FHA Loan Requirements (Complete Guide For First-Time Buyers)

fha loans a fantastic option for not just first-time homebuyers for really anybody who's looking to buy a home who wants a low down payment option and a lot of flexible credit options so if you have credit that's even all the way down to a 500 credit score you could go fha so in this video we're going to talk about so many facets of fha there's going to be a little scroll bar along the bottom here so you can fast forward to different sections if you want to find just the information that you're looking for but you're going to learn a ton about fha loans so you can make the right choice when you're purchasing a home choosing the right loan is going to help you save the most amount of money possible moving forward and help you win the house that you love so let's talk about an overview here with the fha loans so fha loans are insured and backed by hud now what do we mean by insured this is only insured for a lender so basically what it's saying is hud is going to come in and they're going to insure the loan that way if somebody defaults on a loan or goes into foreclosure they're going to give the lender that money back okay so it doesn't do anything to protect you but since lenders have less risk they can pass on some cost savings to you and that means the loans can be a little bit more risky what that means is they'll lend on a lot more difficult loans that maybe a conventional loan wouldn't allow okay so they can be a lot more flexible than other types of loan programs because they are insured and fha was started as a means to help people who couldn't qualify for conventional conventional uh typically started out at least um being around 43 debt to income ratio and needing 20 down most people couldn't fit in that box so that's why fha was created now this is not just for first-time buyers this really is for anyone who wants an fha loan there are construction loans available we're not going to cover that in here but it's a very standard the qualifications to get a construction loan to purchase land and build a home as with purchasing a pre-existing home okay now fha tends to be the best for lower to mid credit scores and should not be a long-term loan okay so low would be on the 500 range mid would be six mid 600 range and fha is not long term because there's really costly mortgage insurance and we'll talk about the costs here in just a little bit but really you shouldn't be carrying an fha loan for longer than you need to because it can be costly it can be a good option short term but long term probably isn't your best option with financing and also fha loans tend to be overlay stacked so basically the way overlays work is fha sets out their their set guidelines okay and that's the the base rules that they have and then lenders are allowed to tighten those up if they want to they can add rules on top of the rules fha already has and this is what's called an overlay and fha loans tend to have a lot of overlays with them because fha has pretty lenient standards and then the lenders want to take on a little bit less risk than that a good example we'll talk about here in just a second with cobit is the minimum being 500 and a lot of lenders saying that the minimum is now 640. okay so let's talk about some covid changes that have happened here with fha so one of the biggest changes that i've seen with covit is that lenders have put on an overlay and not all lenders but most lenders are put on overlay that says the minimum credit score is 640. and i even see people making videos saying yeah the new minimum uh credit score for fha is 640 that's not true at all it still goes down to a 500 credit score it's just that some lenders are choosing not to do that with covet actually most lenders are choosing not to do 640. also if you're self-employed fha wants evidence of ongoing work or current work in your organization so they want some sort of proof that you're going to continue seeing income coming in with covet and also this is an overlay here but future income used to be allowed with fha meaning that you could purchase a home with a job offer and not be working there yet however with covid most lenders are not allowing that they want to see you at work um normally enough to collect anyway anywhere between two to four weeks worth of pay stubs to be able to qualify for a loan now down payment and closing costs this is one of the the biggest things that we need to talk about here with fha all right so the minimum down payment is 3.5 percent all right and the down payment is actually tied to the credit score i'll talk about this here in the slide coming up all right you're allowed to use collateralized loans so something like a 401k loan or a home equity loan uh to be able to qualify for the down payment and closing costs here however you can't use unsecured loans right i can't use a credit card that's not something i can't just go and use a credit card for my down payment or closing cost that's not allowed i can't use a personal loan for down payment or closing costs however i can use a family member loan that can be either secured or unsecured meaning they can either have claims of the property or no claims to the property with with that type of loan from a family member also we could get a gift from a family member to go towards our closing cost or down payment if we need some help there there are also local down payment assistance programs and national down payment assistance programs where you're going to get help to pay for your down payment or some of your closing costs the issue here is that they can be costly i rarely have ever seen a down payment assistance program that is more beneficial for a buyer than if they fund the loan themselves you know paying their own down payment their own closing costs on their own so something to uh to be mindful