FHA Streamline

Establishing Net Tangible Benefit of FHA Streamline Refinance

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Establishing Net Tangible Benefit of FHA Streamline Refinance
The FHA is very flexible in its desire to help current homeowners to refinance; however, there are some stipulations you must meet. One of the largest stipulations with the FHA streamline refinance is to have a net tangible benefit. This means that you benefit from the loan and can prove it. Not only that, however, you have to be able to meet the minimum requirements that the FHA states should be met in order to prove that the benefit is worth it.

What is the Net Tangible Benefit?

The basic net tangible benefit requirement is that the principal, interest, and mortgage insurance premium payment decrease by at least 5 percent from the current payment. The rule applies to you if you are refinancing from a fixed rate loan into another fixed rate loan. The exception to the rule applies if you are refinancing from an adjustable rate mortgage into a fixed rate mortgage. In this case, the payment might not decrease, and might even increase, but the stability of the fixed rate makes up the net tangible benefit in this case.

What a Net Tangible Benefit is Not

There are some things that you might consider a net tangible benefit in your own eyes, but the FHA does not see it as so. These cases include:

  • Reducing the term of the loan – Even though refinancing from a 30-year loan to a 20-year loan is less risky for the lender, it is not enough of a net tangible benefit. In fact, because the payment will likely increase, it could pose to be a slightly higher risk for some borrowers.
  • Refinancing from an ARM to a fixed rate with a significantly higher rate – It might be less risky to refinance from an adjustable rate mortgage into a fixed rate, however, if the interest rate is too high, the net tangible benefit is diminished. If the new interest rate exceeds 2 percent of the existing rate, there is no net tangible benefit for the streamline refinance.
  • Refinancing from a fixed rate to an ARM – In some rare cases, borrowers refinance from a fixed rate to an ARM. Some do this in an effort to save money, but typically in the short-term, such as one year. If the interest rate on the ARM is at least 2 points lower than the current fixed rate, then the net tangible benefit can be found.

The Mortgage Insurance Dilemma

One area that many borrowers end up struggling is with the mortgage insurance premiums. Because mortgage insurance can go up depending on how long ago you originated your current FHA loan, you might have a harder time than you thought qualifying for the 5 percent decrease. FHA mortgage insurance premiums increased in recent years, which could play a factor in whether or not you meet the net tangible benefits requirement.

Ways to Make the Net Tangible Benefit Work for You

If you do not easily meet the net tangible benefit requirements, there are some simple ways to make it work for you. Consider the following steps:

  • Work on the interest rate – You do not have to automatically accept the interest rate that a lender provides you. There are ways to negotiate it, including shopping around with different lenders as the easiest option. Another option is for you to negotiate a lower rate in exchange for paying discount points up front in order to meet the net tangible benefit requirements.
  • Watch interest rates – Interest rates fluctuate on a daily basis, so keeping a close eye on the rates can help you lock the right rate in that enables you to meet the FHA requirements can help you. You can ask your lender to notify you as soon as the rate hits your threshold of acceptable.
  • Increase your term – If you really need to lower your rate, you can work the system backwards. Rather than decreasing your term, you can increase it by refinancing from a 15 or 20-year term into a 30-year term. This automatically brings your payment down which can help you qualify for the refinance. Once you are on better terms with your finances, you can start to make the 15-year payments again, while having the stability of the 30-year amortization in the event that you begin to struggle again.

The Reason for the Net Tangible Benefit

It might seem awfully restrictive of the FHA to have the 5% net tangible benefit requirement in place, but it makes sense. The streamline refinance does not require you to provide very much qualifying information for the loan. You do not need to provide any of the following, according to the FHA:

  • Income documents
  • Credit scores
  • A new appraisal

Basically, this means you could be making less money, hurt your credit, and be upside down on your loan and still get approved for the FHA streamline refinance. The net tangible benefit is the only added protection the FHA has in terms of deciding whether or not you are a good risk on top of your housing history, which is the main determining factor in your eligibility for the loan. If you make your housing payments on time and you are lowering your payment by at least 5%, you are more likely to be able to stay current with the new payments, which is what the lender and the FHA need to see.

