Now, we're gonna be talking about FHA loans, and if this is going to be a good option for you or not. FHA is a fantastic option for not just first-time homebuyers, but really anybody looking to get a loan, especially if you need some flexibility that FHA loans offer along with some special tricks and features that it has, that a lot of people don't know about.
We're going to cover all of the details you need to know to see if you can get approved for one, the steps to get approved for one. If it is going to be the best option for you to move. Or if you want to move forward with a different type of loan.
So let's give her some of these highlights. First. First of all, it's not just for first-time home buyers, you do not have to be a first-time homebuyer to get an FHA loan.
Now it does have a minimum of 3.5% down payment. This is not the lowest down payment from the major types of loans, conventional FHA, VA, and USDA are the four main types of loans that most people get.
Conventional loans actually have 3%. USDA loans have 0% down and VA loans have 0% down. So a lot of people think, oh, 3.5% down is much better than the 20% down needed on conventional. When actually you only need 3% down on a conventional loan if you're a first-time. However, 3.5% down still is super low.
Also what's really great about FHA compared to something like a conventional loan is it goes all the way down to a 500 minimum FICO credit score. This is incredibly lenient and FHA is one of the most lenient loans in terms of credit score and getting approved. So usually what you find is people who can't get approved for a conventional loan, they look at FHA next.
If you can't qualify for conventional the times are shorter for things like if you have a bankruptcy or foreclosure. It's more lenient for lower credit scores and more lenient if you have any late payments or things like that, or even if you just have a higher debt-to-income ratio.
Basically, if you can't get approved with conventional, trying FHA is going to be a good option to explore. If you do really want to qualify for a home.
Now, FHA does tend to be best for lower to middle credit scores. Usually less than 680. If you have a higher than 680 credit score, you still can get an FHA loan which could be a good option.
If you have high debt-to-income. But usually, you're going to find better rates in terms, if you get a conventional loan if you have a higher than 680 credit score.
Now, one thing I really want to stress is FHA should not be a long-term option. Usually, the way I like to think about FHA is almost like a bridge.
You use it now to help you get into a home because that's what you need to qualify is an FHA loan, but then there are steps that you need to take to figure out how to qualify for a conventional loan. Because we want to get low. Are we going to get cheaper debt for the long term and FHA tends to be a more expensive loan long-term.
Let's walk through these terms really quickly because sometimes we gloss over the acronyms and don't cover what they are. So it is a type of loan offered by many different lenders.
It is not offered through FHA. It is a type of loan insured by FHA. So tons of lenders, most lenders in the US offer FHA loans.
What can happen is FHA creates the base guidelines. But then lenders can have rules on top of it. So if the base rule is a minimum 500 credit score, different lenders can actually say, actually our minimum credit score is 640. So even though the base was 500, they can add rules on top of it if they want to.
So FHA, Federal Housing Administration, and what they do is they don't make loans. They just insure them.
It's overseen by HUD, which is the US Department of Housing and Urban Development, and they don't make loans. They just ensure payments to investors.
So you're not going to go to FHA and say, I'd like a loan and they give you. What ends up happening is lenders issue FHA loans, and then what they do is they go to FHA. The FHA will give like a seal of approval on that loan. Then they'll ensure the payment to investors on the secondary market, which is why FHA loans users a lot more lenient because they're backed by the federal government.
Now let's talk about some COVID changes that have happened from 2021 to 2022 and 2021 when COVID's first lockdowns were starting, and this was very new for everybody. What happened is a lot of lenders were tightening the restrictions on loans. And so one of the big things that were happening is we saw credit score minimums skyrocket up to around 640. This is one of the overlays that was talked about except most lenders were adopting those overlays.
Overall, getting a loan, an FHA loan when COVID was first happening was a lot more difficult than it is now. A lot of these things are relaxing and becoming more lenient. So credit score overlays are disappearing, but not totally most lenders have lowered the 640 minimum that they needed. Some lenders are still having their own artificial overlays on there as well. So it's just something to keep in mind.
If you need to find, usually if you find a lender that has overlays, you might need to explore. Multiple different lenders until you find one that has one that can accommodate what you're looking for.
Self-employment requirements are mostly back to normal. For a while, there were some stringent requirements on proving future income. If you're self-employed.
Future employment now is starting to become allowed for a while. It was not being allowed. For example, getting a loan is just based on your job offer. FHA does allow you to get a loan based on a job offer. If you start that job within 60 days of closing on your loan when COVID first was happening. This was almost not allowed across the board, and now that is coming back.
Then if you have been in forbearance, you need to show three on-time payments host forbearance to be able to qualify for a new FHA loan. So it's something to keep in mind. If you do have a loan, if you're renting right now, then that's something that you won't need to worry about.
