What is an FHA Loan?
Posted 01-18-2009 at 11:58 AM by ricardocobos
What is an FHA Loan?
An FHA loan is a loan that is insured by Housing Urban Development Agency (HUD). It is important to understand the distinction between a Lender and an Insurer. The Lender in this case is not HUD, it is whoever makes the loan for you i.e.; XYZ Bank & Trust or Americas Super Big Mortgage Giant Co. Obviously these are examples of lenders who if they were real could make you an FHA loan if they were licensed and approved by HUD to do so. The Insurer in this case is HUD or the Federal Government or more accurately the US Tax Payer.
HUD has created guidelines on what type of loan they will insure. The guidelines are the same for ALL lenders but every lender can and in these market conditions will enhance those requirements. For example in the case of credit scores; HUD does not have a minimum credit score requirements but the bank I work for has instituted a minimum credit requirement for FHA loans of 580 and I have heard of other banks and lenders requiring at least a 600 to 620.
HUD requires a borrower occupy the home as their primary residence and to be able to demonstrate stability of income. Generally the proposed house payment as it relates to their debt to income (DTI) ratio shouldn’t exceed 31% of their gross monthly income and no more than 43% when considering all other types of debt obligations like car payments, credit cards, student loans, child support, alimony and separate maintenance. Exceptions to this rule are made all the time when the loan is approved using Fannie Mae’s Desktop Underwriter (DU) Automated Underwriting System (AUS) or Freddie Mac’s Loan Prospector (LP) and generally both AUS will allow ratios well in excess of HUD’s 31/43 guideline for people with good credit, cash reserves and other mitigating factors. In addition HUD grants broad latitude to Direct Endorses (DE) Underwriters to make judgment calls for loans who have compensating factors such as; trailing spouses who may not be working yet but have a history of gainful employment, large down payments, a borrower who has a good history of either paying more in rent or housing expense and too many more to list here.
One of the most unique feature of an FHA insured mortgage loan and what sets it apart from any other mortgage loan product in the market today is they allow for a non-occupant co-mortgagor. In laymen’s terms you can have a parent co-sign and not live in the house that is being financed.
HUD doesn’t have income restrictions but they do impose property and loan limits and many lenders add to those restrictions as well you can check loan limits at https://entp.hud.gov/idapp/html/hicostlook.cfm And you can check to find HUD Approved lenders at; Lender List - HUD.
One last thing to remember is that your lender may have additionally imposed restrictions that HUD doesn’t require but it is the lenders right to do so as long as they are complying with Fair Lending laws in the application of those rules. For example; a common occurrence that I see is where lenders will not make an FHA loan to purchase a manufactured home yet HUD will insure the loan. In this case you need to find a lender who will make that loan for you. Finally; when in doubt check the HUD website; HUD - Why Ask For FHA Loan
An FHA loan is a loan that is insured by Housing Urban Development Agency (HUD). It is important to understand the distinction between a Lender and an Insurer. The Lender in this case is not HUD, it is whoever makes the loan for you i.e.; XYZ Bank & Trust or Americas Super Big Mortgage Giant Co. Obviously these are examples of lenders who if they were real could make you an FHA loan if they were licensed and approved by HUD to do so. The Insurer in this case is HUD or the Federal Government or more accurately the US Tax Payer.
HUD has created guidelines on what type of loan they will insure. The guidelines are the same for ALL lenders but every lender can and in these market conditions will enhance those requirements. For example in the case of credit scores; HUD does not have a minimum credit score requirements but the bank I work for has instituted a minimum credit requirement for FHA loans of 580 and I have heard of other banks and lenders requiring at least a 600 to 620.
HUD requires a borrower occupy the home as their primary residence and to be able to demonstrate stability of income. Generally the proposed house payment as it relates to their debt to income (DTI) ratio shouldn’t exceed 31% of their gross monthly income and no more than 43% when considering all other types of debt obligations like car payments, credit cards, student loans, child support, alimony and separate maintenance. Exceptions to this rule are made all the time when the loan is approved using Fannie Mae’s Desktop Underwriter (DU) Automated Underwriting System (AUS) or Freddie Mac’s Loan Prospector (LP) and generally both AUS will allow ratios well in excess of HUD’s 31/43 guideline for people with good credit, cash reserves and other mitigating factors. In addition HUD grants broad latitude to Direct Endorses (DE) Underwriters to make judgment calls for loans who have compensating factors such as; trailing spouses who may not be working yet but have a history of gainful employment, large down payments, a borrower who has a good history of either paying more in rent or housing expense and too many more to list here.
One of the most unique feature of an FHA insured mortgage loan and what sets it apart from any other mortgage loan product in the market today is they allow for a non-occupant co-mortgagor. In laymen’s terms you can have a parent co-sign and not live in the house that is being financed.
HUD doesn’t have income restrictions but they do impose property and loan limits and many lenders add to those restrictions as well you can check loan limits at https://entp.hud.gov/idapp/html/hicostlook.cfm And you can check to find HUD Approved lenders at; Lender List - HUD.
One last thing to remember is that your lender may have additionally imposed restrictions that HUD doesn’t require but it is the lenders right to do so as long as they are complying with Fair Lending laws in the application of those rules. For example; a common occurrence that I see is where lenders will not make an FHA loan to purchase a manufactured home yet HUD will insure the loan. In this case you need to find a lender who will make that loan for you. Finally; when in doubt check the HUD website; HUD - Why Ask For FHA Loan
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