If you have trouble establishing your net tangible benefit on the FHA streamline refinance, talk to your lender. There are typically ways to work around it so that you can show the 5% savings. If a lender is not willing to work with you, make sure to shop around – every lender not only has different requirements but also different interest rates and costs, which could help to determine the savings you have on your loan. The FHA streamline refinance is not hard to obtain, but it might require a little creative financing in order to ensure your approval overall.

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What’s the Time Required for FHA Condo Approval Process?

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What’s the Time Required for FHA Condo Approval Process?
Condo approval is a necessary component of the FHA approval process. This means if you purchase a condo, you have an extra layer of approval you must go through in order to close your loan. The lender must not only ensure that your credentials meet with the approval of the FHA, but that the condo association does as well. In order to obtain this approval, the condo association must go up for review with the HUD Review and Approval Process. This process might sound daunting, but it is rather ordinary – every association must go through it. In general, the process takes 30 calendar days to complete, but it can take a little longer depending on the number of applications received at one time.

What are the FHA Condo Requirements?

The condo requirements are the same across the board, no matter where you purchase a condo unit. The requirements include:

  • 50 percent of the units must be owner-occupied As of this year, however, these requirements were eased up slightly. Today, owner occupied means that the unit does not fall under any of the following categories:
    • A tenant does not live in the property
    • The property is not empty and listed in the MLS
    • The property is not empty and available for rent
    • Being purchased by a borrower that does not intend to live in the property as their first property
  • Adequate liability and hazard insurance must be in place that covers 100 percent of the replacement cost of the building(s).
  • If the building is in a flood zone, adequate flood insurance must be obtained.
  • If there are investor owned properties in the building, one owner cannot own more than 10 percent of the units.
  • All common units must be completed and available for use by homeowners.
  • At least 50 percent of the units must be occupied without FHA funding prior to the first FHA approval for the building
  • The property is not used as a timeshare or vacation home.
  • At least 85% of the homeowners must be on time with their association dues. If there are homeowners with late dues, they cannot be later than 60 days and cannot total more than 15% of the homeowners.
  • There must be adequate reserves in place in the association’s budget in order to cover immediate and future necessary repairs.

If the condo building is not yet finished and is still under construction, the following requirements must be met:

  • An environment review application must be completed
  • All information for units, common areas, and the building as a whole must be provided
  • A map of the area is necessary
  • A site plan must be completed
  • Approval by the Historic Preservation Office must be obtained
  • EOE form must be executed

The FHA may request further documents for unfinished buildings, such as a proposed budget, any minutes from homeowner’s association meetings that took place, and any management plans that are in place.

If the building already exists when approval for the condos are requested, the requirements are similar with a few additions including:

  • Recorded plat
  • Any legal documents that were executed
  • Current financial statements
  • Current minutes from any meetings
  • Proof of completion of the project

Why are there Requirements for Condos?

Generally, condos are a higher risk for the lender and the FHA, which is why they require further approval. For example, if more than 15% of the homeowners were delinquent on their homeowner’s association dues, then the association would run into financial trouble. This could mean that the work that needs to be done on the property does not get done. This trickles down to affect every property, which eventually affects the value of the units, which can harm the borrower. If the borrower runs into trouble and cannot pay the mortgage and yet cannot sell the property because the value is not high enough, the FHA ends up with the property on their hands as a HUD home because you foreclosed on it.

The requirements might seem strict, but they can go through the HUD approval process fairly quickly. Typically, they do not take more than 30 days to complete and in some cases, can be done in as little as 2 weeks. The length of time depends on the amount of information the lender provides to the HRAP and how fast the lender responds to any inquiries the board has for them. The association also needs to be willing to provide all documents that support the units, including any legal and financial documents, as well as the minutes from any meetings. Some developments do not want to be bothered with the FHA rules and do not get FHA approved, but it is in their best interest to do so since a majority of borrowers today turn to FHA financing.

