 The advantage of a California FHA loan is mortgage flexibility.
Many people look for an assumable FHA mortgage when purchasing, but often an assumable FHA mortgage loan balance is lower than you could get with a new FHA mortgage and therefore requires a bigger down payment. Our team of loan officers can quickly answer your questions about California FHA guidelines at 800-325-2062.
It has been a very long time since FHA financing has been useable in many areas of California because the maximum FHA loan was too low for the cost of homes (only $362,750 in high cost counties like much of the Bay Area). Because of that, everyone used conventional financing and/or sub-prime financing (for borrowers with less than good credit.)
 Today, however, FHA stands as having the potential to be the most sought after form of financing for a number of excellent reasons.
Benefits of California FHA Loans
- The FHA loan limit is going to be increased in almost every county in California, and to over $700,000 in high cost areas like the Bay Area.
- Easier qualifying than conventional loans. FHA’s debt ratios are flexible, and FHA allows a closely related non-occupant co-borrower to assist in helping a borrower qualify.
- No credit score is required as long as the borrower can provide alternate sources of credit.
- More flexibility for borrowers with credit scores below 620.
- A low down payment of only 2.85% is required.
- No higher fees are charged for having credit scores less than 680.
- All the funds for down payment and closing costs can be a gift.
- Much more lenient requirements for borrowers who have had a bankruptcy.
- Cash-out refinances to 95%.
California FHA Loan Requirements
FHA guidelines are fairly straightforward.
To qualify for an FHA loan, we must analyze all your income to ensure that it is enough to cover the mortgage and your other obligations. Also, the stability and probability of continuance must be analyzed. Income that cannot be verified, is not stable, or will not continue cannot be used in determining your ratios.
DEBT RATIOS: FHA guidelines allow debt ratios for manually underwritten loans up to 31/43. Debt Ratios are the relationship between your income and your expenses. Ratios are expressed as two numbers like 31 over 43. These are now standard FHA ratios. The first number, 31, represents the relationship between your income and your new housing expense of principal, interest, taxes, insurance and homeowner dues. For example, if you make $4,000 monthly and have a housing expense of $1,240, you would have a 31% top or front ratio.
The other number,43%, represents your total monthly debt, including the housing expense and all other debt such as credit cards, loans, child support, etc. So in the above example where you are making $4,000 per month and have a total expense of $1,640, you would have a 41% bottom or back ratio.
 When we use automated approvals, FHA guidelines allow your ratios to go has high as 50%. Also, with compensating factors you may be able to qualify even if you exceed the FHA guidelines.
STABILITY OF INCOME: FHA HUD does require an arbitrary minimum length of time you must have held a position to be eligible. However, the lender must verify your employment for the most recent two full years. If you have been in school or in the military during any of this time, you must provide evidence supporting this. You must also explain any gaps in employment of a month or more.
Allowances for seasonal employment may be made.
The lender is looking to show a steady source of earnings. Frequent job changes may show a lack of stability. Also, large swings in income will cause an underwriter to question the stability of your income. If you have changed jobs frequently within the same line of work, but continued to advance in income or benefits, you should still be OK.
California FHA Credit Requirements
When reviewing your credit and applying the FHA credit requirements, past credit history is the most useful guide in determining your attitude toward your obligations. Making payments in a timely manner represents a reduced risk. However, if your credit history shows continuous slow payments, judgments, and delinquent accounts, strong compensating factors will be needed to get your loan approved.
When an underwriter reviews your Fico Scores, it is the overall pattern of behavior that will count rather than isolated occurrences of unsatisfactory payments. If you had a period of financial difficulty in the past, this does not necessarily mean that your FHA loan will be denied, especially if a good payment record has been maintained since then.
When bad credit accounts show up, the underwriter will try to determine if the cause of the late payments is due to financial mismanagement or circumstances beyond your control. There is a big difference between these two items.
Compensating Factors
Compensating factors are those extra things that can make a difference in getting a loan approved or not. They may be treated differently by different underwriters, so FHA guidelines have no hard and fast rules about using them.
Here are some examples of compensating factors:
- Excellent credit history
- Putting down more than 3%
- Having a lower Debt Ratio
- Attending a homebuyer education class
- Down payment comes from the borrower instead of a gift
- Longer residence history at one place
- A longer job history at one job
- Additional reserves after closing
- Amount of payment shock, which means how much the payment increase will be as a result of this loan
- No derogatory accounts on your credit report in the last 12 months
Why choose Cherry Creek to handle your California FHA loan?
Many lenders have no concept of how to do FHA loans anymore. At Cherry Creek we have been doing them for the past 20 years. The best way to take advantage of this amazing program is to call our team at 1-800-325-2062.
We will assist you in getting pre-approved and be well on your way to either purchasing the home of your dreams or refinancing the home you already own.
*FHA, which stands for Federal Housing Administration, was created by congress in 1934 and became part of the Department of Housing and Urban Development (HUD) in 1965. The FHA mortgage is designed increase home ownership in the United States by helping lenders reduce their risk in making loans. It is important to note that FHA does not loan money but does insure the FHA mortgages that an FHA lender originates.
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