of here so credit requirements and down payment go hand in hand with fha so it goes all the way down to a 500 credit score which is crazy because uh you know it it's hard to find uh loans or lenders who will go down to a 500. but fha does and if you're struggling to find a lender who's not going down to 500 with fha you want to shop around to find a lender that will help you out there so if you have a 500 score up to a 579 you're going to need to put 10 percent down okay and if you have a 580 plus then you can do three and a half percent down all right now fha is one of the most lenient types of uh you know major loans if we're talking about conventional fha usda va it's one of the most lenient types of those loans and it tends to be best for scores below 680. all right so technically you could qualify for a conventional loan if you have a 620 score however what i've found is even if you can qualify conventional if you have below a 680 fha is probably going to be a better route for you short term then you can build your credit score and refinance into a conventional loan normally that's going to give you the best mix the best loan strategy moving forward um instead of just holding on to an fha for a long period of time or getting a conventional loan with a minimum you know minimum middle credit score that's going to cost you a lot of money because you're going to penalize with the interest rate so credit events here so fha loans are more forgiving on revolvement revolving and installment lates okay they normally let you have around two lates within the past 12 months on revolving accounts and normally one installment late within the past 12 months ideally you would have none but fha can be a little bit more lenient here also as far as like non-medical collections greater than two thousand dollars total again this is non-medical um you either need to have one of these three remedies either a payment plan it needs to be paid off or five percent of the balance is going to be calculated in your debts income ratio and this is going to shrink how much you can qualify for um with a new home so here are some waiting periods that you might need to wait for so if you've had a deed in lieu a foreclosure a short sale you need to wait three years from the deed transfer of those events if you had a chapter seven bankruptcy you'll need to wait two years from the discharge and if you've had a chapter 13 bankruptcy you need 12 months of on-time payments and court approval to be able to get into an fha loan now rates rates with fha actually are really low okay and this can kind of trip people up because they think why in the world is fha having such a lower rate and it tends to actually have lower rates than conventional we'll talk about a chart comparison here later on in this video but the reason why there's lower rates is because it's backed by the government now what offsets these low rates is high mortgage insurance costs and we'll talk about that here in just a bit so rates are similar to usda and fha brokers are going to tend to have better rates on fha loans and the reason why is because legally they can't take a difference in the the risk-based pricing and pocket themselves like someone like a direct lender or bank could it doesn't mean all of them you know all banks or direct lenders do that but for the most part if you're using an fha loan or any government loan for that matter brokers tend to have lower rates there all right and it's going to be easier than conventional to get lender credits if you need to a lender credit is where you would increase the rate slightly to receive a credit towards your closing costs and again because fha loans are insured and backed by the government lenders take on less risk meaning you can get a lower rate meaning that there's more flexibility for the lenders to give you money towards your closing costs if you need it so they would increase your rate slightly to give you credit towards your closing costs again that's only if you want it only if you need it now mortgage insurance mortgage insurance is one of the most costly things about fha it is the one of the biggest downsides like fha gives us so much leniency and flexibility with how we set up this loan and who can qualify for it but the big downside the way that we pay for it is through mortgage insurance and mortgage insurance is what funds fha's ability to insure this loan for the lender so fha has two types of mortgage insurance number one there's an upfront mortgage insurance okay and this is 1.75 of the loan amount it's not paid up front but it's going to be wrapped back into your loan so if we were purchasing you know if we had a 300 thousand dollar loan here we're going to actually call this a loan and not a house 300 000 loan the mortgage insurance cost up front would be thousand two hundred and fifty dollars so instead of taking out a three hundred thousand dollar loan we're actually taking out a three hundred and five thousand two hundred fifty dollar loan all right and then also we have a mortgage insurance premium okay um this is similar to conventional's pmi private mortgage insurance on commercial it's basically the same thing on fha except they call it a mortgage insurance premium it's 0.85 so that would actually be 216 per month on a 300 000 loan so fha can have pretty intense mortgage insurance here also mortgage insurance doesn't change based on the buyer on a conventional loan the higher your credit score the less riskier loan is the lower your mortgage insurance on fha it does not matter if you have a 500 credit score or an 800 credit score your mortgage insurance is always going to be the exact same cost here with both of these types of mortgage insurance also your mortgage insurance will not fall off at 20 equity no matter how much you put down they do not go off of equity with if your mortgage insurance