How to qualify for a FHA loan in Omaha Nebraska

December 31, 2019
Michael Petrovich
FHA loans in Nebraska, FHA loans in Omaha NE

Omaha NE FHA home loans, who qualifies?

The FHA loan program was designed for buyers needing a low down payment option but with less than perfect credit. Buyers with higher debt ratios or limited assets can also benefit from a low down payment FHA loan.

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Benefits of an FHA loan

Low down payment
Higher debt to income ratios
Less than perfect credit allowed
Gift funds, co-signers, and seller credits allowed
Low rates even with less than perfect credit
NOT a first time home buyer program

Low down payment

FHA was designed to help buyers that did not have the 20% to put down on a home. In the last few decades conventional financing has also created their own low down payment option, but for many buyers FHA is the way to go.

A minimum down payment of 3.5% is required on FHA. This is actually slightly higher than conventional’s low down payment program, but FHA is less strict on income, assets, and credit. A buyer with less than perfect credit or higher debt can still qualify for FHA’s 3.5% down option when they are likely to be denied for conventional financing.

High debt to income ratios

Another benefit of FHA the higher debt to income ratios allowed. So what is debt-to-income?

For your application, we will take all of the minimum payments on your credit report and add it to the new house payment we get your total monthly debts (we will also add alimony, tax liens, and child support). Once we have that debt we compare it to your gross monthly income. The percentage is called your Total Debt to Income ratio. FHA will allow up to 56.99% on total debt ratios. For example, if you make $10,000 a month, all of your debt payments and the new house payment can be $5699 a month. This is much higher than conventional AND FHA will allow this high debt ratio even with less than perfect credit.*

*It is not guaranteed that you will qualify at 56.99% or less. FHA allows low credit scores but it is possible FHA will not approve you at less than 56.99% if there are substantial credit issues. You will need to contact a loan officer and complete an application to know for sure.

Less than perfect credit allowed

For buyers with less than perfect credit, FHA is often not only the best option it is the only option. Conventional loans technically go down to 620 on credit score, once you get below 680 (especially with a low down payment) it becomes more difficult to qualify for conventional financing. FHA will go as low as 580 on a 3.5% down payment.*

If you have less than perfect credit, unless you have a very large down payment, FHA is going to be the best and often only option to get home financing.

*Just like conventional, while FHA will go down to 580 on credit score it does become much more difficult to get FHA to approve the loan once you get below 620. I always recommend buyers get their scores to at least 620 no matter what loan program we are using. The loan process will be smoother and the rate and fees will be better.

Gift funds, co-signers, and seller credits allowed

Even with the low 3.5% down payment, many FHA buyers do not have the funds needed to cover down payment, closing cost, and escrow set up. FHA does have several ways a buyer can cover these expenses and get into a home with little to no money out of their pocket.

Gift funds

Gift funds are funds from an immediate family member that can be used towards a home purchase. These funds can cover all or part of the down payment, cost, and escrow. This is very popular for young first time home buyers with parents contributing gift funds. With the FHA gift funds there is one important piece of information that the donor must be aware of as soon as possible. FHA will require the most recent bank statement from the donor’s account. We will need to see that the donor had the funds in an account at the time they donated the money. FHA wants to make sure the funds actually came out of the donor’s account and not from an unapproved source. Understandably, many donors think this is a bit invasive and hesitate to give us the required documentation.

Co-signers

Co-signers are another great benefit of FHA. If a buyer is too high on the debt to income ratios, or lacks even the limited credit history required by FHA, an immediate relative can go on the loan as a non-occupying co-signer. This co-signer will have to qualify for the loan just as if they were living in the house. The loan appears on their credit until the house is sold or the loan is refinanced out of their name. This option is popular with parents looking to buy a home for their college age children. The parents co-sign for their child and they have some college buddies rent rooms to cover the mortgage. After the 4 or 5 years of college there can be significant equity in the home to give the college grad a head start on adulting.

Seller credits

Seller credits up to 6% of the purchase price are allowed on FHA. The seller can cover some or all of the closing cost and escrow up to 6% of the purchase price (usually more than enough). The seller cannot cover any of the down payment, but, combined with gift funds, this is a great way to get into a home will little or no money out of the buyer’s pocket.

Low rates even with less than perfect credit

FHA loans are guaranteed by the Federal Housing Administration. This guarantee reduces the risk to the lender in the case of default. Because of this guarantee, lenders are able to offer rates well below market rates for more traditional loan programs. Even with less than perfect credit, a buyer can get an FHA loan with a fantastic rate and low fees.

NOT a first time home buyer program

This is a common misconception of the FHA program. A buyer is not required to be a first time home buyer to use the FHA program. This is an advantage over many conventional low down payment options that have income restrictions or first time home buyer requirements. Because of FHA’s flexibility on credit, income, and assets, it is commonly used by first time home buyers, but it is not required to be a first time home buyer.

If you currently own a home, you can get a free home report that includes a home value estimate here:

Are you looking to purchase a home in Omaha NE with FHA?

FHA is a program designed for buyers with high debt ratios, lower credit scores, and limited assets. Because of this many of the buyers using FHA will be “on the edge” of qualifying. What does that mean? Well many buyers may qualify, but one change in information could disqualify the buyer. For example, if a loan officer miscalculates income, does not fully review the credit history, or does not do a detailed check of assets there could be issues. It is important in these cases to work with a local loan officer who knows the area and is very familiar with the FHA loan process.

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