FHA Loan Requirements (NEW And Complete Guide)

hey kyle here with winthehouseylove.com in today's video we're going to 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 so there is a scroll bar at the bottom you can use to skip around to different portions of this video but i promise you at the end of this video you're going to know more about fha loans than most home buyers and probably more than a lot of loan officers we're going to cover all the details you need to know to see if you can get approved for one the steps to get approved for one and if it is going to be the best option for you to move forward with it or if you want to move forward with a different type of loan so let's cover 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 usd are kind of the four main types of loans that most people get conventional loans actually have three percent down usda loans have zero percent and va loans have zero percent down so a lot of people think oh three point five percent down is much better than the twenty percent down needed on conventional when actually you only need three percent down on a conventional loan if you're a first-time homebuyer however 3.5 down still is super low also what's really great about fha compared to uh 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 commercial loan they look at fha next okay and this is really is one of the most lenient if you can't qualify for commercial 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 which we'll talk about here in the affordability section as well but 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 a 680 credit score you still can get a fha loan and could be a good option if you have high debt to income ratio but usually you're going to find better rates and terms if you get a conventional loan if you have a higher than 680 credit score now one thing i really want to stress about this video 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 as an fha loan but then there's steps that you need to take to figure out how to qualify for a commercial loan because we want to get longer or we want to get cheaper debt for the long term and fha tends to be a more expensive loan long term which i will break down this cost analysis near the end of this video okay so now let's cover what is fha 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 tons of lenders most lenders in the us offer fha loans and what can happen are fha creates the base guidelines um but then lenders can add rules on top of it so if the base rule is minimum 500 credit score fha can actually our 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 okay so fha federal housing administration and what they do is they don't make loans they just insure them i'll talk about here more in just a second it's overseen by hud which is the us department of housing and urban development and again it doesn'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 a loan what ends up happening is lenders issue fha loans and then what they do is they go to uh basically fha fha basic kind of thing but almost like they give like a sealed approval on that loan hey everything looks good and then they'll actually insure the payment to investors on the secondary market which is why fha loans usually are just a lot more lenient because they're backed by the federal government okay now let's talk about some coveted changes that have happened from 2021 to 2022 in 2021 when covid uh 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 was happening is we saw credit score minimums skyrocketed up to around 640. this is one of the overlays that was talking about except most lenders were adopting those overlays overall getting a loan an fha loan during 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 talking with 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 was kind of some stringent requirements on proving future income if you're self-employed future employment now is uh starting to become allowed for a while it was not being allowed for example getting a loan just based on your job offer um 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 um when cove first was happening this was almost not allowed across the board and now that is coming back and then if you have been in forbearance you need to show three on-time payments um post-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 percent down all right if you have a 580 credit score and higher the minimum is 3.5 down some really interesting note which i will cover this here in just a little bit a little bit more is that if you do have 10 down mortgage insurance will fall off uh if you put less than 10 down mortgage insurance will not fall off and again i'll cover that here in a future slide in a second so this is a pretty big difference right if we're talking about a four hundred thousand dollar home ten percent down is forty thousand dollars as a down payment three point five percent down is fourteen thousand dollars down as a down payment and so if you're in that range or if you're like in a 570 range if you can increase your score up to 580 or higher you can reduce your your down payment dramatically from 10 percent to 3.5 percent down and 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 and these are going to be based more specifically um 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 down payment assistance often can have some sort of i don't want to say necessarily a catch in a bed a bad way but there are terms you need to consider sometimes the rate is higher sometimes the loan has to be paid back sometimes you have to stay in the home for five to ten years you want to make sure you understand those terms before you accept down payment assistance now do keep in mind though when you are buying a home how how much you are putting down how much equity how much stake you have or ownership you have in your home because 3.5 down is a very small sliver of ownership and 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 in mind it usually is much safer to put in a higher down payment if you can but fha does go down to 3.5 percent now the closing costs uh portion you have your down payment and the closing costs um with all types of loans um with fha it's going to be very similar to pretty much every other type of loan you do have an upfront mortgage insurance cost 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 are 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 okay down payment closing costs are going to cost you fifteen thousand dollars 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 and so usually this is done with 60 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 one percent of the purchase price or higher as a large deposit and these are non-payroll deposits so for instance if you're buying a home that's three hundred thousand dollars and you had four thousand dollars 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 a loan from a 401k or other real estate that you have like a home equity line of credit that is allowed you are 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 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 down payment and it can be secured against the home or unsecured i do have a more detailed video covering that if you're interested more in that as well again you can get a gift from a family member for down payment and closing costs cash on hand technically is 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 ex count on it if you have cash if you want to use your cash you'll need to deposit into your bank account and wait at least two months so your funds will be what is called seasoned and then that way that 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 and just a little fun bit of trivia here the reason why bank accounts are looked at so strictly here is primarily because 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 line by line in that way okay so