Now, the down payment does change based on your credit score. So if you have a 500 to 579 credit score, you're going to need 10% down. If you have a 580 credit score in higher, the minimum is 3.5% down.
Some really interesting note, which I will cover here in just a little bit is that if you do have 10% down, mortgage insurance will fall off. If you put less than 10% down, mortgage insurance will not fall off. This is a pretty big difference, right?
If we're talking about a $400,000 home, 10% down is $40,000 as a down payment, 3.5% down is $14,000 down as a down payment. So if you're in that range or if you're like a 570 range, if you can increase your score up to 580 or higher, you can reduce your down payment dramatically from 10% to 3.5% down.
It's important to remember, you can always put more down than the minimum if you would like to.
There are also down payment assistance programs that you can attach with FHA. These are going to be based more specifically on your county or state programs. That's, we're going to find a lot of down payment assistance in there as well. If you're having trouble with the 3.5% down.
However, it is important to keep in mind that a down payment often can have some sort of I don't want to say necessarily a catch in a bad way, but there are terms that you consider. Sometimes the rate is higher. Sometimes the loan has to be paid back. Sometimes you have to stay in the home for 5 to 10 years. You want to make sure you understand those terms before you accept down payment assistance.
Do you keep in mind though, when you are buying a home how much you are putting down, how much equity, how much stake you have, or ownership you have in your home?
Because the 3.5% down is a very small sliver of ownership and a home. So for instance, it is just this green sliver here at the top of this square. That is 3.5% down. Of the whole value of the home, which isn't necessarily bad. It's just important to keep in mind. So if the market changes, you may be in your home for a while and not be able to sell it. If your home decreases in value you might not be able to sell it without bringing money to the closing table to pay off the remainder of the loan. So it's important to keep that it usually is much safer to put in a higher down payment if you can. But FHA does go down to 3.5%. Now the closing costs a portion.
You have your down payment and the closing costs with all types of loans with FHA, it's going to be very similar to pretty much every other type of loan. You do have upfront mortgage insurance costs that I will talk about in a slide here in just a little bit. All the other closing costs are going to be the same. You want to talk with a lender to get an estimate of what third-party costs are going to look like when you were buying a home with an FHA loan.
Now, when you do have your down payment and closing costs, the lender needs to actually verify that money. You can't just say, I want to buy this house and they say, Down payment and closing costs are going to cost you $15,000 and you say, sounds good. I'll be there.
They have to actually verify the money where it came from and that you have it in your account. So usually this is done with six days' worth of bank statements, showing that you have the funds to be able to close on a loan.
Now with that, usually FHA does look at anything that is 1% of the purchase price or higher as a large company. These are non-payroll deposits. So for instance, if you're buying a home that's $300,000 and you had $4,000 in cash and you deposited in your bank account, they have to then ask, where did that $4,000 deposit come from? And usually, cash is not acceptable, unfortunately. So anything that's non-payroll related, usually they're going to question and want to see that it came from what's called an acceptable source.
Now you are allowed to have collateralized loans, so alone from a 401k or other real estates that you have, like a home equity line of credit that is allowed.
You're not allowed to use unsecured loans like a personal loan or credit card. You cannot use a credit card for your down payment. You can't use it for your closing costs and things like that.
You can actually get down payment assistance from a family member. You can use both a gift, which means that you're not going to pay the family member back, or you can actually get a loan from a family member for a down payment.
It can be secured against the home or unsecured. Again, you can get a gift from a family member for the down payment and closing costs.
Cash on hand is technically allowed by FHA, but most lenders have an overlay where they make it incredibly difficult to use cash. I have yet to find a lender who is on board with wanting to use cash. It is just extremely difficult, and so usually I would not count on it. If you have cash if you want to use your cash. You'll need to deposit into your bank account and for at least two months. So your funds will be what is called seasoned and then that way that a large deposit won't get questioned during underwriting.
Also, sorry for crypto bros. Crypto has to be liquidated in an account for 60 days to be able to use with an FHA loan.
Just a little fun bit of trivia here. The reason why bank accounts were looked at so strictly here is primarily because of the Patriot Act that requires lenders to look at bank statements for evidence of laundering or terrorism, which is always super fun when you have to have your bank accounts looked at in line by line in that way.
So credit score here is how the credit scores are. Most people have three credit scores, one from Equifax, Experian, and TransUnion. What will end up happening is FHA is going to look at the middle credit score and use that.
So for instance, we have a 643 with Equifax, 621 with Experian, 6 36 with TransUnion. FHA would use this middle score. If there are two people on the loan, you and someone like a co-borrower, FHA will use as they'll do the middle from both of you, and then they'll choose the lowest. That will be the credit score used on the loan to determine the interest rate that you get.
