FHA loans are becoming increasingly popular these days as potential homeowners may not able to qualify as quickly for conventional mortgages.

The FHA insures some higher-risk loans, in turn allowing borrowers with low down payments and less than perfect credit to purchase homes and bolster the housing market.

However, while getting through the loan process with an FHA mortgage loan is not necessarily more difficult than with a conventional or conforming credit, there are some issues that you will want to be aware of.

Property Condition

You can’t buy just any property with an FHA loan, or any other loan for that matter. All lenders are concerned with the condition of a property, especially as it relates to livability and safety. 

Significant deficiencies in a home will almost always be noted when the FHA appraiser sees the house. The appraiser must deem it to be livable, without any conditions that could jeopardize health or safety. 

Sometimes you can get the seller to make the needed repairs to pass the lender requirements. In other cases, you may want to go an alternate route. The FHA 203K streamline loan allows you to borrow up to $35,000 for home repairs to bring the house up to code.

Low Appraisal

The primary role of the appraiser is to estimate it’s market value. They base the market value on estimates of the property’s features and a comparison to similar properties that have sold recently. If the appraisal is low, the loan funding could fall through because the FHA underwriting guidelines (along with almost all conventional directions) will not let you borrow more than the home’s appraised value. You can, however, add to the amount you bring in to closing if you prefer to compensate for a low appraised value.

Rather than trying to scrape together a more significant down payment, you may want to take the information to the seller to renegotiate the purchase price. The seller will likely recognize that other buyers would be in the same boat, leading the seller to agree to a lower purchase price.

High Debt-to-Income Ratio

Debt to income ratios is a concern with virtually every type of mortgage loan on the market today. Your FHA loan may encounter a snag in the underwriting process if your total debt payments, including your new mortgage, would be a high percentage of your income.

FHA has an automated underwriting program called TOTAL Scorecard which uses an algorithm to determine a borrower’s qualification. The process is quick, and often you can make up for a high debt-to-income ratio with other compensating factors, like a more substantial down payment or a cash reserve of several months of mortgage payments.

If you have any questions regarding FHA loans or any other home financing questions, please give us a call!