falls off in fact it's going to stay on for the entire life of the loan unless you put 10 percent down then it's going to fall off after year 11. so this is why fha is not a good long-term loan option but it can be a really great short-term option and fha actually works really really well for people with low to mid credit scores to purchase a home work on their credit and then refinance into conventional i'll talk about that strategy here in just a bit so property requirements this has to be a primary residence for a minimum of one year you need to live in the home for a year and then you can decide if you want to rent it out now obviously you can sell anytime you want you can go purchase the home and sell two weeks later that's no problem at all but you need to live in there for a year if you're going to choose to rent it out and not sell it house hacking is loud this is really common with fha loans house hacking is basically a way of using primary residence loans to try to generate some sort of rental income from them so a good example with house hacking would be uh you know you can purchase up to two to four units so you live in one unit and rent out the other units okay that's still primary residence because you live in it but you're getting rental income from the other units another example is i purchased the home 3.5 down i live in there for a year and then i rent out the property and i go purchase another home all right so i still have the fha loan that still stays on there where i have the lower interest rate i didn't have to put a huge down payment for an investment property but i now have rental income after a year of living in the home so 75 percent of rental income is considered to go to offset your mortgage payment okay and that's if you have other homes or if you're renting out other units something that can be really tricky with fha loans is if you're looking at a condo it has to be on a fha condo approved list all right um and this is where each condo individually is vetted for their financial viability which most condos can be pretty mismanaged financially and if your condo you're looking at is not on that list you can have an individual approval but it takes a long amount of time and good chances are if it's not already on the fha approved list it probably won't qualify to be on you know to be an fha approved condo that's not always true um but fha only wants to fund loans for condos that have good financial management okay they don't want the condo association to go under that way they then have to go pay for that loan if it results in a foreclosure okay and then there's also a property flip role with fha i know it sounds like there's a lot of rules here if you're looking at a single-family home you're buying it as a primary residence you're not going to run into any of these weird situations but fha is so flexible that people like to do a lot of things with it so it's going to clear up what it can and can't do so with the property flip rule it's basically saying there's a 90-day period where the home let's say somebody purchased the home so they're the seller and they'll say they purchased it today and then they flipped it two weeks later we want to go buy it with an fha loan that is not allowed we have to wait 90 days from a sale to a new transfer of the deed to us all right fha doesn't let these flips happen that quickly all right the only exception is if it's being sold by a hud itself or there's a couple other situations where you'll barely ever run into these situations where you can get around this role but for the most part if the home was already transferred title less than 90 days ago you're going to have to wait out that 90 day period to be able to purchase it with an fha loan so let's talk about some example homes all right so here we first have a home in columbus ohio right super nice home uh just remodeled fits under our loan limit which we'll talk about here just a little bit but 315 thousand dollars four beds three baths almost 2 000 square feet and if we purchase this with an fha loan we'd be looking somewhere around uh twenty two hundred dollars per month uh as a payment including taxes and insurance and all of that stuff with three point five percent down we also have another example this one is in san diego california again this is under the loan limit um and it's 725 000 it's four bed three bath uh 2 000 square feet and we'd be looking closer to 4 260 per month payment on fha if we did three and a half percent down okay so loan limits fha does have loan limits meaning you can't purchase a home with fha above that limit now there is a link to the lookup in the description you'll put in the county that you're looking to buy in and that's going to show you what that loan limit is for that county so the new base limit uh is 3 356 362 this is an increase of over 24 000 from last year and the way that you calculate what your max purchase price is is you take the loan limit divided by 0.965 and that's going to show you how much your purchase price can be okay so keep in mind when you see that number like 356 000 that's not your max purchase price that's your max loan so we have to do a little bit of math to reverse it and figure out what our max purchase price is then with 3.5 down that's our max loan so just take the loan limit divided by 0.965 and that's going to give you the max purchase price so we can see here with our low cost areas and high cost areas what fha has decided is their new loan limits for 2021 and again you don't have to really worry about this too much just look on that link in the description put in the county that you're looking in and that's going to give you really detailed information about that specific accounting okay so appraisal requirements this is one of the really difficult parts about fha is they can be pretty pretty tight about what they