FHA loans are one of the three main mortgage programs that carry a government-guarantee to the lender. These three mortgage programs are those underwritten to standards issued by FHA, VA and the USDA. The VA and USDA loans have certain restrictions such as who is eligible or where the property might be located. FHA loans have no restrictions other than the requirement the borrower must occupy the property as a primary residence.
There have been recent changes with the FHA loan program and this post will highlight the most important ones, including the 2023 FHA loan limit increase for Marion County to $472,030 which is in line with much of the state. Perhaps two of the more important features of the FHA loan address how income is calculated and credit scoring.
FHA lending guidelines ask the lender to make a reasonable determination the applicants can comfortably afford the new FHA mortgage payment in addition to their current monthly credit obligations. Affordability follows what lenders refer to as “debt-to-income” ratios and is simply a comparison of the gross monthly income and listed credit obligations. Common credit obligations include things such as car payments, student loans and minimum credit card payments.
The mortgage payment is made up of four separate line items. In addition to the amount allocated to principal and interest, a monthly amount is included for the annual property tax bill, insurance premium and a monthly mortgage insurance premium. The mortgage insurance premium is one of two such premiums and paid for by the borrowers with benefit to the lender.
This insurance premium is used to finance the loan guarantee. Should the loan go into default the lender is compensated for the loss by this guarantee as long as the lender used standard FHA protocol regardless of where in Florida the property is located.
As it relates to credit it’s important to note that while the FHA will accept a loan application with a credit score as low as 600 there are those who will approve an FHA loan with lower scores on a case-by-case basis. It might surprise some that there are actually three credit scores on any typical mortgage application including one for an FHA loan. There are three scores with each coming from a different credit repository.
The three repositories are Experian, Equifax and TransUnion. While each uses the very same algorithm when calculating credit scores based on recent payment history due to different reporting dates and merchant subscriptions the scores will usually be similar but not the same.
For example, a borrower applies for an FHA loan and signs an authorization form allowing the lender to order a credit report and scores. The reported scores are 645, 653 and 661. The lender will ignore the highest and lowest score and use the middle one. In this example, the qualifying score is 653 and qualifies for an FHA loan.
FHA loans aren’t restricted by territory, region, or by household income. VA loans for instance are reserved for veterans and active-duty personnel. USDA loans limit the amount of household income as well as require the property to be located in a rural or semi-rural area approved directly by the USDA. FHA loans can be used by anyone including veterans and non-veterans and the property does not have to be located in a specific area.
FHA loans aren’t limited to first-time home buyers either although one might think so due to the relatively large number of first-time buyers who take advantage of the FHA loan program due to the low down payment requirement of just 3.5% of the sales price and competitive interest rates. Buyers that have questions can just submit the Quick Request form or call ph: 904-810-2293