Now let's talk a little bit more about some of the credit score brackets with FHA. So 500 is the minimum, the absolute minimum that FHA allows. So I've done FHA loans down to, I believe the lowest I've done, I can't remember if it's 514 or 518, somewhere in this sub 520 range. It is possible to do.
However, most lenders don't go that low. Usually, you have to search around to find a lender who will go that low because they add in overlays. 580 is more accepted because again, everything less than 580 requires at least 10% down higher than 580 and higher requires 3.5% down. 640 is the most accepted. So if you have a 640 with most lenders, you're not going to run into too many issues with overlays. Then when you get to 680, it's potentially not worth it.
Because again, if you're at a 680 credit score or higher, what I would start to do is make sure you also get a quote for a conventional. To make sure that you compare the two and see which one is better.
Also, there is no maximum credit score, so you can have an 800 credit score and still get approved for an FHA loan. Again, this is the most lenient kind of major type of loan in terms of its credit approval. If you do have a lower credit 620 as the minimum for conventional loans. So FSU goes all the way down, an additional, 120 points of leniency. And if you are between 620 and 680, also try to compare with a conventional loan as well because 620 is the minimum for conventional loans. So if you're at again, 620 to 680, let's compare between the two and make sure you don't go just with FHA, because that was the first thing that was offered to you because you might be able to also qualify for a conventional loan.
So credit events, or like when something happens one event that kind of impacts your credit pretty significantly think like a foreclosure or something like that.
So FHA is more forgiving on revolving and installments late. Revolving is something like a credit card. Installment is something like an auto loan. So much more forgiving than something like a conventional loan would be. Conventional loans, like very clean credit. FHA loans allow a little bit messier credit.
Anything that is a nonmedical collection greater than $2000 total needs a plan with it. So if you do have medical collections, these are ignored on FHA loans. No matter the size. I've worked with a client who literally had a hundred thousand dollars medical bill. And it was from, I believe he got a helicopter rescue and he's fine. But that was not counted into his loan at all. Even though it was a hundred thousand dollar medical collection.
So anything that's nonmedical collection greater than $2000 total between all the collection accounts. If you have several, it either needs to have a payment plan or it needs to be paid on, or it needs to have 5% of the balance included in the debt-to-income ratio.
But for instance, if you have a $5,000 collection account that is going to be $250 per month, that has to be added into your debt-to-income ratio. That means you can have $250 per month, less and your affordability. So it's something to keep in mind. It can really take down how much you could get approved for because without the collection you might be able to be approved for let's say 400,000 with the collection.
It might shrink your affordability down to 350,000. So something we would want to keep in mind.
If you have a Deed in Lieu of Foreclosure or Short Sale, you have to wait three years from the transfer before you can get approved for an FHA loan.
If you have a chapter seven bankruptcy, you have to wait two years from the discharge date.
If you have a Chapter 13 bankruptcy you need to wait two years from the discharge date. If you're looking to get an automated approval, which I will talk about here in a future slide if you're looking to manual approval, which is a harder loan to get more strict requirements on. Then you need to have 12 on-time payments and court approval to be able to get an FHA loan.
If you have any IRS liens, you need to have three on-time payments and that payment needs to be included in your debt-to-income ratio, which again can bring down your affordability.
Now, interest rates FHA often has lower interest rates than conventional. This is again, because it is backed by the government, and it is less risky for lenders to take on than conventional loans.
It's going to be similar to USDA rates. VA rates for veterans tend to be much lower.
Then it's easier than conventional to get lender credits if desired. So the way lender credits work is a lender can actually offer you a higher interest rate and it gives you credits towards your closing costs.
And so with an FHA loan, one of the features of it is that it is a little bit better than conventional. If you need some extra money to pay closing costs down, if you're really tight on your budget, then you can actually look at increasing the interest rate to get your credit. Of course, that doesn't mean higher interest over a longer period of time.
I do have a web page, you can look at average rates, compared conventional and FHA. It's WinTheHouseYouLove.com.
So now let's talk about mortgage insurance. One of the most painful things about FHA loans is their mortgage insurance because there are two types.
So conventional loans have what is called PMI, private mortgage insurance, and mortgage insurance. Really only protects the lender in the event of default of you not paying back the loan. It is insurance for the lender to get their money back.
Same thing with FHA. However, it's not called PMI. It's called MIP. Why is it different? Who knows. It's called a Mortgage Insurance Premium and there are two kinds there's both monthly and upfront. This is where FHA actually tends to be more expensive than conventional loans is because of the mortgage insurance premiums. So first you have an upfront mortgage insurance premium.
