FHA Loans

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FHA loans in California are a great option for first time home buyers. A typical mortgage loan will require a 20% down payment which can be out of reach for many. FHA Loans require as little as 3.5% down payment and that amount can be gifted from family members or other sources. However, while the down payment maybe lower you will need to have a manageable amount of existing debt to qualify.

FHA Loan Debt Ratios

The FHA loan has the reputation of a ‘first-time home buyer loan.’ While anyone can use it, it is great if you’ve never owned a home before because of its low down payment requirements and flexible underwriting guidelines. While you may not need a high downpayment you will need to have lower amount of debt.

Qualifying for an FHA:
  • Minimum 580 credit score
  • Maximum 31% housing ratio (your housing payment can’t exceed 31% of your gross monthly income, including spouse if married)
  • Maximum 43% total debt ratio (your total monthly debts can’t exceed 43% of your gross monthly income, including spouse if married)
  • Stable income and employment for 2 years
  • 3.5 percent down (with a 620 credit score, 100% of the down payment can be gift funds)


(Gross monthly income - before taxes are taken out

What Debts Must be Included

Actually, just about every debt payment must be included in the FHA DTI calculation. These include the following, but may include others.
  • Credit card or lines of credit payments
  • Auto loan payments
  • Student loan payments –
  • Other installment loans or leases
  • Mortgage payments
  • Taxes, insurance, and association dues on free and clear properties (including land)
  • IRS and state income tax payment plans
  • Alimony and child support
  • Payment for the proposed new mortgage
Occasionally, debts pop up that do not report on the credit bureaus. These must be disclosed and counted as well. For instance, someone may say, “That is just a buy here pay here car loan that does not show on my credit report.” However, that is a debt and must be counted.

Requirements

FHA Loan Limits

FHA Loans in California have limits on how much can be borrowed. Since these loans are targeted towards first time home buyers and not for people looking to upgrade into a larger house.

Due to increasing home prices in 2020 the FHA has increased loan limits for most of the country will be $331,760. This limit can by higher in places where homes are more expensive. In Maricopa county California the FHA Loan limits are $331,760 for a single family home, and $424,8000 for a duplex.

Impound Accounts

As part of your FHA Loan you will need to have impound accounts to pay for property taxes and homeowners insurance. These can normally be paid once or twice a year but in order to reduce the risk of default the FHA will require you to pay towards these bills each month through an impound account. So if your property taxes are $3,600 per year and your homeowners insurance is $1,200 per year for a total of $4,800 then you would have an impound account payment included in your mortgage each month of $400 to cover this expense.

FHA Loan Fees and Insurance

An FHA mortgage requires an upfront premium, or fee, of 1.75% of the loan amount. You can:
  • Pay that premium at closing, if you have the cash.
  • Or you can roll it into your loan amount, which increases your monthly payments slightly because you're borrowing more.


In addition to the upfront premium, you’ll pay a monthly premium that is added to your mortgage payments. This fee varies from 0.45% to 1.05% of the loan amount, per year, depending on:
  • The loan amount.
  • The size of the down payment.
  • The term (the number of years the loan is financed for).

Here's an example of an FHA loan payment:

$300,000 house purchased with a 5% down payment $285,000 loan amount @ 3% APR

You can see that the monthly payment increased substantially when mortgage insurance and impound payments are included.
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You can use our handy mortgage calculator as an FHA loan calculator by including one time expenses of 3%, Arizona property taxes at 1.3% and home insurance at .35% and you'll be pretty close to your actual payment.
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