credit score here is how the credit scores are used most people have three credit scores one from equifax experian and trans union 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 xperia 636 with transunion fha would use this middle score if there are two people on the loan you and somewhat like a cobarter what fha will use is 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 okay so with the 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 was 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 5 580 and higher requires 3.5 down 640 is the most accepted okay so if you have a 640 with most lenders you're not going to run into uh too many issues with overlays and then when you get to 680 it's potentially not worth it because again if you're a 680 credit score or higher what i would start to do is make sure you also get a quote for a conventional loan 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 okay again this is the most lenient kind of major type of loan in terms of its credit approval if you do have lower credit um because 620 is the minimum for conventional loans so fh 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 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 credit events are like when something happens um one event that kind of impacts your credit pretty significantly think of like a foreclosure or something like that um so fha is more forgiving on revolving and installment lates 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 non-medical collection greater than 2 000 total needs a plan with it so if you do have medical collections these are ignored on fha loans um no matter the size i've worked with a client who literally had a hundred thousand dollar medical bill um and it was from i believe he got like uh it was like a helicopter rescue and he's fine um but that was not counted into his loan at all even though it's a hundred thousand dollar medical collection so anything that's non-medical collection greater than 2 000 total between all the collection accounts if you have several it either needs to have a payment plan or it needs to be paid off or it needs to have five percent of the balance included in the debt to income ratio which will cover in the affordability section but for instance if you have a five thousand dollar 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 afford 250 dollars per month less in 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 want to keep in mind here so credit events um if you have a deed in lieu a foreclosure or a 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 into manual approval which is a harder loan to get more strict requirements on fha 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 lanes 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 commercial loans it's going to be similar to usda rates um va rates for veterans tend to be much lower and 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 give you credits towards your closing costs and so with an fha loan one of the features of it that is a little bit better than conventional is that 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 does mean higher interest over a longer period of time i do have a web page you can look at average rates compare conventional and fha it's a win the house you love dot com rates if you're interested the link is also in the description so now let's talk about mortgage insurance one of the most painful things about fha loans is their mortgage insurance because there's two types so conventional loans have what is called pmi private mortgage insurance and mortgage insurance um 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 and this is where fha actually tends to be more expensive than commercial loans is because of the mortgage insurance premiums so first you have upfront mortgage insurance premium this is 1.75 percent of the loan and this is most the time is added to the loan uh balance up front okay and i'll give an example here a second and then you have 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 dollars and 50 cents per month for the first year and then it would lower every year after that with a 300 000 loan 50 250 5250 upfront as a mortgage insurance premium that 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 and usually 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 okay now let's then explore what we need to do in the meantime to refinance into a cheaper conventional loan so 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 in pmi than if you had a lower credit score with fha it does not matter if you have an 800 credit score or 500 credit score you still pay the exact same mortgage insurance premium also mortgage insurance premium will not fall off at 20 equity like it will on a conventional loan it will stay on uh no matter your down payment it doesn't just automatically fall off at a specific equity point however it stays on for the life of the loan unless you put 10 percent or more down if you do then it falls off after 11 years okay so a fall off on fha mortgage insurance only happens after 11 years if you put 10 or more down all right so if you put 3.5 down in the beginning it will never fall off even if you get to 10 equity even if you get to 20 equity it doesn't fall off the only way to remove the mortgage insurance is to like if you put less than ten percent out you will have to refinance into a conventional loan and have 20 equity to remove the mortgage insurance premium okay 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 homebuyers it does have to be a primary residence and so usually what this looks like is 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 and then you can sell it at any time if you want to so the one-year occupancy thing kind of tricks people up uh trips people up 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 in time so you could buy 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 multi-family 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 a fha condo approved list or it needs to have a condo spot approval which can be kind of a lengthy and frustrating process and 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 so i do have a link to the condo lookup in the description as well what was that noise uh property requirements there is a property flip rule all right and 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 okay if it's between 91 and 180 days here are the stipulations a second appraisal is required if the sale price is 100 or more overpriced paid by the seller if the second appraisal is more than five percent lower than the value of the first appraisal the lower value must be used and the buyer is not allowed to pay for the second appraisal this doesn't happen super often but every once in a while i have run into an issue where someone has flipped it home and when i say by flip it doesn't have to mean like remodel it's just a flip just means bought sell buy sell that's it that's all that'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 uh 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 requirement all right so house hacking house hacking is very common with fha loans this is a big kind of semi investment strategy again you're buying a multi-family 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 um so that can help to offset uh the mortgage payment in your debts income ratio if you're buying a home that has a three to four unit home there are three to four units uh you have to use what's called a self-sufficiency test so basically the home uh or the multiple units have to be able to pay for itself 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 um 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 two thousand dollars per month you need to have six thousand dollars in savings after you pay down payment and closing costs as reserves 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 to you