want as far as the appraisal alright so an fha appraiser is going to come out and they're basically going to see if it meets the standards of an fha loan and they're a lot tighter than conventional so fvj is mainly worried about what they call health and safety and they kind of can take this to a bit of an extreme but they want to see structural soundness think of a home that's going to be move-in ready if it has work that needs done most likely you're going to need some sort of like fha rehab loan to make that work okay um it's most likely not going to qualify fha if it needs some work done and it is stricter than conventional because it's government insured again they don't want to have to pay out to a lender if there's big issues so that's why they have all these tight restrictions up front so here's some common issues that you may run into that are going to be called out by fha broken glass chipping paint these are two huge ones i see these all the time on fha appraisals where an appraiser goes in and says here's chipping paint we have to get this fixed before it can be funded with fha plumbing issues exposed wiring broken hvac rotting wood and wet basement or crawl space these are some of the big things that i keep seeing come up on fha appraisals that need to be fixed all right and if you have a good real estate agent they should be able to spot these things before an appraisal happens the last thing you want is an appraisal to happen and then you have to get something fixed and then repay for a re-inspection fee which is going to be around 200 bucks to have an appraiser go out again and make sure that it was those repairs are fixed all right so employment fha one's two-year history of stable employment now they even specify there is no set length of time at a specific job so it doesn't mean two years at one job it means two years history is what they want to see they want to see that over the past two years that you can be employed that you can make a consistent amount of income and their income isn't this big you know roller coaster going up and down they want to see some sort of consistency with your employment all right and even if you change jobs frequently as long as it's within the same field that's perfectly fine you can change your job six times within the past two years as long as it's with the same company as long i'm not the same company as long as we're in the same field so let's say we had um you know you worked as a teacher for uh six different schools maybe you had a move in between there that's perfectly fine or you work for six different plumbing companies perfectly fine those are in the the same line of work there all right and we don't have to be at a specific job for a set period of time however the longer we're there the easier it is for an underwriter to use that income and a more consistent basis all right so it is ideal if to be in a similar field if you're changing jobs um now debt to income ratio this is going to change how much we can afford for a home all right and again this is keep in mind this is all about what a lender would qualify you for um not what you should take out okay there's a huge difference between what you could get approved for and what you should take out for a loan just because the lender is going to give you money doesn't mean you should take it right um a lender is not a financial advisor right you are your own financial advisor you have to be in control of your budget just because someone says here's a loan for 400 000 doesn't mean it's a smart choice for you okay keep that in mind before everyone gets angry in the comments i don't make these rules okay the bank is going to willing to give you a lot more money than you probably should take out you just have to keep that in mind so there are two different types of debt to income ratios and debt income ratios are just showing us how much debt we have compared to our income so front-end ratio is where we take the future housing payment how much we might spend monthly on a home divided by our income so if we had a hundred thousand dollar per year income and this could be as a household or this could be individually fha will allow us to do 36.99 front end ratio that's the maximum that they'll allow that's a 3 000 monthly mortgage payment that they would allow on a hundred thousand dollar income that's pretty significant on a hundred thousand dollar income and our back end ratio goes up to 56.99 on fha meaning that you could qualify for up to thousand seven hundred and fifty dollars per month in total debt okay let's like let that sink in for a second hundred thousand dollar per year income that's eighty three hundred dollars per month right uh fha says that even based on eighty three hundred dollars per month gross they'll allow you to have almost up to five thousand dollars per month in monthly debt payments okay fha has so much leniency there again just because someone will give that to you doesn't mean that you should take it on so if we wanted to max out our debt on an fha loan we could purchase a home that's three thousand dollars per month and have an additional seventeen hundred dollars per month in monthly debt payments right and payments to credit cards student loans auto loans all of that stuff here with student loans fhas can be a little bit tricky mainly because they do not allow ibr so ibr is just income based repayment basically where your student loan uh your monthly payment is going to be based off of your income and not necessarily the loan balance itself so conventional loans allow you to use income based repayment right if your income based repayment is zero dollars per month right now meaning you pay zero dollars per month on your student loans on fha they're actually going to make you use one percent of your balance in your debts income ratio so if we go back you know to looking at