This is 1.75% of the loan. And this is most of the time is added to the loan balance upfront. I'll give an example here in a second, and they have a mortgage insurance premium. This is a monthly premium that you pay it's 0.85% of the loan amount per year. And it does lower each year as the low loan balance decreases over time.
So if you've got a $300,000 loan mortgage insurance premium is $212.50 per month for the first year. Then it would lower every year after that. With a $300,000 loan, $5,250 upfront as a mortgage insurance premium is added to the loan. So instead of taking out a $300,000 loan, initially you're actually taking out a $305,250 loan.
This is why FHA is a lot more expensive and usually, this is why I would say it's not usually a great long-term option. Also isn't the first choice that you're going to have. It usually is going to be one of those situations where, Hey, this is what we can qualify for. Now let's then explore what we need to do in the meantime, to refinance into a cheaper conventional loanwhere you're not paying so much mortgage insurance.
Also, mortgage insurance premium does not change based on the buyer or the loan with conventional loans. The PMI private mortgage insurance actually changes based on your credit score. So if you have a higher credit score, you pay less than PMI than if you had a lower credit score with FHA.
It does not matter if you have an 800 credit score or a 500 credit score, you still pay the exact same mortgage insurance premium also. The mortgage insurance premium will not fall off at 20% equity. Like it will on a conventional loan. It will stay on no matter your down payment, it doesn't just automatically fall off at specific equity points.
However, it stays on for the life of the loan, unless you put 10% or more down, if you do, then it falls off after 11 years. So a fall off on FHA mortgage insurance only happens after 11 years. If you put 10% or more down. So if you put 3.5% down in the beginning, it will never fall off. Even if you get to 10% equity, even if he gets a 20% equity, it doesn't fall off.
The only way to remove the mortgage insurance is to refinance into a conventional loan and have 20% equity to remove the mortgage insurance premium.
Now let's talk about property requirements. FHA does have to be a primary residence.
So even though it's not just for first-time home buyers, it does have to be a primary residence.
So usually what this looks like you need to move in within 60 days.
You need to stay in it for one year. If you're going to plan to rent it out.
Then you can sell it at any time if you want to. The one-year occupancy thing tricks people a little bit. So the one-year occupancy requirement is basically just, that is your intent. If you're intending on this being a primary residence, you need to stay in there for at least a year before you decide to rent it out, you can sell at any point. So you could bow, you can get a loan right now, buy a home and then move out or sell it six months from now. That's perfectly fine. You own it as a primary residence and then you sold it.
No problem at all. If you want to buy it and then rent it out, you need to live in it as your primary residence for one year before you rent it out. If you rent it out before that one year, mark, you will have to refinance into an investment loan. If you wait for a year, you will not have to refinance it into an investment loan.
House hacking is allowed. This is where you live in one unit, you buy like a multifamily home. You live in one unit and rent out the others. So you can do two to four units on an FHA loan.
You can buy condos with FHA, but it does need to be on an FHA condo-approved list, or it needs to have a condo spot approval, which can be a lengthy and frustrating process.
There's not a guarantee that the condo that you're looking at will be approved. So basically what's happening is FHA has to make sure that the way that the condo is operating actually makes sense. So it doesn't harm you and the FHA loan in the future. Here are the Approved Condo Lists.
There is a Property Flip Rule. So basically what this means is you can't buy a home that was just recently flipped.
So this is measuring the time between the sale and the purchase. So if someone has a home listed for sale and they flipped it, if it's 90 days or less, it is not allowed.
If it's between 91 and 180 days, here is the stipulate. A second appraisal is required. If the sale price is a hundred percent or more over the price paid by the seller. If the second appraisal is more than 5% lower than the value of the first appraisal, the lower value must be used and the buyer is not allowed to pay for this appraisal.
This doesn't happen super often, but every once in a while I have run into an issue where someone has flipped a home. And when I say buy flip, it doesn't have to mean like remodel that it's just a flip. It just means buy, sell, buy, sell. That's it. That's all it's required in the flip. It doesn't matter if they did upgrades or they didn't do upgrades. If they bought it, sold it 90 days or less. It is not allowed. They have, you have to wait out that period 91 to 180 days you will have to look at the second appraisal report.
So how's hacking house hacking is very common with FHA loans. This is a big kind of semi investment strategy.
Again, you're buying a multifamily home two to four units living in one, renting out the others. 75% of rental income can be used to help you qualify for that loan. So that can help to offset the mortgage payment and your debt-to-income ratio. If you're buying a home that has three to four unit home, there are three to four units. You have to use, what's called a self sufficiency test.
