All about FHA loans, with Justin Brown, loan broker

[MK: You really, really can buy income properties with as little as 3.5% down through FHA loans. Interested? Read on.]

We’ve spent so much time talking about FHA loans, I figured I’d bring in a pro. Meet Justin Brown of Nu Home Financial. Justin’s a loan broker who has recently done some very good work for my clients. I sent him some questions and he responded. Here they are:

What’s the minimum credit score you can work with to get an FHA mortgage? What can you do for someone with a score below that level?  

For an FHA loan it is ideal to have at least a 640 fico score, however there are programs available for credit scores down to 580, they can be very restrictive and almost impossible to get funded. For those that have a sub 640 fico score I will typically offer a free credit evaluation and give them a plan of action that will help them reach the targeted score, in some cases in as little as a month.

Is there a rule of thumb for how much personal income you need to carry a mortgage on a 2-4 unit building? How does the rent from the units play in to that?

Typically with FHA you need to have enough income so that your total reported debt obligations including the proposed mortgage payment will be less than a certain percentage of your income. Depending on your credit score and other factors your total obligations can be as high as 50-55% of your monthly gross income, or as low as 43%, however the great thing about an FHA loan on a multi unit property is that you are allowed to use the proposed rents as income, even if the units are vacant!

How many years of income do you need to see to do an FHA loan on an income property? What kind of documentation do you need?

The lender will typically need to see a 2 year work history, unless there is evidence you are a recent graduate. Typically for an employee of a company you will need to provide your most recent 2 years tax returns, most recent 2 years w2’s, and a recent 30 day period of paystubs. For those that are self employed, on a fixed income, recipient of benefits or other sources of income, the documentation will differ. Basically the lender just needs to see a 2 year history with evidence supporting it, and they need to reasonably be able to determine it is likely to continue for at least the next 3 years.

Besides income and credit score, are there any other things that stop people from getting FHA mortgages? What are they?

Although Income and Credit Scores are the two main factors that prevent most people from qualifying, but other factors can include assets or late rent payments in the last 12 months. An example of how assets can hinder a buyer from closing, if your down payment cannot be sourced and shown to have been seasoned for 60 days it will be an issue,  i.e. selling goods for cash with no documentation or tangible proof to support it, mattress money (cash saved for years, then suddenly deposited into your bank account) assets must be able to be sourced with an official paper trail. Assets must also be seasoned for 60 days, any large deposits typically more than 1,000 will need to be explained and sourced.  If you plan on buying a home it is best to have a recent 60 day statement period with no unusual activity or large deposits. Do not make sudden transfers or deposits without first checking with your lender if you are planning on buying a home in the next few months. Also if you are currently renting make sure your rent history will not show any late payments over 30 days late this will disqualify you from buying a home for 1 year from the most recent late payment.

What is PMI? Who needs it? How much does it cost?

PMI (Private Mortgage Insurance) and MI (Mortgage Insurance) are types of insurance that protect the lender from losses resulting from a foreclosure. If not for mortgage insurance companies and providers you would not be able to purchase a home for less than 20% down, it makes loans with as little as 3% down available. For FHA loans and Conventional loans the amount of monthly mortgage insurance can vary, depending on the down payment, loan term, credit scores and other factors. Although FHA loans have had the mortgage insurance cost change quite a few times in the last couple years, as of April first for a 3.5% down homebuyer they can expect to pay an up front fee of 1.75% of the loan amount, and a monthly fee that is calculated by taking 1.25%  of the loan amount and dividing by 12.

If people want to get in touch with you to find out if they qualify for a loan, how can they do that?

A pre-approval can be a quick 5-10 minute phone call in some cases, the best way to start is by calling me at 909-833-3200 ext 2, cell 714-494-5322, or by going to my website and clicking on APPLY NOW.