Who Qualifies for an FHA Home Loan?

Written by Ashley Sutphin Posted On Tuesday, 19 October 2021 00:00

A mortgage the Federal Housing Administration backs is known as an FHA loan. FHA loans are unique from other mortgages and home loans. They’re often helpful for first-time homeowners because they offer a combination of a lower down payment requirement and lower credit score standards.

The following are some of the critical factors when it comes to qualifying for an FHA loan.

Credit Score Requirements

The minimum credit score for an FHA loan approval is 500. That’s lower and often significantly lower than lender requirements for traditional mortgages. The lower credit score requirements are a big reason this is an appealing program for first-time buyers.

While the FHA has guidelines for credit score minimums, that doesn’t automatically mean a lender won’t have higher requirements. FHA loans aren’t from the government directly.

Instead, they’re insured by the FHA on behalf of the lender.

Even though lenders’ risk is minimized because they have that backup, they may reduce their risk by having higher credit minimums. Just as you would with any other type of mortgage, it’s still important to shop around and compare FHA lenders to make sure you’re getting the best terms.

Also, even if you find a lender who follows the 500 minimum credit score, that doesn’t mean you won’t get lower interest rates and a better term if your score is higher than that.

Minimum Down Payment

The minimum down payment if you get an FHA loan depends on your credit score. If you have a score of at least 580, then your minimum down payment requirement is just 3.5%. If you have a score between 500 and 579, your minimum down payment is 10%.

There’s a term you may hear, which is the Minimum Requirements Investment or the MRI. That’s just another way to refer to your down payment.

Debt-to-Income Ratio

When you’re applying for a mortgage, any lender will consider what’s called your debt-to-income ratio. It doesn’t matter the actual type of mortgage, but one difference with an FHA loan is that a lender looks at two ratios.

The first ratio is what the FHA calls the Total Mortgage Payment to Effective Income Ratio or PTI. This measure is the ratio of the potential monthly mortgage payments you might make compared to your monthly income. Your PTI can be up 40% with a credit score of at least 580.

Your debt-to-income ratio or DTI looks at a measure of your income before taxes that you spend on your debt payments every month. These debt payments can include your rent and mortgage, student loans, and credit cards. The highest DTI you’ll be allowed for approval of an FHA loan is 50%, and that’s only if your credit score is at least 580. You’ll also have to meet other qualifications.

Income Requirements

There’s not any particular salary that blocks you from getting an FHA loan or qualifies you automatically. You do have to have a few things, however:

  • • You need at least two credit accounts established. This could be something like your car loan and one credit card, as examples.

 

• You can’t have any delinquent federal debt or judgments, including tax-related judgments against you or obligations linked to a previous mortgage insured by the FHA.

 

• If you’re getting cash gifts from friends or family to help with your down payment, or you’re getting money from anywhere else, you have to be able to account for them. The gifts need to be verified and signed by the person giving them to you.

Required Documentation

Documentations you need to apply for an FHA loan include a valid government-issued ID such as a driver’s license.

You’ll need proof of a Social Security number and up to two years of pay stubs, tax returns, or W2 forms. Additionally, as was mentioned, if you receive any gift funds for your down payment, you’ll need signed documentation of those.

Property Requirements

A property has to meet certain requirements as do you, for an FHA loan.

First, the loan has to be for your primary residence, and one borrower has to occupy the property within 60 days of closing. The home can be single-family, multifamily with up to four units if you occupy one, or a manufactured home as long as it’s on a permanent foundation.

You can’t use an FHA loan for an investment property unless it’s a multiunit property and you’re going to live in a unit.

The home can’t be a flip, which means you can’t buy it within 90 days of it previously selling.

Finally, you don’t have to be a first-time buyer to qualify for an FHA loan, even though many people who use this loan are. If you are a first-time buyer, there might be an advantage in that you could also get down payment or closing cost help through a state-based first-time buyer program.

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