Understanding FHA Guidelines and FHA Requirements for a Mortgage

Are you looking to gain a further understanding of FHA guidelines and FHA requirements? When applying for an FHA loan, being pre-approved by a lender that goes by FHA guidelines will make for an easier process. Some lenders have tougher FHA income requirements:

Require a higher credit score.
Require a larger FHA down payment.
Have additional guideline that can make the loan process more difficult.

The FHA Handbook. 4000.1 covers minimum requirements when it comes to FHA loans. This book is available to the public and can often be difficult for real estate and mortgage professionals. The process is streamlined through an Automated Underwriting System (AUS).

5 Steps When Applying for an FHA Loan

1^st step: contact a mortgage Loan Originator to obtain a list of loan documentation required for underwriting and processing a loan. Depending on your case scenario, loan documents can vary.

2^nd step: after the Loan Originator reviews documentation, they will ask for authorization to pull credit and put together a complete application.

3^rd step: at this point, they will run an Automated Underwriting System (AUS) to determine your eligibility results. Not all Loan Officers have access to AUS and rely on other people in the company to run the technology driven underwriting process that provides a automated loan decision.

4^th step: the Loan Originator will review AUS findings to determine if findings are met.

5^th step: go over a comfortable mortgage payment that includes (PITIA):

Principal.
Interest.
Taxes.
Insurance.
Homeowner’s association dues.

At this point you will get a pre-approval letter to start shopping for a home.

FHA Down Payment Requirements

FHA guidelines require a minimum required investment, which is a contribution of cash or cash equivalent of at least 3.5% of the adjusted value of the property. The minimum required investment must come from an acceptable source.

The down payment is 3.5% for FHA loans with a 580 FICO or higher.
10% down with a FICO credit score under 580.

FHA grants are available, but you should go over the pros and cons with your Loan Originator.

Acceptable Sources for Down Payment

The down payment must come from an acceptable source and should be reviewed during the pre-approval process. The FHA down payment or minimum required investment can be satisfied as long as the gift is an acceptable source of gift funds.

FHA guidelines state that a gift can be provided by:

The borrower’s family member.
A employer or labor union.
Clearly defined close friend with documented interest in the borrower.
A charitable organization.
Public entity or government agency providing home ownership assistance to first-time home buyers and low or moderate income families.

The gift contributions has to have no expectation of repayment. During the underwriting process, the underwriter will ask to source large deposits. Going over large deposits will prevent any delay and prevent any issues during the underwriting process.

FHA Income Requirements

Minimum FHA income requirements all depend on the Automated Underwriting System (AUS). Income depends on your particular case scenario, which the Automated Underwriting System (AUS) analyzes credit, capacity, and collateral. In some cases, borrowers can go up to higher debt-to-income ratios and this is determined during the pre-approval process and finalized in underwriting.

The Automated Underwriting System (AUS) is compiled of data elements that determine the credit risk evaluation by:

Including a credit report, liabilities/debt.
Effective income, assets/reserves.
Adjusted value.
The projected mortgage payment.

Once the Automated Underwriting System (AUS) is run, the results are determined and either:

A loan can be approved/eligible.
Refer/eligible, which can be eligible for a manual underwrite.
Ineligible results.

Often borrowers believe that they are approved for a loan because they have a pre-approval letter, but the loan still has to be underwritten. Once a subject property is under contract or a borrower applies for a to-be-determined mortgage pre-approval, they will have to go through the loan process to obtain a loan commitment and the clear to close.

FHA Guidelines for Bankruptcy

Bankruptcy waiting periods are different depending on the loan type. FHA guidelines for bankruptcy are as follows according to the FHA handbook:

Two years have to be elapsed for a Chapter 7 bankruptcy. A Chapter 13 bankruptcy does not disqualify a borrower from a FHA loan:

12 months of the payout period must be elapsed when in a Chapter 13 bankruptcy.
- Borrower will need written permission from the bankruptcy court to enter into the mortgage transaction.
- All payments have to be made on time.

In some cases there are extenuating circumstances for shorter waiting periods, but can be difficult unless proper documentation is evident.

FHA Requirements for Foreclosure

FHA requirements for foreclosure and a deed-in-lieu of foreclosure are three years from the case number assignment.

The trustee’s deed date must be three years out from the case # assignment.

Collections, Judgments, and Federal Debt

When applying for an FHA loan with collections, judgments and federal debt:

Medical collections are obligations that are not considered debt.
Federal Debt that is delinquent may result in a borrower being ineligible for a FHA –insured mortgage.

Once the federal debt is reflected by public record, credit report, CAIVRS, or another equivalent system, the status of the delinquency must be verified.

Cumulative outstanding collection account balances of $2,000 or greater require:

Debt to be paid in full from an acceptable source of funds either prior to settlement or paid at the time.
Verify a payment arrangement has been made or if a payment arrangement is not available use 5% of the outstanding balance to calculate debt-to-income ratios.

No Credit History and Non-Traditional Credit

Borrowers are eligible for maximum financing using non-traditional credit. When a score is above 580 credit score, a borrower may qualify for 3.5% down with a manual underwrite. Examples of non-traditional credit include, but not limited to:

Rental housing payment.
Telephone service and utility company, such as gas, electricity, water, television, and internet service.

A minimum of three credit references with 12 months is required when using non-traditional credit.