these front-end and back-end ratios having student loans is going to probably significantly reduce how much we can afford right because if we took an example of let's say we had forty thousand dollars in student loans that's a four hundred dollar per month debt payment that we have to include in our debts income ratio and your lender is going to do this for you but it's just helpful to know that if you are on income based repayment conventional might be a better option for you if you're tight on your debt to income ratio now fha is interesting because it allows what's called manual underwriting most of what we talked about so far is all through what's called an automated underwriting system and this is basically where it's a computer software that all lenders have access to and they're taking all the information about you and your loan and running it through a software that says you're good to go or you're not good to go now if the software comes back and says hey this is this has too much risk for the software to actually give an answer on you can do a manual underwrite in a manual underwrite requires a lot more documentation a lot more work normally a higher interest rate um and a couple other things that can be a little bit more difficult and it will also change our ratio here for how much we can qualify for with what's called compensating factors so i know this sounds a little bit tricky here your lender is going to take care of all this for you but it's just helpful to know that this is an option for you okay so a good example would be let's say we went to go apply for an fha loan and the underwriting software kicks back and says we can't get this approved so we can talk with the lender that does manual underwriting and let's say our credit score was 580 and above well our debt to income ratio is going to be capped at 40 and 50 front-end back-end ratio and we also need two of the following we either need cash reserves meaning extra money in the bank after we close we need a minimal increase in housing payment we need additional income not reflected in our you know income we put on an application or residual income meaning a lot more income left over compared to our our debts so basically here you know don't get overwhelmed by all the details here this is your lender's job but it's helpful to know there are extra ways if a lender comes back immediately and says you're not qualified um ask them about manual underwriting is that a thing that you do if so is that something that i could qualify for and if they say no it's something we can't do then maybe look at another lender who does do manual underwriting that way you can get an additional opinion an additional view with fha and if you can qualify now seller credits seller credits are when you ask the seller to pay a portion of the purchase price towards your closing costs and this is negotiated when you get under contract fha will allow you to ask for up to six percent of the purchase price so on a hundred thousand dollar purchase price you could ask for up to six thousand dollars towards your closing costs on a 200 000 home we could ask for up to 12 000 towards our closing costs their closing costs are probably never going to be that high um but it is what fha does allow here um for what you can ask as a maximum so some special requirements and features um we did talk about house hacking this is super common on fha loans kind of in the investing world a little bit also there is a hundred dollar down hud rio program meaning if you're purchasing a home from hud and you get you can just google the hud home store find homes there you can actually do a hundred dollar minimum down payment instead of 3.5 hud basically says hey if you buy this home from us meaning it was a foreclosure it was an fha foreclosure instead of doing a three and a half percent down you can just do a hundred dollars down all right there also is a 203 k rehab loan meaning if there is a home that needs work and it's not going to qualify through an fha appraisal you can actually finance the rehab costs inside of the fha loan you're going to run into higher rates it's going to take a longer time to close it's going to be a more complicated process but it is an option that you have available to you also fha is really common as in my mind a bridge strategy now no one else calls it that i call it that burst light when i'm talking to clients but anytime i run into somebody who has a lower to mid credit score and we say you know we're probably going to need an fha loan to get you qualified for this house what i recommend is that they qualify with fha to get the home then they work on their credit score ideally within two to three years i'd like them to refinance into a conventional loan with a higher credit score and i call this a bridge because in my mind fha really is only good as a short-term loan i shouldn't be holding an fha loan for longer than i mean personally i would say five years is even getting to the point where it's like oh we're holding on to this for a little bit too long all right so fha is going to be given in 30-year terms 20-year terms 15-year terms but you shouldn't be holding it on to to it longer than five years i think um what would be best is if you need to qualify for with fha maybe because your credit's a little bit lower or you have a high debt to income ratio then get that loan that's perfectly fine but now we need to work on a game plan to refinance into a cheaper loan in the future and there also is down payment assistance programs that you can find again they're going to be a little bit more costly it's going to be a longer process to go through than just going you know funding the down payment yourself but it is an option that you have available to you now refinancing after you get this fha loan you can refinance through a process called streamline it's called