The FHA recently reduced their requirements for condo approvals in an effort to help borrowers that are either first-time homebuyers or those that fall into the low to middle-of-the-road income earners. Because these borrowers make up a majority of the housing industry today, the FHA wanted to increase the likelihood of them being able to purchase a condo, since that is typically the first type of home people want to purchase whether it is their first home or they are just overcoming a financial crisis and want to be homeowners again. Condos have a lower level of responsibility in terms of work that needs to be done and the effort that homeowners need to put in. Borrowers that work a lot or do not have a large amount of money to put down often turn to condos first. Finding a condo that is already FHA approved will make the process go the fastest, but getting it approved for FHA loans is not an impossible task, you just have to have some patience as you wait for the process to get completed.

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Will My Loan Balance Go Up when I Streamline Refinance?

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Will My Loan Balance Go Up when I Streamline Refinance?

The FHA Streamline Refinance is a great way to save money every month when you refinance from an FHA loan into another one. The only reason you can get an FHA streamline loan is if you are lowering the interest rate, with the exception for those borrowers that refinance from an adjustable rate mortgage to a fixed rate mortgage. Because of the nature of the loan, which does not require any verification, you must be saving money every month. The largest verification required for the streamline program is the payment history – you must have a perfect 3-month payment history on your housing payments for the three months immediately preceding the loan application and a maximum of one late housing payment in the 9 months preceding that time. Other than that, the verifications are very minimal, which is why your loan balance cannot increase for a streamline refinance.

Where does the Loan Balance come From?

The loan balance for your streamline refinance originates from the existing outstanding principal balance on your loan. This is the starting point. The only other amount of money that can be added to the loan is the upfront mortgage insurance premium you must pay. This amount is required on every loan and is equal to 1.75% of the loan amount. For example, on a $200,000 loan, the upfront MIP required would equal $3,500. This means the maximum amount of your new loan amount would equal $203,500. This amount could change, however, if your loan was originated less than 36 months ago. The FHA provides FHA borrowers with a refund of the upfront MIP they paid on their original loan. This amount is prorated based on the amount of time that has passed since the origination of the loan.

Since you cannot refinance your FHA loan until you have made 6 payments on it, the upfront MIP refund starts in the 7th month, at which point you receive 70% of the amount of insurance you paid back as a refund, which is applied towards your new upfront MIP. The amount you receive goes down 2 percent for every month that passes, with the final amount of the refund totaling 10 percent of the amount paid in the 36th month. This amount is taken off of the new upfront MIP, therefore reducing your maximum loan amount on the FHA streamline refinance.

Closing Costs are not Included

The one thing about FHA streamline refinances is that you cannot include your closing costs in the loan amount. You are restricted to the outstanding principal balance and the remaining amount of the upfront MIP charged – all closing costs must be paid at the closing. There is a way around this, though – you can negotiate a no-closing cost loan with the lender or a reduced closing cost loan, depending on how low you need the interest rate to go in order for the FHA to allow the streamline refinance.

Many lenders are willing to pay the closing costs for you in exchange for providing you with a slightly higher interest rate. Every lender differs in how much they will pay and how much it will affect your interest rate, which is why you need to shop around with different lenders to see which will offer you the best deal. If you do not have the couple of thousands of dollars necessary to pay closing costs, find a lender that will pay them for you. Of course, you should determine if it makes sense for you to refinance if you take the higher interest rate, though. In some cases, the savings do not equate to enough if you are not planning on staying in the home for the long term.

Overall, the maximum loan amount for the FHA streamline refinance is maxed out at the original outstanding principal balance plus any upfront mortgage insurance that is required. Lenders offer different programs for different borrowers, so do not be afraid to ask for help with the closing costs if you know that a refinance will benefit you in the long run.

Will My Credit be Checked When I FHA Streamline Refinance?

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Will My Credit be Checked When I FHA Streamline Refinance?

The FHA Streamline Refinance is known for its few verification requirements. In general, you do not need a credit verification or verification of your income. In fact, you can even skip the appraisal, basically giving you a new loan for very little verification. This is according to the FHA, though. Every lender is able to add their own requirements to the process in order to minimize their risks. In some cases, this means requiring a specific credits core. In general, however, your credit will not be checked.

