CCAR Housing Opportunities

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FHA HOME LOANS- OVERVIEW

The Federal Housing Administration (FHA) was created to provide American families with a better opportunity to own homes. In 1937, FHA offered the first 30 year mortgages with low down payments, a great improvement over 40 to 50 percent down payments with loan payback over 5 years.

Today, FHA operates under HUD, and insures loans from HUD-approved lenders. This insurance protects lenders against potential losses suffered from default and foreclosure. And with this protection, lenders are able to loan money to a greater number of people.

Highlights

Credit qualifying is not overlooked, but is very generous, especially when there are derogatories or a lack of verifiable credit. For instance, a borrower who has had credit problems might be allowed to provide a reasonable explanation and be viewed with common sense underwriting or simply given a second chance. Chapter 13 Bankruptcies are allowed with reestablished credit and timely payments of at least 12 months while Chapter 7 Bankruptcies discharged two years or more prior to closing with reestablished credit are also generally acceptable. Homebuyers without any credit can provide alternative sources of credit such as the timely payment of bills for insurance, phone, electricity, gas, cell phone, pager, etc.

Closing costs are generally low with an FHA mortgage. HUD has created a list of non-allowable closing costs assessed to borrowers. By not being responsible for these non-allowable closing costs, borrowers can save hundreds of dollars.

Down payment requirements are as little as 1.25% under $50,000 and only 2.25% over $50,000 with an FHA mortgage. Furthermore, FHA allows the seller to pay most of the other costs of the purchase, as long as the buyer pays at least 3% total toward the home investment. Another benefit regarding down payment is that a family member may give a gift for the entire down payment to the borrower. Similarly, government agencies or non-profit organizations can contribute to the down payment. This promotes home ownership today for people who have not been able to save a substantial down payment.

Income Before a borrower can be approved for an FHA home loan, the stability of income and its continuance must be determined. An FHA-approved mortgage requires verification for the preceding two full years. This must be documented through lender verification and/or W-2’s and tax returns. School or education can be counted toward this two year requirement. An allowance for seasonal employment may be used, as well as non-employment income.

Acceptable income sources include:

Salary/Hourly/Self-employment income from self-employment must be the net income after expenses but before taxes, and averaged for the previous two years.

Overtime or Bonus income as long as it has been received for the most recent two years and is expected to continue, and must also be averaged for the previous two years

Part –time income may be used if it has occurred without interruption for the past two years and has a probability of continuation

Commission income is averaged over the last two years and requires income tax returns (1040’s with all schedules)

Retirement/Social Security/Disability must continue at least three years

Alimony/Child Support/Separate Maintenance timely payment must continue at least three years

Notes receivable with a 12-month history and at least three-year continuation

Interest and dividends averaged for the previous two years

Rental is treated like self-employment income and is calculated from the borrower’s last two years’ tax returns (1040 schedule E) and/or leases