FHA Loans Are Big in Washington. Here’s Why.
Are you a Washingtonian looking home loan that won’t cost you an arm and a leg for a down payment? FHA loans have helped millions of people buy a home since the 1930s and, if you qualify, you can get one with as little as 3.5% down.
How do FHA loans work? First, a loan is made between a private lender and a borrower (you). Then the Federal Housing Administration insures it; they run the insurance pool that protects lenders in case a borrower defaults.
And that’s a big deal because loans that are backed by FHA insurance have a built in safety net for lenders. When FHA insurance absorbs some of the risks, lenders are encouraged to write more loans with 1) competitive interest rates, 2) forgiving credit standards and, 3) low down payment requirements.
FHA Mortgage Insurance
The FHA insurance pool that backs mortgages is funded by you, the borrower. So there’s no free lunch here. FHA mortgage insurance comes in two flavors.
- Upfront Mortgage Insurance Premium (UFMIP) is paid at the time of closing and is a one-time cost.
- An ongoing, annual Mortgage Insurance Premium (MIP) is calculated each year and then added to your monthly mortgage payment (it’s broken up into 12 pieces).
It’s a good deal. In fact, because FHA loans are easier to get than other types of mortgages, they are a very popular choice for first time home buyers in Washington State. More broadly speaking, 20% of all loans written across the country are FHA-insured.
FHA Loan Requirements in Washington
Two “buckets” of information are evaluated to determine whether your loan gets approved by an underwriter. The first bucket of items concerns the borrower, things like their income and credit history. The second bucket includes aspects of the home itself, like it’s location, price and how many units are in the property (duplexes, etc.)
To get an FHA loan in Washington, here are the borrower and property eligibility requirements.
FHA Loan Limits in Washington State
FHA will not insure loans that exceed a certain size. The total amount you can take out is capped based on the location of the property and the median value of homes in the area. The number of units in the property also matter. For the sake of simplicity, FHA loan limits in Washington, for one-unit properties, are:
- $271,050 floor in low-cost areas,
- 115% of median home prices in the county, or a maximum of
- $540,500 ceiling in high-cost areas.
What that mean is that you can get a loan in a high-cost area like King County (Seattle, Bellevue, Renton, Kent, Federal Way, Kirkland and Redmond) up to $540,500. Same thing in Pierce County (Tacoma, Puyallup and Lakewood) and Snohomish County (Everett, Snohomish, Lynnwood and Marysville.)
Applying for an FHA Loan in Washington
Most lenders will only need a handful of documents from you when you apply.
- 2 years’ tax returns
- 2 months’ current pay stubs
- Name and address of employers
- Checking and savings account numbers
- Social security number
- Current real estate assets
- Credit report (your loan advisor will pull this for you)
- Approximate value of your personal property (assets)
If you are self-employed, you’ll be asked for an income statement and balance sheet from your business. Depending on your situation, underwriters may ask for even more information. Here’s a comprehensive list of pre-approval documents.
WASHINGTON FHA BORROWER ELIGIBILITY
Ideally, you’ll have a steady work history over the last 2 years. Changing jobs, getting a promotion or moving to a new company with a similar role, is generally OK. That’s because those situations typically result in the same or increased income.
The minimum FICO credit score for an FHA loan is 620. Sometimes exceptions are made (perhaps as low as 580) if you come to the table with a bigger down payment.
You’ll need a track record of paying your bills on time and in full. Take a look at your credit report to see if you have any late payments. A 30-date late payment or two won’t necessarily destroy your chances of getting approved, but any more than that and you’ll be pushing the envelope.
It never hurts to start monitoring your credit score to know where you stand. Each year, you can get a free credit report from AnnualCreditReport.com.
If you’ve had a significant, derogatory credit event like bankruptcy, foreclosure or short sale, you’ll be subject to mortgage waiting periods.
Lenders want to make sure that borrowers can afford under FHA guidelines. To determine affordability, lenders calculate your Debt-to-Income Ratios (DTI). There are two ratios.
The first is called a front end ratio, and it compares your expected mortgage payment to your monthly gross income (before taxes).
Mortgage Payment ÷ Gross Income = Front End Ratio
The second measure, or back end ratio, compares your expected mortgage payment plus your monthly debt payments (credit cards, student loans, etc.) to your gross monthly income.
(Mortgage Payment + Debt Payments) ÷ Monthly Income = Back End Ratio
FHA specifies a 31/34 debt-to-income ratio (front end/back end). FHA loans made in Washington typically comply with the following:
- Front end ratio: 31% of your gross (before tax) income may be used for a monthly mortgage payment.
- Back end ratio: 43% of your gross income, combined with your other monthly debt payments, may be used for a monthly mortgage payment.
FHA loans in Washington State require a 3.5% down payment. One cool feature of FHA loans is that they allow down payment gifts. That means your blood or by-marriage relatives can contribute money toward your down payment.
It must be a gift, not a loan! You and the donor(s) must sign a mortgage gift letter to legally verify that no repayment of the gift is expected.
WASHINGTON FHA PROPERTY ELIGIBILITY
FHA loans can be used to buy several types of homes. Co-ops are not eligible for an FHA mortgage in Washington, but several other types of properties are, including:
- Single Family Detached
- Single Family Attached
- 2–4 Unit Detached/Attached
- Condominiums (must be FHA-approved)
FHA Inspections and Appraisals
An FHA-approved appraiser must conduct the appraisal and inspection of the property. The appraisal determines the value of the home and the inspection determines its soundness as a safe and sanitary dwelling. After all, there must be validation that a home is worth as much as you agree to pay for it and that it is safe in which to live.
Final Thoughts in Getting an FHA Loan in Washington State
FHA loans represent an excellent opportunity for folks with less-than-perfect credit to buy a home in Washington with as little as 3.5% down. Whether you’re in King County or Clark County, FHA-insured mortgages can be used as long as the total loan amount does not exceed the local loan limits. FHA loans have been around since the 1930s and have helped millions of Americans become homeowners. Perhaps you will be next!