Chicago FHA loans are, according the the FHA, for everybody. And it is true, the FHA would insure loans for everybody who qualifies. Except that, for some people, they are not a good idea: they come with mortgage insurance which, on 30-year loans, is there for the life of the loan. And, then, there’s the upfront mortgage insurance too.
On the other hand, because they are easier to qualify for, FHA loans are a great idea for people with blemishes on their credit or employment history and for people with smaller down payments.
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Qualifying for an FHA Loan in Chicago
Here are what makes the FHA a great idea for so many Chicago area home owners and buyers:
- You do not need to have credit scores to qualify for an FHA loan.
- If you do, they can be low, as low as 500.
- You only need 3.5% down payment (3% equity left in your home for a rate and term refinance).
- They can be used to buy or refinance 1-4-unit properties (detached single family houses, condos, townhouses, 2-4 unit properties, including some mixed-use properties).
Chicago FHA Loan Programs
The FHA has several loan programs: loans to cover regular purchases and refinances (what most people think when they think FHA loans); renovation loans, reverse mortgages, construction loans, manufactured home loans, energy loan programs.
Given the size of the Chicago area, there’s plenty of need for all these loan types.
Chicago FHA Loans: Limits
Chicago FHA loans limits are the limits for the entire Cook County. Each type of property has its own limit, and those limits are set for one year. As of the writing of this article, these were the limits for Cook, Du Page, Lake, and McHenry and Will counties:
|1 unit||2 units||3 units||4 units|
In a way, those limits are unfair. Because not all cities have the same property values. People looking for mortgages in Des Plaines can consider a larger percentage of the properties for sale in that city than people looking for mortgages in Glenview, for instance.
Ready to talk to a Chicago mortgage specialist about your upcoming FHA loan? Call me at 847-840-8884.
FHA Loan Requirements
Chicago FHA loan requirements are many and some change over time. These are the main ones:
- FICO® score at least 580 = 3.5% down payment.
- FICO® score between 500 and 579 = 10% down payment.
- If no credit, 12 months of on-time payments on utility or phone bills or rent.
- UMIP (Upfront Mortgage Insurance Premium) is required.
- MMIP (Monthly Insurance Premium) is required.
- Housing Debt-to-Income Ratio < 43% (principal, interest, mortgage insurance premium, property taxes, property insurance, flood insurance and homeowners’ association must be less than 43% of borrowers’ monthly income.
- Total Debt-to-Income Ratio <56% (all of a borrower’s monthly debt payments must be less than 56% of their monthly income.
- The home must be the borrower’s primary residence.
- Borrower must have steady income and proof of employment.
- Properties must meet FHA’s standards for safety and soundness.
- 3 and 4-unit properties must pass the self-sufficiency test (75% of the market rents of all units, including the owners, must cover all housing expenses (principal, interest, mortgage insurance, property insurance, property taxes, flood insurance, homeowners association fees, if any).
- No bankruptcy in the previous 2 years (some exceptions are allowed).
- No foreclosure or deed-in-lieu in the previous 3 years (some exceptions are allowed).
Those are FHA’s requirements. Some Chicago area lenders have stricter rules. They call their restrictions overlays. The most common overlay has to do with credit scores. Very few lenders go to 500. Most stop at 620, some go to 600, and a few go to 580.
Note on the Self-Sufficiency Test and Mixed-Use Properties!
HUD (runs the FHA loan programs) does not consider rent from non-residential units to be rental income for the purposes of the self-sufficiency test.
So, to get an FHA loan against a 3 or 4-unit mixed-use property, you either have a really large down payment or rents are really high or the price is really low.