If you decide to seek an FHA loan there are certain guidelines that Agency loan counselors will want you to meet. Two of the most important are the relative amounts of your mortgage and your household income, and the monthly mortgage payment in relation to your total monthly debt obligations.
Generally, the FHA will want your mortgage payment (generally meaning principal, interest, property taxes and property insurance — PITI) to be no more than 31% of your gross monthly income. Further, your total monthly debt obligation including the mortgage; credit cards; auto loans; student loans; etc. should come to no more than 43% of your monthly income. These ratios are more generous than many that you will find for non-FHA loans being offered today. Even higher ratios are available if you are purchasing an energy-efficient home. The so-called “stretch” ratio is 33/45 — 33 percent for PITI and 45 percent for all ongoing monthly payments. The FHA requires an appraisal of the property. Beyond physical inspection, the applicant must disclose all “sales concessions” to the appraiser. Those may include loan discount points, origination fees, interest rate buy downs, closing cost assistance, payment of condominium fees, builder incentives, down payment assistance or monetary gifts. The FHA has a list of closing costs which it considers reasonable and customary. Those include:
- Lender’s origination fee (one percent maximum)
- Attorney’s fees
- Appraisal fee
- Inspection fee (up to $200)
- Title insurance and title examination fee
- Property survey
- Credit reports (actual cost)
- Transfer taxes and recording fees
There is a cap on the amount you can borrow through an FHA loan. It is based on the median cost of a home in your area and it is adjusted annually. You can find the maximum loan amount available through the FHA for your area on our 2010 FHA Loan Limits page. You can also find a list of FHA lenders who can assist you with your loan calculations. The FHA has certain credit history guidelines that generally play a role in qualifying for a loan. Credit scores above 620 will probably qualify through the automated application process. Scores below 620 will be rejected in the automated process and will be processed manually, including an interview with the applicant. With re-established credit, applicants who are still paying on a Chapter 13 bankruptcy filing are eligible after one year and those who filed Chapter 7 are eligible after two years. Applicants who have gone through foreclosure are ineligible until at least three years have passed since the foreclosure date. In the interim, the applicant must have reestablished good credit. Any civil judgments must be paid off. Any delinquency on federal debts such as taxes and student loans will disqualify the applicant.