can live in there for as long as you'd like but live in 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 than like a conventional loan would be um 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 uh for your purchase because these appraisals stick with the property now this sometimes can be a good thing because hey if principal's 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 and 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 an fh appraisal fha is concerned with their appraisals about what they blanket they call health and safety issues so think of things like structural soundness and kind of more move and ready is what you're going to expect with fha primarily and it is stricter than conventional because it is government insured so here are some appraisal highlights i'm not going to run through all these because this is a long list but feel free to screenshot this 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 get it fha loan you need to make sure that all 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 uh you need needing to fix them the seller needed to fix them or the deal to be uh cancelled entirely so i'm gonna run through some example homes because sometimes people hear like the requirements for things and in their mind like well there's nothing i can ever afford here's some examples for you here in columbus here is a home it has a gorgeous living room and looks nice on the outside 430 000 with 3.5 down would run you around 15 000 down payment i would estimate closing costs somewhere around 8 500 in there as well uh your total mortgage payment on this would be around 26.72 and you can see that mortgage insurance premium in there is almost 300 which is why fha loans can be pricing 300 is just going to the mortgage insurance for this fha loan um in here uh here's a home for phoenix um what you need to do is actually do 8.5 down instead of 3.5 and the reason why is because there are loan limits for fha which i will cover here in just a little bit and so actually to make sure we don't exceed the maximum loan limit you need to put a higher down payment down so on this we need to put almost just a little bit above 39 thousand dollars down closing costs would run somewhere around 9 200 and the total monthly payment would be around 25.91 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 than that that's perfectly fine okay sometimes i see people and they're like i'll never be able to afford a home now like not every home is 400 thousand dollars it might be different in your area might be higher in your area i don't know exactly where you live i can't have every situation apply to every single person watching this video unfortunately loan limits like we just talked about these are updated every year most of the time at 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. okay and 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 0.965 and so that gives us a maximum purchase price 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 minimum or the maximum loan amount uh 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 limit's higher and if you're in a high cost area that actually the limit's actually higher most of the country uh this doesn't apply to but if you're in high cost areas um think of areas in 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 on a similar field if you are planning on changing jobs though and retirement does count as employment so in the employment field if someone asks you for your employment and you've been employed for or you've been retired for five years just write in retired that's your employment history okay if you're a student that counts as your employment history they just want to know what you've been doing the past two years okay 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 non-taxable income you can gross it up by a hundred and fifteen percent so for instance if you have uh like social security um you can actually multiply that times one point one five so twenty five hundred dollars a month in social security that is non-taxable grossed up would be 28.75 so that would be using your debts 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 income ratios there is no minimum or maximum income limits sometimes i see people say like 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 fha probably not for probably for a very small house you could also make two million dollars a year and qualify for fha um self-employed you need to have two years average of your tax returns that's what's going to be used as your income and then we look at affordability fha uses a metric called debt to income and what this is 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's two different types of dis income ratios there's a front end and a back end front end is also called your housing ratio so it is only the mortgage payment divided by so the mortgage payment which is a debt divided by your gross monthly income and the back end which is your mortgage payment plus any other debts so like a credit card car loans student loans those added together divided by your monthly gross income so if you had a 60 000 per year income the maximum housing payment you could have would be 23.49 and the maximum back you could have would be 28.49 so what this means here is the maximum mortgage payment you could have with 60 000 per year income would be 2 349 and then you could 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 ratios these are the absolute maximums this might not apply to you though often if you have a lower credit score those 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 manual under 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 and if that's the case usually you're going to be looking at much lower to income ratios if you are in a community property state which you can just google that community property state oregon community property state florida see if you're in a community property state your spouse's debts do need to be included in the debt to income ratio as well now just because these are the maximums again 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 2400 per month mortgage payment that would be pretty insane that would be what a lot of people would call being a 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 on okay now i do have a really quick calculator that you can use if you want to look more at your affordability and so i call this a max purchase price calculator the link is in the description what it allows you to do is put in your scenario so we'll do 3.5 down on a 30-year loan and 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 uh that's a conservative estimate based on much lower debt income ratios fha would actually likely approve this person up to 450 000 a uh dollar 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 this calculator i wrote it as risky this is incredibly risky to take on a payment that that's that's that high but i just wanted to show you and illustrate 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 leniency 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 if you are interested so now let's talk about student loans here so student loans also are going to impact your affordability and your debts income ratio if you do have them there have been some new changes with income driven repayment which is really nice but really quickly i want to talk about cavers so if you have any student loans that are in default likely what's happened is you've been reported to the cavers system and this is a government database that shows anybody who's defaulted on federal debt if that's the case if you defaulted on a federal student loan you will not be able to get a new fha loan right 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 loans and get out of cavers before you can apply uh for an fha loan and get approved for one so if you do have any loans that are in federal student