So basically the home or the multiple units have to be able to pay for themselves. And so the way FHA does this is they say 75% of future rental income must exceed the principal interest tax and assessment payment. So the mortgage payment. It has to exceed that.
Now the occupancy rules might change based on your state, but 25% usually is a good rule of thumb there. Some states might be only 15% instead of 25, 75% is usually what's going to be a really good rule of thumb. Usually, also you need three months of reserves as well. So if the mortgage payment is $2,000 per month, you need to have $6,000 in savings after you paid the down payment and closing costs as research.
With house hacking as well, you need to live in there for at least one year and then move to another primary residence. If you want you can live in there for as long as you'd like, but live there for at least one year before you decide to move out and keep that rented.
So property condition FHA is a lot more strict on its property condition. Like a conventional loan would be.
So what you can do is actually transfer in a past FHA appraisal within four months. So if there was an FHA appraisal done on a home, you're looking to buy and it was done two months ago, you can actually use that appraisal for your purchase because these appraisals stick with the property.
Now, this sometimes can be a good thing because the appraisal is already done. But often it can be a bad thing too because you can't just get a new appraisal with FHA. That appraisal value is going to stick with the home. So if it comes in lower than you want it to be, it's going to stay there for four months and you need to wait until that time period is over to get a new updated value with a new FHA appraisal.
FHA is concerned with their appraisals about what they blanketly call health and safety issues. So think of things like structural soundness and more move in ready is what you're going to expect with FHA primarily. And it is stricter than conventional because it is government.
• Roof must have at least 2 years remaining life
• No exposed electrical wiring
• Appliances must be operational
• Handrails not needed if their absence doesn't pose a safety threat
• No standing water on site near foundation
• Attic must be accessible
• Pest inspection only required if current or past infestation is evident
• Property line cannot be located within 300 feet of an above ground or subsurface stationary storage tank with a capacity of 1,000 gallons or more of flammable or explosive material
• Built before 1978: no chipped or peeling paint on interior or exterior of home
• Built after 1978: exterior defective paint that exposes subsurface must be repaired
• Broken window glasses needs to be replaced, cracked glass does not
These are some very common things that you're going to expect with FHA. So as you're looking at homes and you're thinking you're going to get an FHA loan, you need to make sure that all of these things are in order.
If they're not, they could be called out on an appraisal needing to be fixed, which could either require you need needing to fix them the seller, and you need to fix them or the deal to be canceled.
So I'm gonna run through some example homes because sometimes people hear like the requirements for things and in their mind like there's nothing I can ever afford.
Here are some examples for you here in Columbus. Has a gorgeous living room looks nice on the outside $430,000. With 3.5% down would run you around a $15,000 down payment. I would estimate closing costs somewhere around $8,500 in there as well. Your total mortgage payment on this would be around $2,672.
And you can see that the mortgage insurance premium in there is almost $300, which is why FHA loans can be priced. $300 is just going to the mortgage insurance for this.
Here's a home for Phoenix. What you would need to do is actually do 8.5% down. So the 3.5 and the reason why is because there are loan limits for FHA, which I will cover here in just a little bit.
So actually to make sure we don't exceed the maximum loan limit, you need to put a higher down payment down. So in this, we need to put almost just a little bit above $39,000 down closing costs would run somewhere around $9,200. And the total monthly payment would be around $2,591 per month. So these homes are totally feasible with FHA.
If these situations don't apply to you and you're looking at homes less then that's perfectly fine. Sometimes I see people and they're like, oh, I'll never be able to afford a home now. Not every home is $400,000. It might be different in your area. Might be higher in your area. I don't know exactly where you live.
Most of the time it's 65% of the conventional loan limit. So in 2021, the loan limit for FHA was $356,360. We now have an 18% increase in 2022, which is $420,680.
So then what we can do since those are the maximum loans to find the maximum purchase price with the minimum down payment we can just divide those by. 965. So that gives us a maximum purchase in 2021 of $369, 285. And in 2022, the maximum purchase price with the minimum down payment for FHA is $435,938.
Now that's in most of the country. However, the loan limit does change based on how many units you're buying. So if you are buying a two to four-unit, the loan limits are higher, and if you're in a high-cost area the limit's actually higher. In most of the country, this doesn't apply to you, but if you're in high-cost areas think of areas like California or Nashville or things like that, then you often will be seeing a higher loan limit with FHA that will allow you to purchase a larger home without moving into something like a conventional loan or a jumbo loan.
With income and employment, you do need two years history of stable employment. It does not have to be at one specific job.
Just two years, employment history, not two years at one job history. It's ideal to be in a similar field. If you are planning on changing jobs though.
