FHA Guidelines: All You Need To Know

There Are Over 1,000 Pages of FHA Guidelines

The government issues lots of paperwork, and there is no finer example than FHA guidelines, a modest collection of mortgage thoughts and thinking which includes a mere 1,009 pages of legalisms, exceptions, and requirements.

None of this should be a particular surprise, because, after all, the FHA is part of the government, and the government is known for consuming trainloads of paper.

However, this is a case in which government paperwork operates in your favor. The FHA has been around since 1934, and has backed more than 46 million loans since then. The reasons for the program’s success are buried in the guidelines.

FHA Guidelines: The Short Version

So what’s in the FHA guidelines that borrowers really need to know? Do you have to read more than 1,000 pages of dense government jargon to understand what’s going on?

The good news is that borrowers don’t need to know the many technicalities and complications that apply to lenders. What they should know – and what’s helpful – are some basics, including:

FHA Offers Consumer Protection

FHA loans are designed to reduce marketplace risk for both borrowers and lenders. This means you won’t find any “gotcha” clauses with FHA mortgages, no prepayment penalties, and no hidden fees.

For instance, the FHA requires every purchase agreement with an FHA loan to contain FHA’s Amendatory Clause. This states that if the property appraises for less than its purchase price, the FHA borrower is not obligated to complete the purchase.

Read: How An FHA Appraisal Works

FHA Loans Have Low Down Payment Requirements

You can get FHA financing with 3.5 percent down, even if your credit score is as low as 580. If your score is between 500 and 579, you’ll need ten percent down.

While loans with credit scores below 580 are possible in theory, in practice, the odds of getting one are remote. Fewer than .3 percent of all FHA loans go to borrowers with a credit score below 580.

Since the FHA endorsed 1,258,063 mortgages in FY 2016, this means that fewer than 3,800 FHA loans went to borrowers with truly low credit scores.

Read: Before making A 20% Mortgage Down Payment, Read This

There Are Rules For Down Payments

Your down payment – 3.5 percent – is crucial. Under FHA rules, down payment money can only come from you, friends and family willing to make a gift, or through an approved down payment assistance program.

The down payment must be sourced, and you must provide a paper trail. For instance, if your parents give you money, you need:

• Letter from parents stating that the money is a gift
• Copies of bank statements from parents showing that they have have money to give you
• Copies of deposit slip and check or transfer documents showing you getting the money

The nice thing is that the FHA requires no minimum contribution from you. If you can get your whole down payment from other people, you can still get an FHA loan.

Read: Down Payment Gifts: How To Give And Receive A Cash Gift

FHA Insurance Helps You Buy Sooner

FHA insurance premiums are a real cost, but also create a real benefit. The upfront mortgage insurance premium (the upfront MIP) is now equal to 1.75 percent of the mortgage amount.

The annual mortgage insurance premium (the annual MIP) is set at .85 percent of the outstanding loan balance. You can add the upfront MIP to the loan amount if you choose. If you choose that option, you won’t have to pay for it out-of-pocket at closing.

And what is the benefit of this insurance? Imagine that you have to save to buy a home. As a matter of common sense, it’s a lot easier to save 3.5 percent of the purchase price rather than 20 percent.

If the only option was to buy with 20 percent down, many would-be purchasers would either be pushed out of the market completely, or their plans to own a home would be delayed for years.

Meanwhile, it’s very possible that real estate values would go up. That would make the path to home ownership even more difficult.

For example, the National Association of Realtors reports that home prices in March reached $236,400, up 6.8 percent from March 2016 ($221,400) and the 61st consecutive month of year-over-year gains.

Read: How To Cancel FHA Mortgage Insurance

FHA Guidelines Are Flexible

The qualification standards for FHA mortgages are generally seen as liberal in a time of tight credit.

• As much as 31 percent of your gross monthly income can be used for housing costs such as mortgage principal, mortgage interest, property taxes, and property insurance – what’s known as PITI.
• Up to 43 percent of your income can be used for recurring monthly debts such as housing costs, student loans, auto financing and credit card bills. Other programs can have much lower limits — down to 36 percent for some products.
• You can push the envelope when qualifying for an FHA loan if you have one or more “compensating factors.” For instance, very good credit, conservative use of credit, demonstrated savings habit with regular deposits, energy-efficient appliances, an emergency savings account with at least two months mortgage payments.

Read: 8 Ways To Get A Mortgage Approved (And Not Mess It Up)

Sellers Are Allowed To Pay Your Closing Costs

While sellers cannot contribute to the FHA down payment in any way – that’s a huge no-no – property owners can contribute up to six percent of the total sale price to buyers in the form of a “seller contribution.”

The cash or credit from a seller contribution can pay closing costs or reduce the loan amount. It cannot be used to fulfill your down payment requirement, however.

Of course, in a strong market with rising prices, it follows that seller contributions will be rare. In a buyer’s market, owners may need them to sell their homes. In other words, seller contributions can be negotiable item.

So, nope, there’s no need for borrowers to read through the FHA guidelines. It’s enough to know that the FHA guidelines exist — and that the government vigorously enforces them.

Read: Interested Party Contributions: Getting The Home Seller To Pay Your Closing Costs

What Are Today’s Mortgage Rates?

Today’s mortgage rates are among the lowest of the year, if not the lowest of the year so far. To get your best deal on a home loan, obtain quotes from several lenders.

Choose the most competitive few and call a loan agent from each one.

Work with the one with whom you feel most comfortable.