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 are still used today. Listed below are guidelines and basic information about the FHA program for Wisconsin residents and how it helps potential buyers.
Qualify for an FHA Loan
Low Down Payment
Probably the most attractive aspect of the FHA home loan 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 percent of the home’s purchase price as an upfront payment.
Furthermore, the money that is used for a down payment does not have to come directly from the buyer’s pocket. A family member or certain non-profit agencies can give the money to the buyer 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 Maximum Loan Limits in Wisconsin
There are some restrictions on the amount of money that can be offered for this mortgage. Regardless of credit score or income, loans over the 2023 FHA loan limits in Wisconsin are not allowed.
For most counties across the state, the highest authorized by FHA is $472,030 for a single-family home, as of January 2023. 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.
View Wisconsin FHA loan limits by county
Documenting Income and Assets
In order to gain approval for this mortgage, all buyers 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 buyer that is self-employed, personal tax returns, as well as business tax returns from the last 2 calendar years, will need to be provided.
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.
FHA 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 and investment homes cannot be purchased. This is due to the restriction that buyers must intend to live in the home as their primary residence.
Income vs Debt Ratios and Rules
Lenders in Wisconsin will examine a buyer’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 buyers get approved even though one of their ratios may be slightly higher than the ratio limits.
FHA Mortgage Insurance Premiums (MIP)
FHA MIPs are a necessary and mandatory expense for homeowners who take out FHA loans. These premiums are in place to protect lenders in the event of borrower default. There are two types of FHA insurance premiums: upfront and annual.
Upfront premiums are paid at the time of closing and typically equal 1.75% of the loan amount.
Annual premiums are paid monthly and are based on the borrower’s loan-to-value ratio and loan amount. The higher the ratio, the higher the premium. Both premiums can make homeownership more accessible for buyers who may not have a significant down payment, but it’s important to budget for the ongoing expense of these premiums.
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 school 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 buyer 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 FHA refinances to help current owners maximize their home’s worth or save on interest.
FHA Rate and Term
People that have a current FHA loan, or another type of loan, may choose to use a rate & term refi. The purpose of this type of home loan 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 loan and is currently paying 8% interest could choose to refi 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 loan with 7.5% and may wish to take advantage of the currently low rates.
The rate and term refi do not allow owners to take out cash in the new 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 refi loan pays off the existing mortgage and the extra funds are given to the owner 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 owner can apply for the cash-out refi, regardless of the type of their current loan.
FHA Streamline Refinance
This last type of refinancing is only available to people who are currently making payments on an FHA loan. For owners that meet the guidelines, a streamlined refi can allow you to get a better interest rate without the typical paperwork of a normal FHA loan.
The minimum guidelines are:
- You are not allowed to have more than a single 30-day late payment within the last 12 months.
- Any owners with 60 days late payment on the mortgage, or higher, are not allowed
- The owner must state that they will continue to reside at the property as their primary home
- The homeowner 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 Loan in Wisconsin
Based on all of these attractive qualities, it is easy to see why so many people choose an FHA loan. 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.