July 29, 2010 (FreeRateUpdate.com) – FHA mortgages are loans that are insured by the Federal Housing Administration and were designed to help borrowers who do not meet the strict guidelines of conventional loans. Required down payments for FHA mortgages are lower, as well as the interest rates, making them very desirable especially for first time home buyers. Although the easiest of all loans, borrowers still must consider the guidelines when qualifying for an FHA mortgage.
Income-Borrowers must demonstrate a steady employment history with at least 2 years at the same employer. Income must be steady or increasing over the 2 year period. If there is a change of employment, it must be in the same line of business.-In order to verify employment and income, the lender will require 2 years of W2’s, pay stubs covering the most recent 30 days which show year to date income and tax returns. In addition, the lender will also get a verbal verification of employment.
Credit
-A borrower’s credit must be in good standing with less than two 30 day late payments within the last 2 years. Currently, the desired credit score is 620 with a minimum credit score of 580.
-Credit will be considered for a Chapter 13 bankruptcy after one year and after 2 years for a Chapter 7 bankruptcy. In both cases, good credit must have been established after the date of the bankruptcy. Many times, the lender will also require a copy of the bankruptcy discharge papers.
-If a borrower has a foreclosure on their credit, the foreclosure must be at least 3 years old with good credit established after the foreclosure.
-Any civilian judgments must be paid off prior to closing. If there is a delinquency on any federal debts such as taxes and student loans, the borrower will be disqualified for an FHA loan.
-Proof of residency history is also required or canceled rent checks for 1 to 2 years, depending on the lender and the loan application.
-If alimony and/or child support is be paid out by the borrower, this will be included in debt ratios and will need to be documented with legal, court reported papers.
Assets
-Borrowers must have evidence of sufficient funds to close on an FHA mortgage. In order to verify assets, lenders require 2 months of the most recent bank statements or a verification of deposit and a 30 day most recent bank statement. In addition, any 401k or pension statements and investment statements will be required.
-Any financial gifts that are being used for the down payment or to qualify for the mortgage will also have to be documented by the donor.
Additional Information
-Alimony, child support and disability will all need to be documented. If these are used as additional sources of income, there must be proof that this income will continue for at least 3 years.
-Borrowers must have a valid driver’s license or identification, social security card, green card or work permit. Any expired identifications will not be accepted.
-To qualify for an FHA mortgage, a borrower must have a minimum down payment of 3.5%. There are also qualifying ratios to consider. The total monthly debt which includes the mortgage payment, credit cards, auto loans, student loans, etc. must not exceed 43% of the total monthly income. The PITI (principal, interest, taxes, insurance) cannot exceed 33% of the total monthly income.
Many FHA mortgages are approved with automatic underwriting, but all FHA files are examined by an FHA underwriter who may request additional information and documentation depending on the integrity of the file. Because of this, many FHA mortgages are approved by the FHA underwriter as they consider various compensating factors. As a rule, there are no longer any documentation waivers with credit scores under 700. Borrowers must be aware that, in many case, lenders have their own additional requirements of documentation.
Although it may look as though it is difficult to qualify for an FHA loan, it is not. The most difficult part is having all of the required documentation ready and in order when applying for an FHA mortgage. For the borrower, being honest, upfront and proactive with documentation during the application process will simplify qualifying for an FHA mortgage and result in a quicker closing.