Deciding on Whether or not to Pull your Credit

One factor that determines whether or not you qualify for the FHA streamline refinance is your housing history on your current FHA loan. The lender must be able to determine that you have only one 30-date late payment in the last 12 months. In that time, however, the first three months prior to the loan application must have a perfect housing history; the late housing payment can only be in the 9 months before that time. If the lender cannot determine your housing history without a credit report, they might pull your credit.

The basic determinations regarding whether or not your credit needs to be pulled are as follows:

  • You must have held the original FHA loan for at least 6 months
  • You must live in the property
  • Your loan amount many not increase unless it is because of the upfront MIP that you must pay
  • Your refinance must be because of the ability to lower your payment or refinance from an adjustable rate mortgage to a fixed rate mortgage
  • You must meet the housing payment requirements

Increased Loan Amount

If your loan amount increases more than 20 percent for any reason, your credit will need to be pulled. These instances are very rare as the maximum loan amount is restricted to the outstanding principal balance and the new upfront MIP minus any MIP refund. The one instance where it might occur, however, is if you were to refinance from an adjustable rate mortgage into a fixed rate. If the fixed rate is higher than the initial ARM rate, you might have an increase that totals more than 20 percent. If this is the case, the streamline refinance requires that you have your credit pulled to ensure that you can meet the financial requirements for the higher payment.

The FHA Template

The point of the FHA streamline refinance is to provide borrowers with a more affordable payment. The FHA does not require credit to be pulled, income to be verified, or an appraisal to be done because they use the original FHA loan as a template for approval for the new loan. In essence, you are lowering the payment, which means you are lowering the risk you provide to the lender and the FHA. Because FHA loans are guaranteed by the FHA, lenders have less to worry about as well, making it easier to qualify for the loan.

With all of this being said, some lenders refuse to provide any loan, including the FHA streamline refinance loan without pulling your credit. This is called a lender overlay and is the lender’s right in order to minimize the risks they take. When it comes to the FHA, you can qualify without a credit check, which could mean you qualifying with a credit score as low as 500. In reality, however, most people that have a credit score that low also have poor housing history, which would disqualify them for the loan, which makes not pulling your credit less of a risk for the FHA and the banks.

Why you Should Consider an FHA Refinance

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Why you Should Consider an FHA Refinance

You don’t have an FHA loan right now, so why would you consider one when you want to refinance? There is one simple reason – you do not need a lot of equity. In fact, you only need 2.25 percent equity in your home in order to qualify! There are many other benefits, but the fact that you can lower your rate without the minimum 5% equity that conventional loans require is often enough to get people to refinance into an FHA loan.

No Double Approval

With a conventional loan, not only do you need 5% equity at a minimum, you also need to gain approval from not only the lender, but the company issuing the private mortgage insurance as well. If the PMI company does not feel that your loan is a good risk, they will not provide the PMI, which means you cannot get approved for the loan. This double approval can stand in the way of many people obtaining a conventional refinance.

The FHA refinance does not require that double approval – once you gain approval for the FHA loan, you get the mortgage insurance as well as it comes directly from the FHA, not a third party. This makes it possible for more people to qualify for a refinance, saving them money in the long run, especially if they obtained their original loan when interest rates were higher.

Easier Guidelines

FHA loans as a general rule are easier to qualify for than conventional loans. They have lower credit score requirements and are more flexible with the debt to income ratios. The FHA themselves are the most lenient, but some lenders might add their own requirements to tighten up the restrictions and decrease their risk of default. Some lenders, however, stick with the FHA guidelines because the FHA guarantees the loan for them – this means if you were to default on your loan, the lender would receive a portion of the money back from the FHA, decreasing their risk of loss.

Finance the Closing Costs

Yet another reason to refinance into an FHA loan from a conventional loan is the ability to finance your closing costs. Let’s look at an example:

  • Appraised value $200,000
  • Allowed loan amount $195,500
  • Outstanding loan amount $193,000
  • Allowed closing costs to be rolled into loan $2,500

This means that you can roll in a portion of the upfront mortgage insurance you will have to pay, which equals 1.75% of the new loan amount or you can roll in the closing costs that equal up to $2,500. Either way, you reduce the amount of money you must bring to the closing, making the refinance even more affordable for you.

