FHA Loan Requirements and Underwriting Guidelines 2017

There are several reasons why a borrower would want to consider applying for an FHA loan. You may want to buy a home, but you don’t have a down payment that a conventional mortgage would require. You would like to refinance your property, but you don’t have the required amount of equity in your home, or you might have had some credit issues in the past that has given you an unhealthy credit score.

What is the Federal Housing Administration?

The Federal Housing Administration, commonly known as “FHA,” is part of the U.S. Department of Housing and Urban Development (HUD.) The program was created for low income individuals, or families that might need a little help in the home ownership process. FHA does not fund loans; they insure residential mortgages for FHA approved lenders in case a borrower defaults. This allows borrowers to qualify with lower interest rates and be subject to less strict underwriting guidelines.

FHA Mortgage Requirements for Purchases and Refinances

  • FHA provides insured mortgages for single family homes, multiunit homes, as well as condominiums
  • FHA loan maximum can vary per county; however, $521,250 is the average for most counties. You can check what your county’s maximum loan amount is here
  • As of late 2009, the minimum down payment has risen from 3% to 3.5%
  • You must have two years of steady income and your DTI (debt to income ratio) cannot exceed 29%. Meaning, if you have a monthly income of $3,000, your mortgage payment cannot exceed $870, which is 29% of your monthly income
  • The borrower cannot have a credit score under 580, or 620 depending on the lenders’ guidelines
  • The first mortgage to be refinanced must already be FHA insured and current
  • The new FHA refinance must reduce the borrower’s monthly principal and interest rates with a cash-out no greater than 85% loan to the value of the home
  • A bankruptcy must have been discharged for a minimum of 2 years and has not had a foreclosure for at least 3 with unblemished credit since
  • Minor collection accounts do not need to be paid in full in order to qualify for the loan. Judgments, on the other hand, must be paid in full.

These are the latest FHA mortgage requirements from HUD as of  the changes that were made in late 2009. If anything should change in the mean time, please let me know and I will update the requirements immediately.

Expected FHA Mortgage Insurance Premium Increase

On Wednesday, January 30, 2013, the Federal Housing Administration (FHA) announced that they will be increasing the rates that they charge on insurance premiums for mortgage loans. This is just one of multiple steps that are being taken to the FHA, allowing them to shore up finances weakened by the recent economic woes. In addition to the insurance premium increases, borrowers will now be required to pay their mortgage insurance for the entire life of the loan. Currently, the reports have indicated that the expected increase for yearly premiums on mortgage insurance rates is expected to rise by 0.10 percent for the majority of new mortgage loans and 0.05 percent for any borrowed amounts that are $625,500 and over.

Coupled with the FHA’s mortgage insurance premium increase, any homeowner who has an FHA-backed mortgage will now be expected to continuously pay on these premiums, which are based on the unpaid balance of the money borrowed, through the entire life of the loan. There will no longer be a cancellation of premiums when the borrower has repaid 22 percent against the principal of the loan.

Any borrowed amounts that are $625,500 or more will now require homeowner’s provide an increased down payment towards the purchase price before they will be eligible for the loan. Currently the down payment rate is a minimum of 3.5 percent of the overall amount of the home that is being purchased. The percentage is expected to increase to 5 percent for a down payment prior to being able to obtain the loan. In addition to these increases in down payments to receive a loan, it will be increasingly difficult for borrowers to obtain a loan with poor credit scores as well as high debt to income ratios. Additional changes are currently being planned for reverse mortgage programs through the agency. These proposed changes are expected to only apply towards new loans and will be announced officially within the next few days, according to reports from the FHA.

FHA Commissioner Carol Galante released an official statement announcing that “these are essential and appropriate measures to manage and protect FHA’s single-family insurance programs.”

The FHA report at the end of the 2012 fiscal year revealed a $16.3 billion deficit in the insurance fund. The majority of the problems, they have determined, are tied directly to the various mortgage loans that were insured by the agency through 2007 to 2009. The United States Department of Housing and Urban Development announced to Congress in November 2012 that their claims against the FHA’s insurance funds, which are tied directly to these loans, are expected to reach costs of $70 billion.

The FHA has already increased their mortgage premiums four times since 2009 to attempt to protect them from any potential financial loss. Within the last year, the FHA provided insurance towards almost 1.2 million single-family mortgages. These have reached an overall total cost of $213 million. The reports from the agency have shown that approximately 78 percent of all the loans established during this time were provided towards first-time home buyers.