credit card payments will be included in your debts.
With this information, your debt-to-income ratio can be calculated. Your monthly debts are compared to your gross income, with a limit of 43% when your credit score is below 580. If you have better credit you could qualify with a DTI of up to 50%, but the lender might want to see other things in your favor to approve the loan.
FHA Property Requirements
Before your FHA loan will be approved the home has to be appraised. This appraisal will show how much the home is worth and that it meets the Housing and Urban Development guidelines.
If the appraiser finds that the home will require many repairs before the purchase can proceed, the mortgage could be declined. However, if there are minor issues, repairs can be made and the purchase can continue. This might require negotiation with the seller to fix the problems or reduce the price.
The FHA appraisal will also show the lender that the home is worth the amount you have offered to buy it for. This reduces the risk for the lender, making it less likely that they will lose money if the home forecloses.
The appraiser will look at everything inside and outside of the home, including the area where the property is situated. So if there is a large amount of traffic or factories releasing harmful fumes nearby, there could be a problem. Other things that they will look at include:
Foundation
Cracks in the foundation might not be that much of a problem and could be fixed, though it could also make the home ineligible for an FHA loan.
Roof
The appraiser will look for damage to the roof and indications of leaks. Problems with chimneys, skylights, and gutters will need to be addressed if issues are uncovered.
When you buy a home, you don’t want to have to spend a lot of money on the roof soon after. The appraiser will judge the remaining life of the roof so that the buyer avoids an expensive bill when they are a new owner.
Wiring
The home should meet the basic electrical requirements of the jurisdiction. Fraying wires, faulty fuses, and damaged breakers will need to be repaired. If there are many of these problems, further inspections might be required by an electrician.
Plumbing
There needs to be adequate hot and cold water in the kitchen and bathrooms. If there are signs of leaks repairs might be required. The water heater will be checked to ensure it is functioning correctly.
These are just some of the things that could become a problem during the appraisal. Other relatively common issues include; pests, lead paint, drainage, faulty heating and air conditioning, and broken appliances included in the purchase.
Other Virginia FHA Loan Requirements
Mortgage Insurance Premiums
When you finance your home purchase with an FHA loan, you will have to pay mortgage insurance premiums. MIP is similar to private mortgage insurance (PMI) charged with conventional loans and has to be paid monthly.
With MIP there is also an upfront charge and it has to be paid on every loan even when you have a 20% down payment. Private mortgage insurance isn’t required with conventional loans when the loan-to-value (LTV) is less than 80%.
PMI can be canceled when you have 20% equity in the home, but MIP could be paid for the term of the loan.
The upfront mortgage insurance premium is currently 1.75% of the loan amount. The annual MIP is between 0.50% and 0.75% for mortgage terms over 15 years and between 0.15% and 0.65% for shorter terms. The annual mortgage insurance premium is divided by 12 and added to monthly mortgage payments.
These insurance premiums are used to protect the lender should the borrower fail to stick to their payment schedule.
Virginia FHA Loan Limits
If you want to buy a very expensive home for the area, it might not be possible with an FHA loan. Loan limits vary between states and are higher in high-cost parts of the country. The maximum loan amount can vary between counties in the state and is generally lower than the maximum available with a conventional loan.
The loan limit for a single-family home starts from $498,257 in many Virginian counties, rising to $1,149,825 in areas including Arlington County, Clarke County, Fairfax County, Fredericksburg, and a few others. You can view a complete list of county loan limits in Virginia by selecting Virginia in the state field. Limits increase for 2, 3, and 4 unit properties.
Occupancy
When you buy your Virginian home with an FHA loan, it has to be your primary residence. When you close on the home you have to move in within 60 days.
The FHA doesn’t allow you to use their loans to buy investment properties or second homes.
Summing Up the FHA Mortgage Requirements
When you are buying a home in Virginia, an FHA loan could be your best option. It allows you to buy a home without the best credit, and offers a low down payment option, but still has competitive interest rates.
