FHA loans are perhaps the most popular mortgage choice for buyers in Charleston and surrounding Charleston County. The Federal Housing Administration introduced the FHA loan program in 1934 in order to bring some semblance of stability in the home loan industry as individual banks used their own internal approval guidelines that could require down payments as high as 50% and for very short terms, such as three to five years, requiring the borrowers to refinance the loan at the end of that initial period.
Mortgage companies like to approve FHA loans because the lending guidelines, set by the FHA, are easy to follow and the individual loan comes with an inherent government guarantee. This guarantee compensates a lender for a loss on the loan should the home be foreclosed upon. As long as it is shown the lender approved an FHA loan using established FHA guidelines the lender receives compensation for the loss. This guarantee is financed by the borrowers in the form of two separate mortgage insurance policies. The initial policy is referred to as the upfront mortgage insurance premium and is typically rolled into the loan amount and does not have to be paid for out of pocket. The second policy is an annual one that is paid in monthly installments during the course of the loan.
As with other government-backed mortgage programs, FHA loans are only used to finance an owner-occupied property and may not be used to finance a rental property, a second home or a vacation or beach property. FHA loans are allowed on not just a single family residence but can also be used to finance a condo or townhome as long as the borrowers occupies the home as a primary residence. The property can be located anywhere in Charleston regardless of the home seller.
Underwriting guidelines for FHA loans are considered to be relaxed somewhat compared to say conventional loans with a 5% down payment. Lenders will pull a credit report from each of the three credit repositories, Experian, Transunion and Experian. These three digit scores range from 300 to 850 with the higher score indicating better credit. Approved FHA lenders typically ask for a minimum credit score of 620, which most consider to be “average” credit. This can be compared to certain conventional loans that ask for a 680 credit score or higher.
FHA loans ask there be at least a two-year employment history of full-time employment. Part time employment can be used on a case by case basis if a two-year history can be verified as well as the likelihood the part time income will continue into the future. The lender uses the gross monthly income of all borrowers on the application and is verified reviewing copies of the most recent pay check stubs covering a 30 day period as well as the most recent two years W2 forms. For those that are self-employed, lenders will require the two most recent filed federal income tax returns, both personal and business. A business owner will also be asked to provide a year-to-date profit and loss statement.
FHA loans ask for a down payment of only 3.5% of the sales price. For a $250,000 sales price, the down payment is then $8,750. Interest rates for FHA loans are as competitive as any other loan program and can be even more competitive when looking at a conventional loan with a 5% down payment. Current 2017 FHA loan limits in Charleston County South Carolina is $357,650 – home buyers looking for a loan that is beyond the FHA or Conventional loan limit should read up on the 95% Jumbo loans here.
Home buyers can learn more about FHA loans here, please contact us at 800-871-2636 for more info.