Many people discount the value of an FHA refinance because they think the program is strictly for first-time homebuyers or people with bad credit. In reality, the program is for anyone that is ready to lower their interest rate and ensure an approval by all parties involved. FHA loans often offer lower interest rates than any other program and offer the most flexible guidelines to help you get into a loan. If you are paying too much interest, consider exploring an FHA loan for your refinance. The possibilities are there to save plenty of money every month, even with the need to pay the annual mortgage insurance, which is oftentimes lower than the amount you would pay for private mortgage insurance on your conventional loan.

If you have minimal equity in your home and think you are stuck with your conventional mortgage with a high interest rate, think again – the FHA refinance is a great way to get you into a new loan that saves you money every month!

How Deferred Student Loans Affect your FHA Loan

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How Deferred Student Loans Affect your FHA Loan

Deferred student loans used to be ignored on many loan applications, including the FHA loan. If your loan payments were not due for more than 12 months, the payment did not get included in the debt ratio used to qualify you for a loan, which meant that many homeowners were qualifying for more home than they could afford in the long run. Today, however, when you apply for an FHA loan, any deferred student loans must be included, even if the payments do not begin for more than one year. This is in an attempt to predict not only the current affordability of a new mortgage, but the future affordability as well.

How Deferred Student Loans Affect your Debt Ratio

When you apply for an FHA loan, you will have to consider the future payments that you will incur as a part of your debt ratio. There are a few ways that the bank will determine your payment in order to calculate your debt ratio.

  • Loan documents – The most effective way to ensure that the right payment is used to calculate your debt ratio is to provide the loan documents from your student loan. These documents should show the amount of the future payments when they begin. This allows the lender to create an accurate debt ratio for you.
  • The 5% rule – If you do not have loan documents, the FHA requires lenders to calculate 2% of the outstanding loan amount. For example, if you have $20,000 out in student loans, the payment used for calculating your debt ratio would equal $400. Chances are that your payment is nowhere near that $400 calculation, but without evidence, it is what the lender must use.

If your deferred loan is not a student loan, but any other type of installment loan, the lender is required to calculate a payment of 5% of the outstanding loan amount useless there is adequate evidence of a lower payment required by the bank.

Qualifying with Future Expenses Helps

It might seem unfair to include future expenses in your debt ratio, but the FHA created this requirement in order to prevent future default. By ensuring that you can afford the loan not only now, but when new debts start to become due, you can lower your risk of not only default, but of losing your home as well. While it definitely makes qualifying for an FHA loan more difficult, it is for the greater good of everyone involved in the loan.

When the future deferred loan payments get included with your loan approval, you will have a better idea of your cash flow a few years down the road if your income remains the same. This way there are no unpleasant surprises when your student loans become due.

The FHA created this new requirement, which began in September of 2015 in order to get a handle on the average amount of student debt, which totals close to $30,000! Without the need to include the future debt, many homeowners were finding themselves in hot water when the loan payments became due, forcing them to default either on the student loans or the mortgage payments; either way, consumers were defaulting on government debt, which hurts everyone I the long run.

The FHA loan is usually easy to qualify for and even with deferred student loans, it can still be considered easy to obtain, as long as you know what you are getting yourself into. If you are unsure of your future student loan payment, contact the issuing bank to get evidence of the payment so that an accurate debt ratio can be calculated for you.

The Reasons to Use an FHA Loan Calculator

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The Reasons to Use an FHA Loan Calculator

If you are ready to purchase a home and know that the FHA loan is one of your top options for financing, it is beneficial to use the FHA mortgage calculator before you start shopping for a home or a loan. The calculator can help you figure out what you will owe on the home should you go the FHA financing route. Because FHA loans are not just for first-time homebuyers, everyone can use this calculator to see if an FHA loan makes sense for their situation. If you are unsure whether or not you should check out FHA financing as an option, here are a few reasons to use the calculator.

