FHA Loan Requirements (2020): A Clear And Helpful Guide

FHA Loan Requirements (2020): A Clear And Helpful Guide

Hey, Kyle here with kyleseagraves.com. My goal is to help you get a
crystal clear home loan that helps you win the house you love. So in today's video, we're talking
about the requirements for FHA loans. If you watch the previous video on
conventional versus FHA, you might have decided FHA is the option for
you and FHA loans are fantastic loans. They're actually a program created
by the government, some years ago to help, mainly, people get into
home ownership for the first time. So they were one of the first true first
time home buyer programs, but now FHA has morphed into such a large program that
so many lenders carry that it's not just for first time home buyers and FHA has
really great, requirements and, rules on how you can get the FHA loan that make
it really accessible for a lot of people.

There's a lot of pros. There's also some cons of we'll
talk mainly about some of the requirements for getting an FHA loan. So right up front, the two big things
that people are concerned about when when we're talking about requirements,
is how much money do I have to put down and what does my credit score have to be? So, first of all, how much
money do I have to put down? FHA will allow you to do a
minimum down payment of 3.5%. As long as your credit
score is 580 and above. Okay. So that is one of the lowest down
payments that you can get outside of conventional sometimes can go down to 3%.

USDA will do 0% and VA will do 0%,
but 3.5% down is a fantastic option if you have a credit score, 580
and above, which most people do. If you have a credit score of less than
580 down to 500, you'll be required to put 10% down and you might have
some extra reserve requirements, which means you need some extra money
in the bank to close on the loan. Also with ,FHA the requirements in terms
of how much debt you can have versus how much income you can have, are a lot
more lenient than conventional loans. So conventional loans tend to
be a little bit strict on, what your credit score looks like. Normally conventional loans like a
higher credit score, and they want you to have a lower debt to income
ratio, which basically it means how much monthly debt obligation do you
have divided by your total income.

So, FHA will allow us to go
up to 56% most of the time. So you probably don't know your
debt to income ratio offhand, but 56% is a pretty high number. That's saying that if you took your income
times 0.56, that's how much monthly debt you could carry, every single month,
including including your housing payment. It's pretty high up there. Which means that if you have a,
a good amount of debt or maybe student loans, FHA might be a really
great option for you because it allows, some more leniency in there.

Or if you have maybe income on the
lower side, maybe you're in a high cost area and you need a little bit more
flexibility FHA does not have as strong requirements on that debt to income ratio. So then that brings us to student loans. Student loans are a big debt that
we're seeing kind of sweeping across the nation and student loans, how
do they affect you with an FHA loan? So your student loans are either
going to report a monthly cost, a monthly minimum cost on your credit
report and if it doesn't, so if you're loans are deferred or in forbearance,
then what will happen is your lender will take 1% of your balance and
use that as your monthly payment.

So for instance, let's say you
had $10,000 in student loans and it was deferred until next year. What your lender would do is take that
10,000 and multiply it times 1% and then use that as part of your debt income
ratio there if there wasn't like a minimum payment showing up on the report,
also some requirements with FHA loans. They're a little bit more strict in terms
of with the property is allowed to look like, and not how it looks cosmetically,
but FHA is really concerned about property requirements when it comes to what
they call health and safety standards. So, conventional loans are a lot
more lenient on what you can buy. For example, most people will buy
foreclosed properties with a conventional loan, but FHA is more strict and they want
to make sure that everything in the home meets their health and safety standards.

So that means, you can't have
things like missing rails on steps. You can't have chipping paint, can't
have broken windows, you cannot have things rotting or things torn down. You need to make sure that the home
is, has no health and safety issues. And if there's any possibility of it, then
an FHA appraiser is going to call it out and want it fixed before you've moved in. So it's something to be aware of. There is an FHA loan called a 203K
that allows you to do some rehab, but that involves a little bit
more than just the traditional FHA. So if we're sticking to traditional FHA
property requirements are a little bit more strict on the FHA side, your realtor
and mortgage advisor can help you navigate some of those restrictions as well. As far as asset requirements for
FHA loans, so how much money do you have to have in the bank? FHA allows you to take all of
the funds needed as a gift. So for instance, if your down payment
and closing costs, let's say the whole thing together is going to
cost you 10 grand out of pocket.

Kyle

You are allowed to get a gift from a
family member for that entire amount. Some loan products don't let
you get a gift for all of it. Sometimes they want, you know, a certain
requirement in there, but you're allowed to get a gift for the full amount of the
down payment and closing costs as well. And finally, one of the biggest,
drawbacks is the mortgage insurance requirement on FHA loans. So they're fantastic loans, but
what happens is FHA loans are given out by lenders across the
nation, but the federal government is the one who backs these loans. It's, it's called a, insured loan, which
means that the government makes sure that if the lenders ever have to foreclose on
a property, that they'll get their money back because the government insures it.

So the person who has to foot the bill
for the insurance is you unfortunately. And that comes in two ways. The first way is there's an
upfront mortgage insurance premium. So all that means is you take
your initial loan amount. Let's say it was a
hundred thousand dollars. FHA is going to charge 1.75%
and add it to the loan. So instead of having a loan for a
hundred thousand dollars, you now have you now have a loan for $101,750. Okay, so that's one that one thing to
keep in mind, and then you also have to pay monthly mortgage insurance.

Over the life of the loan. That mortgage insurance will not
fall off, unless you put 10% down, if you put 10% down, then the mortgage
insurance will drop off after 11 years. But if you put any less than 10%
down, mortgage insurance will be there for the entire duration of the loan. So you have this really great flexibility. It comes at the cost of mortgage
insurance, but then another pro to, kind of offset some of the cost of
the mortgage insurance is since it's backed by the government, you usually
can get really low interest rates than any other loans on the market.

Okay. So the reason why the interest
rates lower is because the lenders have less risk of losing their
money since the loans are insured. So if you get an FHA loan, that
interest rate should be a lot lower than anything else you're
seeing on the conventional side. So if you are going with an FHA loan,
make sure that it's a, you know, it has a low interest rate because you're going
to be paying that mortgage insurance. You need these costs to offset
each other a little bit. You can't be paying a lot in mortgage
insurance with the upfront and the monthly mortgage insurance plus
paying a high interest rate, so something to definitely keep in mind. Overall FHA loan requirements are pretty
lenient as far as what can go in on a pretty traditional loan, it's hard to
find any other loan that is going to be more relaxed in its requirements,
unless you're going into something like a portfolio loan, which has really high
interest rates, probably around the 7%.

Those are loans where you can do one
day out of bankruptcy or, only, you know, no income stated type loans. You can do those loans and
have more lax requirements, but they cost you a lot more. FHA is a fantastic option if you're
looking into getting a loan in the easiest way possible, the best way to figure
out if it's the right loan for you is to talk with your mortgage advisor and
see what options do you have available.

And can you compare the cost
of the conventional versus FHA? If you qualify for both and what's
going to be the total cost over a period of time, the requirements for an
FHA loan really are not too terrible. Usually what you're going to find is
that 3.5% down, you need to make sure the home is pretty much ready to move in. You're also going to have those
mortgage insurance requirements, and you're a lot more lenient on
the requirements it's of debt and income, that you're allowed to have. So, let me know, let me know some
of your thoughts and questions about FHA loans in the comments. I'd love to answer some questions
that you have, or hear some of your experience with an FHA loan in the past. Thanks so much for watching..

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