After the financial problems of the Great Depression, the federal government created the Federal Housing Administration and approved lenders to offer the FHA mortgage. This single action by the government created one of the most popular types of loans that is still used today. Listed below are guidelines and basic information about the FHA program for Wisconsin residents and how it helps potential home buyers.
Essentials of the Program
Low Down Payment
Probably the most attractive aspect of the FHA mortgage is the small down payment requirement. While some loans may require between 5% and 20% of the home’s selling price as an upfront payment, this is not the case with FHA. Buyers are required to pay as little as 3.5% of the home’s selling price as an upfront payment.
Furthermore, the money that is used for a down payment does not have to come directly from the borrower’s pocket. A family member or certain non-profit agencies can give the money to the borrower as a gift. Just be sure to check with your lender about the necessary documents for recording the gift to the buyer.
On the heels of the low down payment requirement, the credit guidelines are the 2nd most popular reasons to use this mortgage. The credit rules for getting approved are much more relaxed when compared to a conventional mortgage. This is not to say that any credit score can qualify. But it is safe to say that many people who may have made financial mistakes in the past will find a quality mortgage with FHA.
Assistance from Sellers
Buying a home involves more than just the buyer, seller, and real estate agent. There will be an appraisal of the home, research of the deed and title to the home, property taxes due to the local county agent, insurance on the home, along with a host of other items. All of these services can add up to a hefty sum of money. In order to help the buyer, FHA will let a seller of a home give 6% of the home’s price to the buyer to be used for covering the closing costs.
This particular item must be negotiated between the seller and buyer, usually with assistance from real estate agents. It is not required by FHA, merely a bonus.
FHA Loan Limits
There are some restrictions on the amount of money that can be offered for a mortgage. Regardless of credit score or income, a mortgage over the maximum level is not allowed.
For most counties across Wisconsin, the highest authorized by FHA is $420,680 for a single-family home, as of January 2022. There are certain high-cost areas, like Pierce County, where the maximum amount is higher. Check with your local lender to find out the highest amount allowed in your area.
Documenting Income and Assets
In order to gain approval for this mortgage, all borrowers must have documented proof of their income and assets.
For income purposes, all pay stubs from all jobs over the last 60 days, as well as W-2 forms for the past 2 calendar years will be sufficient. For any borrower that is self-employed, personal tax returns, as well as business tax returns from the last 2 calendar years, will need to be provided.
Home buyers that intend to use their own money for the down payment and/or closing cost funds will need to give proof of the funds. This can come in the form of bank statements for savings, checking, or CD account or it can be a recent statement from your investment adviser that shows your balance in stocks, bonds, or other accounts.
Guidelines state that a home buyer may purchase a single-family home or a single condo unit. Also, multi-family properties such as a duplex, triplex, or quadplex may also be purchased with this mortgage.
However, vacation properties nor investment homes can be purchased. This is due to the restriction that borrowers must intend to live in the home as their primary residence.
Income vs Debt Ratios and Rules
Lenders will examine a borrower’s current debt obligations and compare that to their monthly income in order to calculate a ratio. This is commonly referred to as a debt to income ratio.
The first part of the ratio compares a home buyer’s current debt requirements to their monthly gross income. Real estate agents, as well as mortgage lenders, sometimes call this the front ratio or front-end debt to income. As a rule of thumb, having a ratio of 28% or lower is ideal.
The second part of the ratio compares the home buyer’s total monthly income to their current debt as well as the potential new mortgage payment. Lenders and real estate agents typically call this a back-end ratio. The rule of thumb for the back-end ratio is 41%.
To illustrate, picture a husband and wife that have a combined gross income of $96,000 per year. Divided by 12 equals $8,000 per month in gross income. If the couple has various payments to credit cards, auto lenders, and student debt that totals $1,593 then their front end ratio would be
$1,593 / $8,000 = 0.19912 or 19.9%, which is well below the 28% mentioned above.
If the couple is considering the purchase of a home with a monthly mortgage payment of $1,233 then their other ratio would look like this.
$1,593 + $1,233 = $2,826 total of debt payments plus new mortgage payment
$2,826 / $8,000 = 0.35325 or 35.325% which is again way under the 41% ratio mentioned above.
As mentioned, these are just rules of thumb. Many borrowers get approved even though one of their ratios may be slightly higher than the ratio limits.
Overcoming Credit Obstacles
Different rules apply to specific credit situations that buyers may have faced in the past. The following list represents some of the most common credit hurdles and the corresponding guidelines.
All child support payments must be up to date in order to qualify.
Student loan debt will be calculated as part of the debt-to-income ratios. Currently, FHA will count 0.5% of the total of all outstanding student loans as a monthly debt obligation in order to calculate both the front-end and back-end debt-to-income ratios.
Any potential home buyer that has filed for a Chapter 13 bankruptcy can apply after the discharge of the bankruptcy. In fact, the payments that were made to the Bankruptcy Court can be used as qualifying credit.
Potential buyers that previously filed a Chapter 7 plan will need to wait a minimum of 2 years after receiving their discharge from the bankruptcy court.
A borrower that has outstanding taxes owed to the United States federal government is not allowed to get approval. The taxes will need to be either paid off entirely or a suitable plan of repayment put in place.
There are 3 different types of refinances to help current homeowners maximize their home’s worth or save on interest.
Rate and Term Refinance
People that have a current FHA mortgage, or another type of mortgage, may choose to use a rate & term refinance. The purpose of this type of refinancing is to take advantage of either a better interest rate, a better term, or both.
For example, someone that has 20 years left on a mortgage and is currently paying 8% interest could choose to refinance to a 15-year fixed-rate with a much lower rate. This would reduce the number of years to repay the mortgage and save interest.
Or, someone may have 25 years left on a mortgage with 7.5% and may wish to take advantage of the currently low rates.
The rate and term refinance do not allow borrowers to take out cash in the loan.
People that have either paid on their home for a while or are the beneficiaries of rising home value, may wish to tap into their home’s equity. Getting a cash-out refinance mortgage pays off the existing mortgage and the extra funds are given to the borrower to use as they please. The money can be used to pay off other debt, go on a vacation, do improvements to the home, buy a boat, or basically any other reason.
Any qualifying borrower can apply for the cash-out refinance, regardless of the type of their current mortgage.
This last type of refinancing is only available to people who are currently making payments on an FHA mortgage. For borrowers that meet the guidelines, a streamlined refinance can allow the borrower to get a better interest rate without the typical paperwork of a normal FHA mortgage.
Minimum guidelines are:
- The Borrower is not allowed to have more than a single 30-day late payment within the last 12 months.
- Any Borrowers with 60 days late payment on the mortgage, or higher, are not allowed
- The borrower must state that they will continue to reside at the property as their primary home
- The borrower does not have to show proof of income
- An appraisal may be waived
Borrowers that have made steady payments on time will have a better chance of approval.
Summing Up the FHA Program for Wisconsin Residents
Based on all of these attractive qualities, it is easy to see why so many people choose an FHA mortgage. Whether it is to buy a home, refinance an existing mortgage, or buy a fixer-upper, the variety of options makes it affordable to become a homeowner.