FHA Loan Problems and Some Good Solutions
August 6, 2023
Many things can complicate an FHA mortgage, but there are steps borrowers can take or plan to take during the planning stages of the loan to help avoid them or reduce their impact on the transaction. We examine some of them below.
Difficulty Saving a Down Payment
FHA mortgages require a minimum of 3.5% down for those with qualifying FICO scores. Those not qualifying for 3.5% down because of lower FICO scores may be asked to put 10% down.
For some, the “FHA loan solution” for this issue is a local down payment assistance program, which may offer a forgivable loan or other means to get down payment help to lower your upfront costs.
The FHA does not administer or offer such programs. Borrowers must find a local option in their housing market.
The Borrower Needs a Multi-Unit Home
FHA mortgages are offered for residential properties the borrower intends to live in full-time as their home.
But that does not restrict the borrower from applying for a loan for a home with up to four living units. The borrower must agree to live in one or more units but is free to rent the unused units or offer them to others.
Changes in Income and Employment
Some borrowers may have trouble getting approved for an FHA mortgage if they want to apply too soon after a job change.
For best results, the FHA loan solution to this problem is to wait a minimum of a year (not ideal) but closer to two years (better) after a major job change to apply for a mortgage.
What do we mean by “major job change?” Switching from full-time salary to commission income, taking a new job that is not upwardly mobile, quitting your job and starting your own business, or switching from salary to contract work.
Changes in FICO Score or Employment After Initial Loan Approval
After loan approval, it is crucial to avoid major changes to your financial position, employment, or credit reports. Some borrowers don’t realize that until you get to the closing day your loan is subject to review or even cancellation if your finances change between approval and closing day.
There is no “fix” for this issue. Instead, preventive maintenance is the key. Don’t apply for new credit, don’t change jobs after loan approval, and don’t miss your non-FHA loan housing payments even once after loan approval but before closing day.
Difficulty Saving a Down Payment
FHA mortgages require a minimum of 3.5% down for those with qualifying FICO scores. Those not qualifying for 3.5% down because of lower FICO scores may be asked to put 10% down.
For some, the “FHA loan solution” for this issue is a local down payment assistance program, which may offer a forgivable loan or other means to get down payment help to lower your upfront costs.
The FHA does not administer or offer such programs. Borrowers must find a local option in their housing market.
The Borrower Needs a Multi-Unit Home
FHA mortgages are offered for residential properties the borrower intends to live in full-time as their home.
But that does not restrict the borrower from applying for a loan for a home with up to four living units. The borrower must agree to live in one or more units but is free to rent the unused units or offer them to others.
Changes in Income and Employment
Some borrowers may have trouble getting approved for an FHA mortgage if they want to apply too soon after a job change.
For best results, the FHA loan solution to this problem is to wait a minimum of a year (not ideal) but closer to two years (better) after a major job change to apply for a mortgage.
What do we mean by “major job change?” Switching from full-time salary to commission income, taking a new job that is not upwardly mobile, quitting your job and starting your own business, or switching from salary to contract work.
Changes in FICO Score or Employment After Initial Loan Approval
After loan approval, it is crucial to avoid major changes to your financial position, employment, or credit reports. Some borrowers don’t realize that until you get to the closing day your loan is subject to review or even cancellation if your finances change between approval and closing day.
There is no “fix” for this issue. Instead, preventive maintenance is the key. Don’t apply for new credit, don’t change jobs after loan approval, and don’t miss your non-FHA loan housing payments even once after loan approval but before closing day.
Do you know what's on your credit report?
Learn what your score means.
