Since the 1930s, Federal Housing Administration insurance has provided a vital safety net for housing lenders and borrowers. Borrowers fund the program with monthly insurance premiums, and the FHA guarantees mortgages against default. If a lender forecloses, the FHA pays the remaining principal balance on the mortgage and conveys title to its parent agency, the Department of Housing and Urban Development or HUD. Although the FHA has covered millions of home loans, its guidelines on properties and borrowers render some of them uninsurable.
FHA guidelines may disqualify a property from the FHA's standard, single-family mortgage insurance program, also known as 203(b) financing. The home may be in need of expensive repairs, or may have been damaged in a storm or fire. More specifically, the FHA program disqualifies any property requiring more than $5,000 in repairs. The home may only be insurable through "rehabilitation" or 203(k) financing, which allows a buyer to roll repair costs into the mortgage amount. In some cases, the FHA will extend conditional approval if buyers set up an escrow account to pay for needed repairs, as determined by an appraiser.
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A loan also may be uninsurable based on the financial status of the borrowers, whom the FHA program qualifies by their credit history and ability to pay a monthly mortgage. The basic measure of the latter is the front-end ratio. If the total mortgage payment is greater than 31 percent of the household's gross monthly income, the applicant is considered uninsurable. The limit on the back-end ratio, which includes all installment debts, is 43 percent as of 2015. An applicant also can be denied on the basis of poor credit. Missed or late payments, accounts in collections, bankruptcies and judgments all count against a borrower, and may disqualify him for an FHA-backed loan. A foreclosure within the last three years also can result in a denial.
Applicants can be disqualified for issues with the IRS and other federal agencies. HUD maintains a Limited Denial of Participation list, for example, and the FHA also disqualifies borrowers who've made an exclusion list under the System for Award Management, maintained by the General Services Administration. Anyone delinquent on a debt to the federal government, or the subject of a lien placed on property by the government, also is FHA-uninsurable.
Limits on Loan Amount
The FHA places limits on the dollar amount the program will insure. As home values vary from one county and region to the next, these limits depend on the location of the property. The standard guideline used by the agency rules is 115 percent of the median sale price in the region. If the median sales price of homes in a particular county was $280,000, for example, then the loan limit would be $322,000; any amount above that limit would not be covered by FHA insurance. HUD provides a useful limit calculator by location on its website.