Understand the FHA Mortgage Insurance

One of the most important reasons to use the FHA mortgage calculator is to determine the mortgage insurance you will be required to pay. There are two types of insurance: upfront and annual mortgage insurance. As the name suggests, the upfront mortgage insurance gets paid at the closing while the annual insurance is divvied up into your monthly payments. When you use a calculator with your actual loan amount, appraised value, and down payment, you will get an accurate number for the mortgage insurance to help you avoid any surprises down the road. When you see how much the mortgage insurance costs, you can determine if you want to stick with the price range that you were looking at when shopping for a home or if you need to lower it to make your payment more affordable.

Play with the Numbers

The FHA mortgage calculator also enables you to play with the numbers of your loan. For example, if you have more money on hand to put down a down payment larger than 3.5%, you can see how it would affect your payment. If the payment will get low enough to make a drastic difference on your monthly payment, it might be worth it for you to put the extra money down. You can also use this calculator before you are ready to start shopping for a home, but are thinking about buying your own home. It can give you an idea of the amount of money you will need to save up so that when you are ready, you can get approved for an FHA loan.

Save you Time

Wouldn’t you rather know what you can afford before you start shopping for a home? What if the price range you thought you would be okay in turns out to be more expensive than you anticipated? If this is your first mortgage, you might not realize what goes into the mortgage process and how your payment is affected. Being armed with the information beforehand can help you stick within the right price range, saving you time and heartache if you were to find a home that you could not afford but really loved. The FHA calculator only takes a few quick seconds to navigate, giving you a good idea of what you could afford without any hard work.

The FHA calculator offers valuable information to those that are ready to shop for a home or even those just thinking about it. When you know what you will have to pay, how your down payment affects the outcome, and what price range you need to stick with, you will know what you are getting yourself into and arming you with the information you need to make solid financial decisions.

How to Qualify for an FHA Streamline Loan with Reduced Income

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How to Qualify for an FHA Streamline Loan with Reduced Income

When you have reduced income due to a temporary situation, you may still be eligible to receive an FHA streamline refinance loan. Understanding the terms under which you would still be eligible can help you refinance the house you own despite your unfortunate plot in life at the moment. This pertains to situations such as a temporary disability or temporary leave of absence from work for personal reasons. In these cases, the FHA might be able to offer you special circumstances when it comes to coming up with your effective income or the income used to qualify you for an FHA mortgage.

What the FHA Streamline Lender Needs

The lender will require a variety of things from you in order to document your temporary reduction in income. These items include:

  • A signed statement from you stating that you do intend to return to your previous employment as soon as you are able. It should also state the date that you anticipate that you will return to your employer.
  • A signed statement from your employer verifying your intent to return to work and that you still have a job at said employer.

How your Income Works

The difficult part of the situation is that you will have to qualify for the FHA loan based on your reduced income.  This means that your disability income or any other type of income that you are receiving in compensation for your injury or illness have to be enough to keep your debt ratio low enough to qualify. Typically, this income is less than what you make on a regular basis, so make sure you take that into account if you are going to apply for an FHA loan while you have reduced income. There are ways that you can reduce your debt ratio with this lower income including:

  • Pay off debts to reduce your monthly financial burden
  • Keep the price of the house lower than you first anticipated you would be able to afford with your regular income
  • Shop around for a lower interest rate to keep your fees down
  • Put a larger down payment down if you have the funds to do so

Using Reserves

In some cases, your reserves can be used as supplemental income to help you qualify for a loan. The only instance that this is acceptable is when your regular income will not begin before the first mortgage payment becomes due on your new loan. You will need to have ample documentation stating that you will not start receiving your regular income before this date from your employer in order for this to work.

If you get approved, you can use your reserves as a part of your income. You must start off by showing the proof that you have adequate liquid assets available. You can verify this with bank statements over the last 12 months or with a Verification of Deposit that is completed by your bank. The reserves that are able to be used are only the surplus reserves. This means that if you need any of your assets to qualify for the loan, they cannot be used as your surplus reserves. Any money that is left over from that point may be able to be used, though. The money that is left is totaled up and divided amongst the months that remain between when your first mortgage payment is due and when you are expected to receive your regular income again. That supplemental income then gets added to your disability income to help your debt ratio become lower.