loans that are in default not private federal student loans that are in 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 zero dollars 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 zero dollars 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 your normal payment on your student loans would be let's say 500 per month but you're on income driven repayment and so you only pay a hundred dollars per month you can use the 100 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 is able to use the hundred dollars per month in your debt to income ratio instead of the 500 per month in your debt to income ratio as long as it's not zero dollars per month and as long as it's not deferred you're actively paying an idr above zero dollars then you can use that in the debt to income ratio so an example uh using the point five percent would be if you had a fifty thousand dollar student loan balance that will be two hundred fifty dollars per month in the debt to income ratio which again can drag down how much you're able to get approved for manual underwriting talked about this a little bit 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 and the computer software is going to say like thumbs up or thumbs down i actually have oh let's see i actually have a embroidered pillow i'm not obsessed about mortgages uh see approve eligible and refer with caution okay so these are kind of the two sides don't ask me why i have this pillow um the two sides here so approve eligible is great that means hey the loan uh 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 version a lot of lenders at that point will 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 and 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 an 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 and 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 and then also you can see in different instances if you have a 580 credit score above the ratios go to 40 and 50 but you either need reserves you need a minimal increase in your housing payment you need residual income there's all these other what are called compensating factors that can add to the complexity so feel free to screenshot this if you'd like to look into this a little bit more seller credits 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 and so fha allows you to request up to six percent of the purchase price uh for closing cost credit this is negotiated okay so it's important to keep in mind that 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 like we don't need any closing costs and another one's like we need you to give us five thousand dollars the seller does not want to give that person five thousand dollars 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 so just keep that in mind talk with your realtor about how that will impact your offer if you do look at that so a 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 twelve thousand two hundred and fifty dollars as three percent down here um why is my pin not working there we go let's estimate closing costs around sixty five hundred dollars and then if we ask for a one percent seller credit so one percent of the purchase price the seller is giving us thirty five hundred dollars to help us with our closing costs that would bring our total cash at do it closing of fifteen thousand two hundred and fifty dollars now let's talk about some special requirements and features uh the daca allowment is that a word daca is now allowed this is new for 2022. this is a change that happened in 2021 somewhere mid way through the year um when for a while fha really didn't have any they didn't say anything about daca recipients being able to be approved for an fha loan or eligible for an fha loan and 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 you've seen in this video house hacking 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 and so it's a really great way to start getting into in the investment world while still owning a home um and without the expensive upfront cost that is required with an fha loan um this one is not very known is the 100 down hud rio program so if you find a home that is owned by hud so you can find this in the hud home store so talk with your 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 100 down so instead of three point five percent down literally it's a hundred dollar down payment you still have closing costs but a hundred dollar down payment on that home as long as your lender has that program as well um 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 i have an entirely separate video on that because it's very complicated and i can't just cover it in a blurb here and then bridge strategy this is something i've made up now the strategy itself just like called 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 and then they hold on to it 4 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 your income you need to find a way to increase your property value so many different strategies that we can refinance into a conventional loan so you don't have that mortgage insurance forever there's no point in paying the expense of mortgage insurance on fha for 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 to then refinance into a cheaper control loan also fha loans like we talked about 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 refinancing so if you 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 decline 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 you know credit check and income and employment all that stuff usually they want to see that you've been paying the fha loan on time and then you can refinance into a lower rate and then also what's very common is for people to refinance from fha to a conventional loan usually if your credit score increases and then also to 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 so i also want to talk about the success rate and seller perception fha loans are less attractive than conventional loans when a seller sees somebody has fha in their mind they're usually thinking the appraisal is going to be a little bit tough maybe this buyer doesn't qualify as much as a commercial buyer there's 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 the market exists there's no way to get around that a commercial 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 like 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 and 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 that unfamiliarity can make it difficult for sellers to want to go with fha as their first choice and here's a quick clip from my friend javier verdana on fha loans and their seller perception of them when making offers with an fha pre-approval they're put with it there's one thing you need to understand fundamentally you're at a disadvantage why are you a disadvantage well most agents regard fha offers weaker than conventional and they are going to 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 will 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 all right and so finally how do you get one how do you apply for an fhl 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 like i'd like an fha loan pretty much any lender can offer fha that you talk 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 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 thanks so much for watching i hope this video was helpful at this point you should know a ton about fha if you're if you're overwhelmed at this point that's completely normal feel free take a break come back to different sections if you have questions about it i also have a ton of other videos about fha loans you can just search in youtube when the house you love fha to find some more of those if you're interested

Channel: Win The House You Love

Views: 779,663

Keywords: win the house you love, kyle seagraves

Id: VXISYMYpfaI

Length: 49min 55sec (2995 seconds)

Published: Thu Jan 27 2022