What is an FHA Home Loan?

FHA home loans offer a special opportunity for you to become a homeowner with the help of a government insured mortgage. The mortgage is issued by the Federal Housing Administration. These loans have more flexible and forgiving terms and in most cases can offer you lower interest rates and lower minimum credit score requirements than other types of loans.

Are you tired of renting? Have you been living frugally for way too long and ready to upgrade your living situation for you and your family? An FHA loan may be a great option to make your dreams of home ownership a reality.

FHA Purchase

Why an FHA Mortgage Might Be Right for You

The FHA loan program has been more popular than ever the last few years as credit has become harder to get. Getting an FHA loan is popular for new first-time home buyers as well as those who have been through a financial credit event like a short sale, foreclosure or other financial hardship in the past and are looking to get a mortgage to get back on track. It was created to help more borrowers realize the dream of homeownership due to its lenient underwriting guidelines and low-down payment options. Due to this, it’s considered the most flexible home purchase program available today.

What’s so great about an FHA loan? 

  • 3.5% down payment
  • Below market interest rates 
  • Up to 57% debt to income ratio
  • Seller can pay your closings costs (up to 6%) 
  • Gift funds from family members allowed
  • Non-occupying co-borrowers can be added to help qualify 

What are the minimum requirements? 

  • 620 credit score of higher
  • 2-year work history 
  • Primary residences only 

These are the questions you should be asking yourself at this stage: 

  • I’m I ready to become a homeowner? 
  • Is my credit at least a 620 or higher and do I have the monthly income to support my current debt load plus a new mortgage payment? 
  • Do I have access to a 3.5% down payment? 
  • Do I have any major credit events in my past that could prevent from qualifying? 

It’s always good to ask these tough questions early in process that way you can plan accordingly and approach the FHA approval process with confidence. 

Coming Up with Your Down Payment

There are various ways of coming up with the down payment money for your new FHA home purchase. Just so you know what everyone else does when they are faced with this situation, here are some traditional places that most people use to pay for their down payment: 

  1. Your 401k
  2. Your IRA
  3. Borrow from friends and family
  4. Down payment gift money from friends and family
  5. Downsize the wedding and use the difference you save
  6. Your current savings 

Gift Money from Family and Friends 

If you do not personally have the down payment, then the best and most recommended way to come up with the funds is to tap into your network of friends and family for a gift or loan. 

If you find yourself thinking about asking friends and family for financial help with your down payment, you are not alone. According to the National Association of Realtors, about 25% of first-time homebuyers get some form of financial assistance from family and friends. Actually, they are the best source of help when buying a home because unlike a lender, family and friends will also be there to help you with the brand-new responsibilities of homeownership. 

When you are first contemplating approaching your family or friends for financial assistance, it is best to be prepared with your mortgage pre-approval letter and a standard letter explaining what the money will be used for, called a gift letter. The mortgage pre-approval letter answers any asked or unasked questions regarding the legitimacy of your intent to use the money for a home, as well as details exactly how much you will need to come up with to close. The gift letter outlines exactly where the funds will be going. 

Types of Properties Allowed

  • Single family homes (SFR)
  • Planned Unit Developments (PUDs), think Townhomes
  • Condominiums
  • Multi unit (duplex, triplex, quadruplex)
  • Second homes and investment properties

Waiting periods for getting an FHA after a credit event and reestablishing your credit:

  • Chapter 7 Bankruptcy: 2 year waiting period, starting from the discharge date is required
  • Chapter 13 Bankruptcy: 1 year waiting period, starting from the discharge date is required 
  • Foreclosure: 3 year waiting period, starting from the discharge date is required 
  • Short Sale or Deed-in-Lieu: 3 year waiting period, starting from the discharge date is required 

FHA Loan Ready Checklist 

When you set your phone meeting with your FHA mortgage advisor, be prepared. Here are the documents you want handy when you have your no obligation consultation.

  • Pay stubs for the last 30 days or most recent leave and earning statement 
  • W2s for the last two years for all borrowers and all employers 
  • Last two years of complete tax returns (if self-employed) 
  • Government issued ID (driver’s license or id card) 
  • Most recent bank statement (all pages) 
  • Purchase contract (If executed) 
  • Be sure to ask your FHA mortgage adviser for the specific documents needed for your unique mortgage situation. 

Pre-Approval Letter 

Once your FHA mortgage advisor has the proper information in hand and you have completed the application, they will complete your approval and go over all the details with you. You will also receive a pre-approval letter for you to start shopping for your new home. This is a critical step since it will let sellers know you are serious and are approved to purchase their home. Your realtor will use the pre-approval to help negotiate and get you the best deal on your home.