Also, retirement does count as employment. So in the employment field, if someone asks you for employment and you've been employed for, or you've been retired for five years, just right in "retired". That's your employment history.
If you were a student that counts as your employment history. It does not have to be, I've been at one specific job for two years.
FHA does have a six-month gap rule. So if you have a gap in your employment, that is six months or greater, then you're required to be on the job for six months minimum when you start back. So you can't have a gap for six months, just get employed and immediately get an FHA loan. You will need to be at that new job for at least six months.
If you have a non-taxable income, you can gross it up by 115%. So for instance, if you have Social Security you can actually multiply that times 1.15. So $2,500 a month in social security that is non-taxable. Grossed up would be $2,875. So that would be using your debt-to-income ratio to help you qualify for more since you're using income, that's not taxed and lenders look at gross income for debt-to-income ratios.
There is no minimum or maximum income limits. Sometimes I see people say what's the minimum I need. What's the maximum I need? That's not how FHA works. No minimums, no maximums. You can make $20,000 a year and qualify for FHA. Probably not for, probably for a very small house. You can also make $2 million a year and qualify for FHA.
Self-employed you need to have two years' average of your tax returns. That's what's going to be used as your income.
FHA uses a metric called Debt-to-Income. What this is it's your debt divided by your monthly gross income. That's your pre-tax income. It's going to give a percentage. And so they have limits on that percentage.
There are two different types of this incubator shows that there's a front end and a backend front end is officers who called your housing ratio. So it is only the mortgage divided by your gross monthly income.
Then back end is your mortgage payment, plus any other debt. So like a credit card, a car loan student loan, those added together are divided by your monthly gross. If you had a $60,000 per year income, the maximum housing payment you could have would be $2,349. The maximum back you could have would be $2849. So what this means here is the maximum mortgage payment you could have with $60,000 per year income would be $2,349. Then you can have an additional around $500 per month in debts on top of it.
Now, not everyone can get approved this high of debt-to-income ratio. So these are the absolute maximums. This might not apply to you though. Often, if you have a lower credit score. The limits are actually going to decrease and FHA doesn't give exact guidelines on this.
These are the only maximums that we know, but this does change based on the computer software for FHA loan approvals.
Manually underwritten loans are lower. So manually underwritten loan is basically when the computer software says, Hey, we're not able to issue an approval on this. You need somebody to look through pretty much every single detail in this loan to see if it can be approved. If that's the case, usually you're going to be looking at much lower debt-to-income ratios.
If you are in a community property state which you can just Google, for example, Community Property State Oregon or Community Property State, Florida. See if you're in a community property state, your spouse's debts need to be included in the debt-to-income ratio as well.
Now just because these are the maximums, does not mean that they will apply to you or that you should take on a payment that high, right? If you make $60,000 per year, you likely don't want to have a $2,400 per month mortgage payment. That would be pretty insane. That would be what a lot of people call them being house poor. You likely don't want that just because a lender will approve you for something doesn't mean that you should take it.
Now I do have a really quick calculator that you can use. If you want to look more at your affordability. So I call this the Max Purchase Price Calculator. What it allows you to do is put in your scenario. So we'll do 3.5% down on a 30-year loan. Then you can put in your yearly gross income. So let's say we make 75,000 and let's say we have. A car loan that we currently pay $350 per month. It will then give you an affordability dashboard showing you an estimated max purchase price, along with a sample of a payment breakdown down payment closing costs.
But what I really want to show you here is the difference in the debt to income ratios that I showed you. Remember, we talked about the 46 and 56 debt-income ratios. What I would suggest for people is staying around this number, however, that's a conservative estimate based on much lower debt-income ratios.
FHA would actually likely approve this person up to $450,000. $2,800 per month payment, which would be about 58% of that person's net income.
So FHA allows people to be approved for a lot more, but you can see in the calculator, that I wrote it as "risky". This is incredibly risky to take on a payment that's that high, but I just wanted to show you what this could look like if you are looking at affordability in this way. I think it's safer to say with more conservative numbers, with a lot lower debt-to-income ratios that make a lot more sense for you and the other financial goals that you have. However, FHA does have a lot of leniencies to approve people for a higher amount.
This calculator has a ton of other tools for estimating other costs and down payments and understanding the math of it all there.
So student loans also are going to impact your affordability and your debt-to-income ratio. If you do have them, there have been some new changes with income-driven repayment, which is really nice.
Get out of CAIVRS before you can apply for an FHA loan and get approved for one. So if you do have any loans that are in federal student loans are in default, not private federal student loans that are on default, those need to get out of default before you look at applying for FHA.
