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FHA Loan Requirements (2019 & 2020)



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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.

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.