In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now families that may have otherwise been excluded from the housing market could finally buy their dream home.
FHA does not make home loans, it insures a loan; should a homebuyer default, the lender is paid from the insurance fund.
The main difference between an FHA Loan and a Conventional Home Loan is that an FHA loan requires a lower down payment, and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy, discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union, or Equifax. If your score is below the minimum standard, you may not qualify.
Yes, generally a bankruptcy won’t preclude a borrower from obtaining an FHA Loan. Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn’t be paid.
Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:
Refinancing or Own Rental Property
Your monthly costs should not exceed 29% of your gross monthly income for an FHA Loan. Total housing costs often lumped together are referred to as PITI.
P = Principal
I = Interest
T = Taxes
I = Insurance
Monthly Income x .29 = Maximum PITI
$3,000 x .29 = $870 Maximum PITI
Your total monthly costs, or debt to income (DTI) adding PITI and long-term debt like car loans or credit cards, should not exceed 41% of your gross monthly income.
Monthly Income x .41 = Maximum Total Monthly Costs
$3,000 x .41 = $1230
$1,230 total – $870 PITI = $360 Allowed for Monthly Long Term Debt
FHA Loan ratios are more lenient than a typical conventional loan.