If that's the case, if you defaulted on a federal student loan, you will not be able to get a new FHA loan. Because if the government says you couldn't pay back one of our loans, they're not going to give you another one of their loans. You have to get out of default of your student loan.
Get out of CAIVRS before you can apply for an FHA loan and get approved for one. So if you do have any loans that are in federal student loans are in default, not private federal student loans that are on default, those need to get out of default before you look at applying for FHA.
Now, if you are on an income driven repayment plan, there's a new rule change from 2021 to 2022 that says if the payment is $0 per month or deferred, then 0.5% of the balance must be included in the debt-to-income ratio. However, if you are an income driven repayment, as long as it's not $0 per month, it can be used in your debt-to-income ratio.
So this is really great for affordability because let's say right now you're a normal payment on your student loans would be, let's say $500. But you're an income driven repayment. So you only pay a hundred dollars per month. You can use the hundred dollars per month in your debt-to-income ratio.
Now on your end, you probably won't even know that this is happening, but your loan officer's able to use the a hundred dollars per month and your debt-to-income ratio instead of the $500 per month and your debt-to-income ratio, as long as it's not $0 per month. As long as it's not deferred, you're actively paying an IDR above $0. Then you can use that in the debt to income ratio. So exam. Using the 0.5% would be if you had a $50,000 student loan balance, that will be $250 per month in the debt-to-income ratio, which again, can drag down how much you're able to get approved for.
There is what's called AUS and manual underwriting. AUS is the automated underwriting system. Manual underwriting is not software based. So basically what happens is when you get an FHA loan is they're going to take your application, put it into a computer software. The computer software is going to say like thumbs up or thumbs down.
So approval eligible is great. That means, Hey, the loan the loan looks good. It can actually move forward. It has an initial approval.
If it says that it's refer with caution, that basically is the kind of the thumbs down. A lot of lenders at that point, we'll just say you're not approved. However, there is an option to do what's called manual underwriting.
Manual underwriting is basically where a underwriter has to go through your loan file a lot more detailed. A lot of lenders don't do this often. It can actually be more costly to do a manually underwritten loan. However, it is an option and FHA usually is one of the most manually underwritten loans compared to other types of loans and tends to be the easiest loan to manually underwrite.
Now, it can be tough to find again, tough to find lenders who will do manually underwritten loans. They're just a lot harder. They're more expensive to do. A lot of people just don't like going through them. And so they don't do them, which again is one of those overlays that we've talked about here is a quick chart showing you the difference of how a manually underwritten loan affects things.
So for instance, if you have a 500, 579 credit score, the maximum debt to income ratios are 31% and %43. Then also you can see in different instances, if you have a 580 credit score and above the ratios go to 40 and 50, but you either need reserves. You need a minimal increase in your housing payment and you need residual income. There's all these other, what are called compensating factors that can add to the complexity.
Seller credits are when you negotiate for the seller to pay a percentage of the purchase price towards your closing costs, to help you be able to make the payment at closing.
So FHA allows you to request up to 6% of the purchase price for closing costs credit. This is negotiated. So in subordinate, the more seller credits you ask for the less attractive your offer is because if you're the seller and you have one offer from a buyer, who's we don't need any closing costs, and another one's we need you to give us $5,000. The seller does not want to give that person $5,000 so it can make the offer less attractive. It's important to keep that in mind, around here in Dayton, Ohio, it's very common for people to use both FHA loans and ask for seller credits. But our market's a lot different than maybe yours as. Just keep that in mind. Talk with a realtor about how that will impact your offer.
So quick example, let's say we're purchasing a home that's $350,000. Let's say we do a down payment of 3.5% down. And it is $12,250 as 3% down here. Let's estimate closing costs around $6,500.
And then if we asked for a 1% seller credit, so 1% of the purchase price, the seller is giving us $3,500 to help us with our closing costs that would bring our total cash at due at closing of $15,250.
Now let's talk about some special requirements and features. The DACA alignment is that a word doc is now allowed. This is new for 2022. This is a change that happened in 2021, somewhere midway through the year. For awhile, FHA really didn't have any, they didn't say anything about doctor recipients being able to be approved for an FHA loan or eligible for an FHA loan. Then near midway through 2021, they actually came out and said, yes, we will allow DACA recipients to be approved for an FHA loan, as long as they meet all the other requirements that we just discussed.
How sacking is a really big feature of FHA loans. This is super common. A friend of mine just recently purchased a three unit home. He's going to live in one, living there for a year, and then he's going to move out and rent out that unit. So it's a really great way to start getting into in the investment world while still owning a home and without the expensive upfront cost that is required with an FHA.
This one is not very known is the a hundred dollars down HUD REO program. So if you find a home that is owned by HUD so you can find this on the HUD home store , talk with a realtor about that. If you're looking at that, usually these are foreclosed.
