So let’s get this right, your credit’s not perfect, you don’t have 20% or even 10% to put down and you’re planning to buy a home in the Bay Area? Well Congratulations, you are the perfect borrower. Well, at least when it comes to FHA.
As of Wednesday March 6th, 2008, the Bay Area can now take advantage of the loan programs the Federal Housing Administration (FHA) has to offer. The FHA is the federal agency that insures mortgages for people who do not qualify for conventional financing. The Federal Housing Administration has been around since the Great Depression, but the loans they insure have been an unknown entity in the Bay Area because of the low maximum loan limit of $362,790. Well, it’s time to put out the welcome mat because the FHA has upped their limits to $729,750 and is finally moving into our neighborhood.
The FHA has more lenient underwriting standards when it comes to your credit score, reserves and down payment. Currently, there is no minimum credit score or reserve requirements, but a borrower needs to put at least 3% down to qualify for an FHA loan. The down payment can be in the form of a gift or can be paid through a county or city assistance program. The borrower also needs to prove they can afford the loan by documenting their income and assets. Finally, the mortgage payment alone should not exceed 31% of the borrower’s income nor should the borrower’s total debt including mortgage payment exceed 43% of the borrower’s income. But……because of the lenient underwriting standards, FHA will let these percentages go a little higher if you have strong compensating factors (excellent credit scores, money in the bank, job tenure).
Another benefit of an FHA loan is a seller can contribute up to 6% of the loan amount towards closing costs, up front taxes, interest, insurance costs, or buying down the interest rate. So with a 6% seller’s contribution and a 3% gift towards your down payment, you could very well buy your home without using a penny of your own money.
Sounds perfect right? Well as you quickly learn in life, nothing is perfect. Your new neighbor has a few unfavorable traits. So just wait until my next post before you start planning the house warming party!
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