The FHA mortgage program was created way back in 1934, Back then, lending guidelines were far from universal and many banks would require 30%+ percent or more for a down payment. Buyers also had to have a standing relationship with the bank.
Mortgages years ago would be for a relatively short term, around 5 years, and the loan would have to be paid off completely or refinanced into yet another short-term loan. Up to that period, only those considered well-to-do could afford to own a home.
Today, the FHA mortgage requires only 3.5 percent down. Here in Naples, the median sales price is around $425,000 for the first-time buyer price point, so with FHA the minimum down payment would then be $14,875. Compare that with a conventional mortgage that would require a much greater 5-20 percent down payment.
More: 5% Jumbo loans are also available to first-time buyers that are financing over the conforming loan limit of $726,200 in Collier County. Learn more about Naples Jumbo Mortgages here.
One of the reasons that first-time home buyers prefer the FHA loan is due to the minimum down payment required. In Collier County, the FHA loan limit is currently set to $450,800 for a 1-unit property. Please see the complete loan limit list for multi-unit properties below.
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To obtain an FHA loan approval, both the buyer and the property being considered will be evaluated. Lenders must first determine that borrowers can afford the new monthly payment along with current credit obligations and they do that by calculating debt-to-income ratios. Lenders compare your mortgage payment which includes a monthly allotment for property taxes, insurance, and an amount toward the annual mortgage insurance premium with your gross monthly income.
Let’s assume you are borrowing $250,000 and taking out a 30-year fixed rate loan at 3.50%. The principal and interest payment plus monthly mortgage insurance are $1,3000 per month. If you add taxes of $225, and insurance at $125 your housing payment is $1,650. If your gross monthly income is $6,000, your housing debt ratio is around 27 percent of your income. FHA lenders like to see the housing debt ratio below 38% in most cases.
Lenders next add up all your other monthly credit obligations in order to arrive at a total debt ratio. Let’s say you have student loan payments of $400 and a car loan of $435. Your total debt ratio would then be 42. FHA lenders like to see this number below 48% in most cases.
Your gross monthly income is documented by reviewing your two most recent W2 forms along with your most recent paycheck stubs covering a 60-day period. If you’re self-employed 1099 or have additional self-employment income you’ll need to provide your two most recent federal income tax returns.
Lenders will then add up these two years and average the amounts providing a monthly figure. Year over year income should be relatively consistent.
FHA mortgages are known to be a bit more lenient with regard to credit when compared with conventional loans with less than a 20 percent down payment. While there are generally no federal guidelines for a credit score, most lenders will require a minimum score of 600 – 580 for those financing the max of 96.5%.
Finally, lenders will make sure the property you’re buying is in good shape and the price is justified when comparing your property with similar homes in the area. Homes should meet all basic HUD requirements in regard to safety and livability.
Getting approved for an FHA loan in Naples is pretty simple. Buyers just need to provide the minimum 3.5 percent down payment, show funds available for associated closing costs, demonstrate a decent credit history, and document their income.
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