FHA Financing (Federal Housing Administration) was created by the government to help homebuyers who cannot afford to put 20% down for down payment in order to purchase a home. Their guidelines are much more flexible than regular home loans. It only requires 3.50% in down payment, a minimum credit score, and it must be your primary residence. Your credit doesn’t have to be perfect neither. The only catch is that it will require you to pay a onetime UFMIP (Up front mortgage insurance premium) that can be included in your loan amount borrowed and there will also be a Monthly MIP (Monthly Mortgage Insurance Premium) on your mortgage payment. Unless you are borrowing a 15 year loan with loan to value less than 90% (Loan amount / Purchase price), this monthly MIP will be required on all loans at different rates.
For example, if you purchase a house for $100,000, you are only required to put $3,500 in down payment ($100,000 x 3.5%). Unlike regular home loans, this small amount of down payment can be a gift from your family, relatives, in-laws or fiancée. It doesn’t need to be your own fund. Then, unless you want to pay it out of pocket, you can also include this one time UFMIP into your loan amount. If you want to borrow at maximum financing, which is 96.5% of your purchase price, your loan amount will be $96,500 ($100,000 x 96.5%), the UFMIP will be $965 ($96,500 x 1%). Your final loan amount borrowed will be $97,465.
Even though your final loan amount borrowed has changed from $96,500 to $97,465, the calculation for the monthly MI will only be based on the “base loan amount”. Base loan amount means the initial loan amount that you borrowed excluding the UFMIP. In this example, your monthly MI will be $72.38 a month ($96,500 x 0.9%/12).
Bad credit: If you have excessive delinquencies on your credit in the past, you are usually approved as long as you have a very good explanation as to why it occurred and how it will not happen again. If underwriters determine that it is only a one time occurrence, we usually approve the loan. For example, another breadwinner in the family passed away and left the borrower with lots of unpaid medical debts, borrower who was divorced and was having a tough time keeping up with the bills, borrower who was injured physically and was unable to work for a period of time, etc. Things happen and we understand as long as there isn’t a pattern of delinquencies and the situation is mended (with proof of course).
Co-signers: even though the borrower doesn’t make a penny, as long as the co-signer has sufficient income earned to qualify for the loan and is willing to co-sign for the borrower (ex: borrower’s parents helping their kid to buy their first home), we are still good to go (crazy huh?). This person doesn’t have to be living with our borrower neither. In loan terms, this person is called the non-occupying borrower. The biggest issue with this is that this co-signer must be able to afford both house payments in order to qualify for the loan. So if any of you have wealthy parents/relatives? WOOO HOOO!
I will write more about FHA financing in the future.