I say usually these are homes that were foreclosed on now owned by HUD. If you're purchasing one of those with an FHA loan, you often can qualify for a hundred dollars down. So instead of 3.5% down, Literally it's a hundred dollars down payment. You still have closing costs, but a hundred dollars down payment on that home, as long as your lender has that program as well.
You can also get a rehab loan. FHA has a rehab loan called a 203k loan where you can finance the rehab costs along with the purchase price.
The Bridge Strategy, is something I've made up. I just call it the bridge strategy, but basically, instead of just getting an FHA, a lot of people get an FHA loan because that was what they were told they should get. Then they hold onto it for 10, 15, 20 years and they're paying mortgage insurance and it never drops off, and it's ridiculous.
FHA should not be the first option, but if it is the option that you have to take because that's what you qualify for, that's perfectly fine. But then you need a plan to say in the next two to three years, what do I need to do to be able to refinance into a conventional loan. So either you need to find a way to increase your credit score.
You need to find a way to lower your debt. You need to find a way to increase her income. You need to find a way to increase your property value. So many different strategies. That we can refinance into conventional loans. So you don't have that mortgage insurance forever. There's no point in paying the expensive mortgage insurance on FHA forever.
Use FHA as a bridge, get into the home, build equity while you're working on your credit or your debt or whatever you need to then refinance into a cheaper conventional loan.
Also, FHA loans, have down payment assistance. They're one of the only loans that allow down payment assistance so easily. Conventional loans, it can be difficult to find down payment assistance programs that will work well.
So when you get an FHA loan, you do have options to refinance.
There's what is called a streamlined refinance to get a lower rate after six months. This is if rates are lower at that point in time, it doesn't just mean you automatically get a lower rate after six months if interest rates decrease after you own the home. And you've been there for at least six months. You can streamline into that, which means you don't have to go through the full underwriting process again, meaning, credit check and income and employment, all that stuff. Usually, they're want to see that you've been paying the FHA loan on time, and then you can refinance into a lower rate.
Then also it's very common for people to refinance from FHA to a conventional loan. Usually, if your credit score increases, then also remove the mortgage insurance.
You can also do a cash-out. This is where you pull equity out of your home as a lump sum of cash. But you do need 20% minimum equity in the home to be able to do that.
FHA loans are less attractive than conventional loans.
When a seller sees somebody has FHA in their mind, they're usually thinking their appraisals are going to be a little bit tough. Maybe this buyer doesn't qualify as much as the conventional buyer. There are all these things that run through their head that may not be fair necessarily, but that's just the market. That's just the way that the market exists. There's no way to get around that. A conventional offer is almost always going to be more attractive than an FHA offer. So you usually have to compensate a little bit.
If you know FHA is what you qualify for and you're in a tough market. You're against multiple bids. You likely are going to need to do something to make your offer more attractive, offer more money, offer an appraisal gap, lower contingencies. Talk to your realtor about ways you can make your offer a little bit more attractive if you're going with FHA.
Then around 10% of us loans are FHA loans. So they're not a huge portion of the loans that people are going to see, which is some of the unfamiliarity can make it difficult for sellers to want to go with FHA as their first choice.
So, for the seller's perception of FHA, here's what my friend Javier Vidana said: "When making offers with an FHA, pre-approval, here's one thing you need to understand fundamentally, you're at a disadvantage. Why are you at a disadvantage? Most agents regard FHA offers weaker than conventional and they are. Say that to their sellers when they present all offers. So if there are multiple offers and there are conventional offers in that pile, the conventional ones, we'll see more priority in the eyes of the seller agent and also the seller, and that sucks. But knowing this, knowing that your FHA side of the offer is weak, you need to make sure that other parts of your offer are really strong and they will hopefully outweigh the fact that your offer is FHA.
Please make sure that you and your agent have an ironclad relationship and are completely honest with each other. And know if the offer is winnable and what you need to do in other parts of your offer to give yourself the best position to win".
And so finally, how do you get one? How do you apply for an FHA loan if you're like, this is what I want to move forward with. Remember it is not directly offered by FHA, so you're not going to go to FHA and say I'd like an. Pretty much any lender can offer FHA that you talked to. I don't really know any lender that doesn't offer FHA. It's incredibly common.
If you'd like to, I do have a link in the description to connect with a lender that I trust who's going to be helpful to you. They can help you with an FHA loan. If you'd like to do the same thing. If you're looking for an agent in your city, I do have a referral program that is great at helping you connect with somebody who is going to have the heart of a teacher and walk you through the next steps of either getting approved for a loan or finding a home that you love.