ENVOY MORTGAGE Blog

FHA Loans Tighter, but Available to Homeowner Wannabes

Democrats and Republicans are forever embroiled in a debate over how much power the government should wield. When it comes to the Federal Housing Administration (FHA), however, both parties agree on one thing – this government agency, which provides mortgages to people who may not qualify for conventional mortgages, is a good thing.

History of the FHA

When the FHA was created in 1934 in the wake of the Great Depression, two million construction workers were unemployed, mortgage loan terms were oppressive, and only 40 percent of Americans could afford to be homeowners. It stimulated the housing market then, and it continues to do so today in the midst of the current mortgage market crisis. In fact, if you’ve gone through a foreclosure or bankruptcy, it may be the only place to turn for a mortgage loan without waiting seven years or longer.

The FHA doesn’t lend money itself -- it provides mortgage insurance to lenders to protect them from losses incurred from homeowner defaults. When this happens, the FHA pays the lender. Since this limits risk to the bank, they’re able to offer loans which otherwise might be perceived as too risky. It’s not entirely easy street for the homeowner, though – he has to pay an upfront fee (about 1.5 percent) to the FHA for this privilege, and a small ongoing fee each month.

FHA Loan Limits and Eligibility

There are restrictions affiliated with FHA loans. First, there’s a maximum loan amount you can borrow, so you may be shut out of the high-end of the market. But there are plenty of homes available below this maximum; in Broward County, FL, for example, the maximum amount of FHA loan available for single-family residences is $423,750, and the average sales price for homes in 2009 was $252,669.  That means there’s lots of wiggle room if you’re not looking for a McMansion. (Find the agency’s limits in your state.)

In order to qualify for an FHA loan, which allows you to make a down payment of less than 5 percent, you must meet the following requirements:

1.  Two years of steady employment, preferably with the same company, with an income that’s steady or increasing.

2.  If you’ve declared bankruptcy, it must be at least two years old; any foreclosure has to be three years old. Both require “perfect” credit scores.

3. Your new mortgage needs to be no more than 30 percent of your gross income. (This percentage includes taxes and insurance.)

Your credit history is a huge factor. FHA loans have less stringent requirements than private lenders. In the past, most loans went to borrowers with FICO scores in excess of 620.  However, they’re now requiring borrowers to have a minimum score of 500 to qualify.

Back in Washington, Republicans and Democrats are still bickering over ways to spend taxpayer money. But both parties can be proud of the FHA, which has insured more than 34 million mortgages since its inception, and continues to exemplify government fulfilling its best intentions.

Please contact me with any questions and more information.