For many potential home buyers, an FHA mortgage can be a fundamental part of their buying strategy. FHA mortgages have been around for multiple generations and have helped many people realize the dream of owning a home.
Generally speaking, the credit requirements for obtaining an FHA loan are less strict than for a conventional loan and present an opportunity for people who have limited credit history or past blemishes to qualify for a mortgage. While a conventional home generally requires a minimum credit score of 740 or higher to qualify, FHA loans are often approved with scores in the lower 600 range.
FHA basics questions and answers you should know before proceeding:
Is there a maximum amount a buyer can borrow?
The maximum FHA loan amount available in 2019 in Cook County, Illinois, is $368,000. Homes priced at or below this limit may be eligible for FHA financing.
What kind of property can be financed with FHA?
FHA home loans are for people that will live in the home as their primary residence. FHA does not loan money for vacation homes or rental properties. However, FHA is flexible about the type of property that you buy. These are the kind of homes that FHA will consider financing:
- Single family home
- Duplex (you must live in one unit. You may choose to rent out the other unit)
- Three-unit (you must live in one unit. You may choose to rent out the other units)
- Four-unit (you must live in one unit. You may choose to rent out the other units)
- Condominium (your loan officer can review guidelines and find out if the condo you want to purchase is approved for an FHA loan)
How much will a borrower need for a down payment on an FHA loan?
FHA rules state that a person buying a home pay 3.5% of the home’s purchase price as a down payment. This means, for example, that a person buying a home priced at $300,000 would need to pay $10,500 at the closing for the down payment.
As long as it is properly documented, the money for the down payment can come from a variety of sources, such as:
- Personal bank accounts or money market accounts
- Retirement accounts
- A gift from a relative or significant other. In order for the gift to be allowed, you and the relative will need to produce copies of your bank accounts. A 60-day paper trail showing where the funds have been withdrawn from and deposited to will be required. You will also need to write a brief letter explaining that the money is a gift and not expected to be repaid.
What kind of documentation does an FHA loan require?
If you receive a W-2 form each year, you will need your pay stubs from your employer for the past 30 days, W-2's from at least the past 2 years, and personal federal income tax returns for the last 2 years.
If you are self-employed or receive income in other forms, you will need your personal federal tax returns for the last 2 years, your business federal tax returns for the last 2 years, and a profit and loss statement from the first of the year through the application date.
Depending on your specific situation your loan officer may ask you for more information.
The lender will also verify employment to make sure that you have been consistently employed for the last 2 years.
Of course, your loan officer will lead you through all the requirements and exceptions to the rules . . . there are always those.
Although the loan limit for FHA loans in Cook County is perhaps too low for many multi-unit properties, there are lots of very nice single-family homes available for well under the $368,000 maximum.
If you want to find out if FHA is the right program for you and your unique circumstances, contact us to learn more about how you can purchase a home using an FHA mortgage. We can answer your basic questions and put you in touch with a qualified loan officer who can get you pre-approved and ready to start house shopping.