Colorado FHA Mortgage Overview Continued ...
Source of funds, important for virtually every mortgage, is critical for an FHA mortgage. Acceptable sources for the cash to close are:
- Earnest money does not need to be verified unless the amount of the earnest money check exceeds two percent of the purchase price, or the money is required for cash to close, or the amount appears to be excessive.
- Checking and savings account balances are acceptable, provided the money has been in account for at least the last two statement cycles. If the money has not been in account long enough, it must be explained and have come from another source outlined on this list.
- Gift funds. Must be properly documented (talk with your mortgage consultant), the gift coming from a close relative, borrower's employer, government agency or nonprofit assistance program (check here for more details about down payment assistance), or close friend who can prove their relationship with the borrower (FHA says "a clearly defined interest in the borrower").
- Collateralized loans from acceptable sources, including: stocks, bonds, retirement accounts including 401(k) accounts, and automobiles owned by the borrowers.
- Money saved is an acceptable source provided it is documented properly (typically with a savings feasibility worksheet in addition to bank statements or account printouts to support that projected savings have actually taken place prior to closing).
- Sweat equity is acceptable under very specific guidelines. Talk with your mortgage consultant BEFORE you make plans for sweat equity.
- Secondary financing (second mortgages) is acceptable, but only from specific sources.
Unacceptable sources of funds include:
- The seller of the property being purchased.
- Real Estate agents involved in the transaction.
- The mortgage lender.
- Signature loans.
- Cash advances on credit cards.
- Any other unsecured debt.
If you have a question about whether the source of your money is acceptable, please talk with your mortgage consultant before you write an offer on a new home. This will ensure that the feasibility of the transaction are known ahead of time.
Credit
FHA has one of the most lenient set of credit requirements of any market-rate mortgage solution. The requirements are:
- A clean year of credit. No late payments or other delinquencies during the most recent year (there are exceptions to this rule, talk with your mortgage consultant to see if your situation might qualify).
- Your credit score does not matter. FHA is not a credit score driven mortgage solution, although most lenders utilize automated underwriting in conjunction with FHA mortgages. Talk with your mortgage consultant about what this means for your situation, and to find out if manual underwriting is an option if you are denied electronically.
- Derogatory credit within the most recent two years must be explained in writing.
- Judgments must be paid off for amounts in excess of $250.
- Collections greater than $250.00 must be paid off (larger amounts where payments have been made on time for the previous year may be accepted).
- Bankruptcy: You must have at least two years from the date of discharge with a chapter 7 (less, but not less than one year, if there are acceptable extenuating circumstances) provided good credit no less than one year has been established, no less than one year since payments began on a chapter 13 (provided payments are on time, and the court provides approval).
- Consumer Credit Counseling: Despite a common belief that this makes getting an FHA mortgage impossible (while still making payments) this is viewed as neither a positive or negative. The credit history of CCC is evaluated the same as any other type of debt.
- Previous mortgage foreclosure: Generally a three-year wait is required, though some extenuating circumstances may allow for a shorter time.
- The borrower must have no unpaid debts with the federal government. In some cases where debts are unpaid but payments are being made (at least 12 months and then only in certain circumstances), exceptions may be made.
- The borrower is not required to have a traditional credit report. "Nontraditional credit" may be established by proving timely payment of debts with utility bills, insurance, telephone, etc.
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