FHA loans are available to most any buyer that qualifies. Unlike the other two government-guaranteed loans, the VA and USDA programs, there are no restrictions on who can apply or where the property must be located. As long as the home is going to be the borrower’s primary residence, either of the three can be used.
FHA loans do require a down payment but it’s relatively small compared to most conventional loans. The down payment is 3.5% of the sales price. In addition, approval guidelines are somewhat relaxed compared to other low down payment loan programs. This low down payment requirement and easier approval make it an ideal choice for first-time buyers. In fact, the FHA loan is used by first-time buyers more than any other program in today’s marketplace.
When you’re getting ready to buy a home and you’re going to take advantage of an FHA loan, there’s going to be some paperwork involved. Your loan officer can provide you with a list of required documentation but to give you a head start, here’s what you should start gathering-
Lenders will determine your ability to repay the mortgage by comparing the mortgage payment, including an amount for property taxes, insurance and mortgage insurance with your gross monthly income. Be prepared to provide copies of your most recent check stubs covering a 30-day period. The paycheck stubs will show both the amount paid and a year-to-date total.
FHA loans also require at least a two-year history of employment. Lenders verify this history by requesting the last two years of W2 forms. The annual income reported on the W2 should match up with what you’re getting paid now. Lenders also like to see an increase in income which indicates job stability and performance but that’s certainly not a requirement. What can be an issue however is a drop-off in year-over-year amounts.
If you’re self-employed, you likely won’t have your own pay check stubs. You might receive income at various times based upon work performed and invoices paid. There is also a two-year history of self-employment required. Lenders will ask for copies of your last two years of personal and business tax returns along with a year-to-date profit and loss statement. Lenders will calculate your qualifying income by averaging the last two years of income with the year-to-date amount.
If you receive income from other sources that is greater than 25% of total income, such as interest or dividends, your income will be documented as if you were self-employed. You will also sign a form referred to as the 4506-T, which is a form that allows your lender to get copies of your last two years of federal tax transcripts. These amounts will be compared to what is shown on the tax returns you provided.
You’ll also need to provide evidence of having enough cash on hand to close on the transaction. This means getting copies of your most recent bank statements or other accounts where you’ll be withdrawing funds. The amounts listed on the statement must show enough funds for the down payment, your closing costs and cash reserves. Cash reserves are simply money left over after the loan has closed and calculated as the number of months of house payments. If the lender asks for three months of cash reserves and your mortgage payment is going to be $1,200, you’ll need to show you’ll have $3,600 available for the reserve requirement. However, the good news with FHA is that the program does not require significant reserves.
Okay, but what if you’re refinancing and not buying? If you currently have an FHA loan and are going to replace with another FHA loan, you can qualify for the FHA streamline refinance mortgage. There is very little documentation required for an FHA streamline. You won’t need copies of your pay check stubs or bank statements and you won’t need tax returns. An appraisal requirement is often waived. When you’re refinancing an existing FHA loan with a new one, very little paperwork is required.
On the other hand, if you’re taking out an FHA loan and refinancing a non-FHA loan, standard documentation will be required, very much the same when you first purchased the home.
Buyers that have questions or want to learn more can contact us at the number above 7 days week.