Tom and Bria Anderson were excited about their future even though the young married couple was still one year away from graduating from pharmacy school. They had found the perfect house to purchase in one of their favorite neighborhoods.
The problem? The Anderson’s were living on student loan stipends, a type of income that cannot be used for loan qualification on most standard loan programs. The beautiful house priced at $160,000 was beginning to look unobtainable. But their loan officer began to put the pieces of the puzzle together.
Key Puzzle Piece: Bria’s parents agreed to co-sign on the loan with their daughter and son-in-law. Bria’s parent’s had good credit, a very conservative amount of debt and enough income to qualify for the Anderson’s note.
Mortgage Solution: The FHA 30- year fixed rate loan allows the family-related co-signer to fully qualify for the loan even if the occupying borrowers have no qualified income. (Some of the conventional loans require the occupying borrowers to have enough income to qualify at a minimum debt-to-income ratio.)
The FHA loan also required only 3.5% down payment and allowed the sellers to pay up to 6% of the sales price toward closing costs and prepaid property taxes and homeowner’s insurance.
The Andersons liked the fixed rate on the FHA loan because they planned to live in the house over 5 years and did not want the payment to increase.
The adjustable rate FHA loan would have adjusted once a year. The FHA 3-1 ARM and 5-1 ARM would have stayed fixed for the first 3 years and 5 years respectively. However, after the fixed term, the rate would have adjusted annually. (There are some advantages to these loan types also.)
FHA Fixed Rate
Max loan amount: $271,050 for 1 unit basic standard mortgage limit.
Cosigner: Allowed if they have principal residence in the U. S, family or long standing family friend not associated with the transaction.
Documentation: Fully Documented
Minimum Down Payment: Borrower’s minimum cash investment (downpayment or downpayment and closing costs) must be equal to or exceed 3.5% of the
contract sales price or appraisal, whichever is lesser. (Can be as low as zero with certain down payment assistance programs)
Mortgage Insurance: Upfront and monthly on FHA loans with minimum down payment.
Occupancy: Primary Residence (A borrower owning a principal residence with an FHA mortgage that he or she intends to keep may not purchase another principal residence with an FHA loan except under special circumstances.) Second Home (with restrictions.) Investment (with restrictions.)
Prepayment Penalty: None
Property Types: 1-4 units
Ratios: 31% house payment to gross income/ 43% house payment & other debts to gross income. (These are suggested ratios. With other compensating factors much higher ratios sometimes allowed through automatic underwriting programs.)
Subordinate Financing: Allowed if it is a governmental or HUD approved Non-Profit Agency or from family member. (other exceptions and restrictions apply)
Seller Contributions: Up to 6% of the sales price or appraised value, whichever is less.
Source of Funds: Gifts allowed with documentation and some restrictions.
Term: 30 yr, 20 yr and 15 year on Fixed Rate or Adjustable Rate FHA loans.
J. Garner, Mortgage Officer
Evolve Bank & Trust