an fha streamlined refinance and this is actually really nice because if you want to take advantage of a rate a good example would be if you purchased a home with fha last year okay maybe your rate was closer to four percent well interest rates have dropped significantly and now it's closer to you know high two percent so instead of doing a refinance where you need uh to recheck credit recheck income recheck the appraisal and get the whole process done again fha allows what's called a streamlined refinance where they don't have to check credit they don't have to check income and they don't have to check the appraisal you go through a refinance that's cheaper and a lot easier of a process you can probably get this done within two weeks and it's just going to take you to a lower interest rate now you can also refinance from fha to a conventional loan now they're going to have to recheck income recheck credit recheck your appraisal but the ideal goal would be here is that you had a higher credit score so now you can move into a conventional loan that's going to be cheaper for you long term and or you can remove that mortgage insurance premium when you hit 20 equity in the loan because again keep in mind for most people mortgage insurance is not going to fall off on an fha loan and eventually we want to get rid of that so now let's walk through a cost comparison a lot of people just don't talk about the comparison uh of costs with fha so we're going to compare this with a 640 credit score all right now 640 is interesting because technically the minimum for a conventional loan is 620. so with a 640 score there's a good chance that we could qualify conventional however conventional tends to be better for people with a 680 score and above and in fact conventional loans tend to penalize people who have below a 680 score with a higher interest rate and higher mortgage insurance and so what i recommend for people is even if they can qualify for a conventional loan if they have a mid 600 score fha short term is probably going to be a better option so let's run through an example here so we can see conventional uh we're comparing is a 300 000 property we can see the down payment on each so conventional is 5 fha is 3.5 we can also see the interest rate how significantly lower the interest rate is on fha again because conventional tends to penalize those uh middle middle to lower credit scores even though they technically can qualify also our mortgage insurance cost is significantly cheaper by about a hundred dollars all right we can see this monthly breakdown i put in an estimate of taxes and insurance in here but looking at this chart tells us a lot about these as well we can see if we took a 640 if we had a 640 score and we went conventional over a period of 20 years we would be saving 73 000 by going with fha okay now what this doesn't account for is you increasing your credit score and then getting a conventional loan but what ends up happening is we can see fha is actually a cheaper option even though it has mortgage insurance because we get such a lower rate on fha it's a cheaper option if we have low to middle credit now ideally the best thing to do would be to get the fha loan take advantage of the cost savings within here within this this period right there's a child screaming outside take advantage of the cost savings here and then when your credit has increased that's when we want to refi to conventional and when we refi to conventional this we're not going to get this conventional loan we're going to get a conventional loan that's probably going to be charting closer like that all right where we're going to get a lot more cost savings compared to fha because we have a higher credit score which is what conventional loans tend to want now let's also talk about the seller perception because when we're using loans it's really important to keep in mind how is the seller perceiving our offer because it's we're not gonna have a good chance of actually getting the home if we come in with bad financing so sellers see fha loans as less attractive than conventional however they're more common than other types of loans like va and usda so if you are coming in with a fha loan it is good to maybe ask for less seller credits maybe to ask for a shorter closing time do things that would make your offer a little bit more attractive knowing that you're competing against cash and conventional offers even things like writing an offer letter can be really helpful if you're coming in with an fha loan that way the seller you know we want to give the seller confidence that we can still close on this loan even if we have to use an fha loan here and then also how do we apply so we don't apply with fha you can't actually apply with fha but you can apply with pretty much any lender almost all lenders are going to allow you to use fha no matter who it is whether it's a broker a credit union a bank a direct lender they're all going to be able to give you an fha loan so in my my recommendation is a shop of three different types shop with a local credit union shop with a local broker and then shop with a direct lender or a big bank that's going to give you a really nice spread to see the different options that you have available to you based on different types of lending organizations um that way you can see same you know they're all fha loans but they're all going to look slightly different depending on their rate and their costs based on the company itself okay so if you want to learn more about the four main types of loans this playlist over here is going to give you some insight so you can choose the best loan to save the most amount of money moving forward

Channel: Win The House You Love

Views: 1,065,845

Keywords: win the house you love, kyle seagraves

Id: S-v9ZxJevfo

Length: 33min 58sec (2038 seconds)

Published: Sat Jan 09 2021