For over 80 years, the Federal Government has offered assistance to home buyers under the auspices of the Federal Housing Administration. Just like Jimmy Stewart suggests in the movie “It’s a Wonderful Life,” the government’s position is that home ownership helps all citizens, and the FHA was created to provide lenders with sufficient insurance to lend to borrowers due to the rise in foreclosure and default rates.
Originally, FHA backed loans were used primarily by first-time home buyers and those with lower incomes. This was largely due to the lower down-payment and credit requirements. However, since the housing market bubble burst here in Illinois and around the country, FHA backed loans have become extremely popular as private lenders tightened restrictions and raised down payment requirements.
Here in the Chicago market over a third of all mortgages written are backed by the FHA.
The program obviously plays an important part in our local market, so it pays to learn more.
What Are FHA Backed Loans?
Simply stated, the FHA does not loan money. The agency guarantees loans made by FHA-approved private financial institutions. Because the full faith and credit of the Federal Government stands behind these loans, the lending institutions have less risk and can offer qualified buyers better terms including:
- Lower interest rates
- Lower down payment requirements
- Less stringent financial qualifications
Who Can Take Advantage of FHA Loans?
FHA loans are designed for home-buyers who meet the following general criteria:
- Are a lawful US resident (not necessarily a citizen), with a verifiable two-year recidency, have a Social Security number, and are of legal age to sign a mortgage in the state of Illinois
- Have worked for the same employer for two years or have a history of steady employment
- Have not had a Chapter 7 bankruptcy in the past two years, or if under Chapter 13 bankruptcy are current on all payments and at least one year out of judgment with trustee approval
- The property will be the mortgagee’s primary place of occupancy
And meet the following financial criteria:
- Can make a down payment of at least 3.0%* (Updated 4/19/15)
- Have a minimum credit score of 620
- Gross Income Ratio of 31% to cover the mortgage payment, Home Owner’s Association fees, property taxes and mortgage and home insurance. (We’ve sometimes been able to secure exceptions, so let’s chat!)
- Debt to Income Ratio, (DTI) of 43% to cover the costs above plus any monthly debt payments including credit cards, car loans, student loans, etc. (Some exceptions to DTI can be considered, so let’s chat!)
How Much Can I Borrow With an FHA Backed Loan
Unlike traditional private loans, there are restrictions on the amount that you can borrow with an FHA loan. The maximum loan amounts ostensibly vary by county within Illinois. In reality, the Chicagoland market has the same uniform limits for Cook, DuPage, Lake, and McHenry counties. These loan limits are:
However, if you were to look to purchase in Kankakee, just an hour south of the cit, the limits would be:
The reason is that housing is substantially less expensive in Kankakee county than in Cook county, and the FHA adjust loan limits based in part on the median cost of housing.
It’s obvious that a loan limit of $365,700 will go farther in McHenry than downtown Chicago, and that’s something to consider when evaluating an FHA loan.
Mortgage Insurance Up-Front and Annual Premiums on FHA Loans
Like conventional loans with less than 20% down, mortgage insurance is required on FHA loans. Unlike conventional loans, the up-front amount, monthly payment, insurance duration and LTV threshold is set by the FHA.
There are two components to the mortgage insurance required by the FHA. The up-front premium, paid when the mortgage is secured, is 1.75% of the loan amount. This can be a hefty sum for a buyer looking to put down as little as possible on a home. Fortunately, the up-front premium can be folded in to the mortgage amount.
The second component is the annual insurance amount that is normally paid monthly as part of the mortgage payment. The amount of this annual insurance component is based on the amount borrowed, length of the loan, and the initial loan-to-value (LTV) ratio. For loans less than $625,000 the current annual premiums are:
- 15 Yr loan, LTV more than 90%: 0.70%
- 15 Yr loan, LTV 90% or less: 0.45%
- 30 Yr loan, LTV more than 95%: 1.35%
- 30 Yr loan, LTV 95% or less: 1.30%
New rules require that loans with an LTV at origination of 90% or more must pay mortgage insurance for the duration of the loan. For 15 or 30 year loans with an LTV at origination of less than 90%, the insurance must be maintained for 11 years.
Other Requirements or Special Considerations for an FHA Backed Loan
As you might expect, there are additional requirements and options for FHA backed loans.
For example, the FHA requires a home inspection by a licensed professional to insure that health and safety of the occupants and the continued marketability of the property. Fortunately, these requirements are fairly consistent with industry best practices and required repairs can even be factored into the mortgage.
Condominiums, especially those that are converting from rental units, pose a unique challenge with respect to FHA loans. Though not impossible, there are several requirements that make purchasing a condo using an FHA backed loan more difficult than a single family home.
Multi-Family Homes Are Eligible for FHA Backed Loans
When you think of housing in the city of Chicago, images of two, three and even four-family homes come to mind. After all, what is more iconic in Chicago than a row of duplexes along a tree-lined street in Wicker Park, the Ukrainian Village or West Town!
Here’s a hot tip. Multi-family home are FHA loan eligible! This can often provide a great living and investment opportunity for the right buyer.
We know from experience that families often view the purchase of multi-unit home as the first step towards building equity in their American dream. We believe in that dream and have become proficient in helping consumers secure loans for multi-family dwellings using FHA backed loans.
Team Beata Bukowski Can Help You With Your FHA Loan
An FHA backed loan can be an affordable and effective way to buy your new home. Because rates do vary by FHA-approved lender, and it’s possible to secure exceptions to the financial ratio, it’s always important to shop around.
Let the loan specialists at Team Beata Bukowski help you navigate through the FHA loan application process to insure that you get the right loan at the right price. Call, email or chat with us today!