Qualifying for an FHA Loan
FHA loans have been around for many years and Guaranteed Rate knows low rates, flexible credit guidelines and low down payment requirements make FHA a great option for many. Some new homebuyers don’t consider government-backed mortgages because they think they’re for people with lower incomes and credit scores. Sure, government loans are indeed wonderful options for less-qualified borrowers, but they also feature a number of benefits for other consumers. Take a closer look at the FHA home loan requirements, backed by the U.S. Federal Housing Administration and managed by the U.S. Department of Housing and Urban Development (HUD). This increasingly popular mortgage requires a lower credit score to qualify, and gives you the option to put as little as 3.5% down.
When researching your options it’s important you are clear on what kind of mortgage best suits your financial needs. Let’s take a look at what qualifying for an FHA loan entails:
FHA loans have no geographical or income restrictions like USDA loans, nor do they require military service like VA loans. Among government loans, then, FHA mortgages are especially appealing because more borrowers can apply! Indeed, word is spreading among the younger set: In January 2017, FHA loans accounted for 35 percent of millennial home purchases.¹
FHA loan credit requirements
Most lenders use 620 as the minimum score with a 3.5 percent down payment requirement. However, with compensating factors, Guaranteed Rate will lend down to 580.
Your mortgage professional will use your debt-to-income ratio to qualify you for an FHA loan. This ratio takes into account all of your monthly debt (what is found on your credit report), your monthly income and the monthly payment of your new home. FHA suggests a back-end ratio no higher than 43 percent; however, FHA is flexible and has been known to exceed their suggested 43 percent.
FHA’s required down payment is 3.5 percent when purchasing a single family home, condo, duplex or multi-family building.. Although this FHA home loan requirement can vary depending on your situation, this down payment threshold is still comparatively low.
FHA is fairly flexible with gifts for down payments and closing costs. They are, however, very strict about the source of the gift funds. Under no circumstance may the gift funds come from any one person involved in the sale or purchase of your future home.
Acceptable sources for gifts:
- Relatives (If not involved in purchase or sale of future home)
- Close family friend
- Agency sponsored homeowner assistance programs
FHA is very specific about the source of the gift funds, so be sure to discuss how these can affect your chances of qualifying for an FHA loan with your mortgage professional.
Lenders like to see stability in a borrower and FHA is no different. FHA requires a two-year work history, preferably with the same company or at the very least the same industry.
U.S. Citizenship is not required for Mortgage eligibility.
Reserves are the savings you will be left with after your down payment and closing costs. One month’s reserve is equivalent to one month’s mortgage payment (principal, interest, taxes, insurance, flood insurance, HOA dues and mortgage insurance).
The following numbers are being used simply for this example; this does not reflect your mortgage scenario.
Assume a $200,000 mortgage with a rate of 3.875% (4.275% APR).
Principle & Interest: $940
Flood Insurance: $100
Homeowners Association Dues:[KF3] $80
Mortgage Insurance: $100
Total Payment: $1470
One Month’s Reserve: $1470
While FHA does not require you have reserves when purchasing either a single family home or condominium, if you are purchasing a duplex or multi-family three months will typically be required.
The home must meet FHA’s minimum standards for the safety, soundness and security. Any defects found during the home inspection or appraisal which fall outside of FHA’s standards will need to be repaired prior to closing.
FHA Loan types
One of the best aspects of FHA loans is the low interest rates that lenders offer, often very competitive with conventional mortgage rates. FHA products can take the form of fixed rate and adjustable rate mortgages (ARMs). With a 3.5% down-payment option, low rates and product flexibility, qualifying for an FHA loan is an extremely attractive opportunity.
The FHA allows for both streamline and cash-out refinancing. With the streamline option, the goals are to get a lower rate and make a lower monthly payment, so the value of the new loan won’t be more than the current loan. In this scenario, establishing the home’s value isn’t factored so an appraisal isn’t necessary. In the cash-out option, the new loan will be larger, so the home’s value and borrower credit status will have to be re-evaluated.
The FHA offers home renovation loans that can be used during purchase or refinance transactions. Called 203k loans, they come in two versions: The limited, or “streamline” 203k, and the full, or “consultant” 203k. The limited 203k is for smaller repairs and improvements that won’t require off-site habitation or exceed $35,000, whereas the full 203k is for major projects without a financial limit that likely require alternative living arrangements. This “consultant” 203k is so named because it requires the input and attention of a HUD representative throughout the renovation.
FHA home loans require a 1.75% upfront mortgage insurance fee and an annual insurance payment that ranges from .45% and 1.05%, depending on the loan term, amount and down payment.⁴ These premiums can be rolled into the monthly mortgage payment to make it easier on borrowers.
FHA home loans usually only apply to primary residences, but exceptions can be made when purchasing second homes. Among them are vacating a jointly owned property or relocating to another area not within reasonable commuting distance.
To learn more about FHA home loan requirements, contact a knowledgeable mortgage expert today!
Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.