The good news is that even with reduced income, you might be able to qualify for an FHA loan. The bad news is it will take a little more work on your part to get it done. You have to have ample documentation stating that you can afford the loan even before you return to work, if that will be the case. Your lower income will have to prevail, so if you are not comfortable shopping for a house in a lower price range because of your lower income, make sure to use one of the above strategies to get your debts lowered, making your debt ratio more attractive even with your lower income. In order to use this program, however, you might have to shop with various lenders as not every lender will be willing to use the reduced income program that the FHA allows.

3 Reasons FHA Loan Limits are not the Only Thing you Should Worry About

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Reasons FHA Loan Limits are not the Only Thing you Should Worry AboutWhen you are shopping for a home and you know you are going to use FHA streamline financing, you might be concerned with the FHA loan limits. These limits are put in place based on the average price of the homes in the area. This amount is then compared to the conforming loan limit, which right now is $417,000. If you live in a high-cost area, the FHA loan limit might be slightly higher than the national conforming limit. On the other hand, if you live in a low-cost area, the FHA loan limit will be lower than $417,000. As it stands right now, the FHA limits vary from $271,050 to $625,000 throughout the United States. But these are not the numbers you should concern yourself with right off the bat – there are three other factors you should consider when applying for an FHA loan.

What’s your Credit Score?

The first issue to be concerned with is your credit score as this is a driving factor in whether or not you are eligible for an FHA loan. Luckily, FHA loans have the lowest requirements for credit scores in most cases. According to the FHA, you only need a credit score of 580 to put down just 3.5 percent on the home you wish to purchase and a score of 500 if you can put 10 percent down on the home. The individual lender you decide to use might have a differing opinion, though. They might not be willing to lend to people with a credit score as low as 500 – in fact, their minimum score might even be 600 or higher, depending on the risk level they are willing to take.

Aside from having the minimum credit score to qualify for the program; however, your credit score helps to determine your loan amount. For example, if you are at the lower end of the acceptable credit scores for a particular lender, they may restrict the amount of money they are willing to loan you. For example, even if the maximum loan amount in your area is $500,000, it does not mean you will be eligible to receive that amount – the lender will take into consideration all of the factors surrounding your loan, including your credit score.

How Steady is your Income?

Your income plays a very important role in the FHA loan amount you are able to receive. There are several requirements regarding your income that you must adhere to including:

  • The stability and consistency of the income
  • The amount of income

You have to be able to prove that you have received the income you receive now for the last 24 months, for most lenders. Some lenders are able to grant exceptions if you were working within the same industry or if you recently took on a better paying job, but consistency is the key. The amount of the income also plays an important role because it determines how much you can afford. Going back to the example of purchasing a home in an area where the FHA loan limit is $500,000, you would need to prove that you had adequate income to afford a loan of that nature or your maximum loan amount would be lower. The lender will determine your exactly circumstances to come up with the right loan amount for you.

What is your Debt Ratio?

If you have never figured out a debt ratio before, this might be a gray area for you. This number is the amount of your monthly debt compared to the income that you bring in on a monthly basis. The lender uses your gross income and all debts that report on your credit report. A few of these debts outside of the new principal, interest, taxes, and insurance include revolving debts (credit cards) and installment loans (car or student loans). The lender needs a total of the monthly debts compared to your income to see what percentage of your income would go to your debts. In general, the FHA does not want a debt ratio higher than 31 percent on the front end, which is your principal, interest, taxes, and insurance and 43 percent on the back end, which is all of your debts including the mortgage. Some lenders will have differing ratios that they require based on the level of risk they can take. In general, however, the higher your debt ratio or the closer it is to the FHA limits, the lower the loan amount you will be approved for by any lender.

As you can see, there are many factors to consider when looking at the FHA loan limits. You cannot just assume that you will get approved for the specific loan limit for your area. Your individual factors play an important role in whether or not you get approved for the full amount or a smaller amount. Because every lender has different requirements, you might find that one lender will give you a higher loan amount than another – if you are turned down for the amount you need from one lender, consider applying with a different lender to see if there is a difference in the loan limit you are provided.