FHA Guidelines For Home Buyers
For many first time home buyers, there does not seem to be an obvious mortgage checklist to work from to get your home loan. Not without speaking to an actual mortgage broker, that is. To help, the FHA Loan Search team has put together FHA guidelines and qualifications that may open the door to a low interest, low down payment mortgage. This information on typical loan requirements may help people get approved if certain personal finance and application requirements are met.
Overview of FHA Guidelines
The Federal Housing Administration was established in 1934 by the United States government. The FHA loan is a highly practical option for homebuyers when it comes to home ownership.
FHA guidelines were created because most moderate-income homes cannot qualify for conventional loans, as they cannot meet the basic credit and down payment requirements.
For example, down payment requirements may be at or above 20% of the total loan amount for conventional loans and credit score requirements may be in the 750 range. These greater requirements often hit people that are looking to buy second homes or investment properties.
Are FHA Loan Requirements Easier to Qualify?
Being as the Federal Housing Administration sought to make ownership more attainable for moderate-income Americans, there are slightly different and fewer requirements that one has to fulfill. For FHA loans, unlike conventional home loans, buyers may be successful applicants even with a low credit score or no credit history.
FHA Loans with Bad Credit – Can I Qualify?
In a nutshell, it would not be inaccurate to say that FHA loan requirements are less strict than conventional loans. To qualify, at a minimum buyers should almost always have a credit score that is above 580 and most always above the 600 range for more loan options. Anything less than that will be problematic.
FHA Credit Requirements
All homebuyers who are hoping to qualify for a loan should have a credit check. Your credit report helps a lender better understand your financial history so that they understand what sort of risk of nonpayment you may pose based on your past. Are you someone that pays bills early? If so, you probably have Good credit and will likely have some loan options to choose from. Do you generally pay some bills late? Oh and then there is that one bill you forgot about last year… If you’re the lender, think at an individual level and consider which person seems to be a riskier client? If you’re going to lend to the riskier home buyer, you’ll accept that risk only if the interest rate is a little higher and with a more significant down payment. This is an exchange of “risk for reward.”
As things pertain to FHA mortgages, this credit check is a little more forgiving than what you will see of a conventional lender. FHA guidelines are not as strict in having a good credit score which makes this an attractive choice for younger buyers that are not established or for those who have had some credit difficulties to overcome.
In some cases, you can have a low or a zero credit score and still qualify for the FHA loan if you have a cosigner on the contract. Usually, a first time homebuyer is allowed to cosign with a blood relative in a deal called the “Non Owner Occupied Co-Borrower.” If you fall into this type of buyer, make sure you know what you are doing and know that if you don’t pay your bills on time, it will impact your co-signer’s credit negatively. For you, this could turn into a relationship problem.
To qualify for FHA insured loans, the general credit score requirement is a 640 FICO score; however, the score can go down to a minimum of a 620 FICO but a score below this can lead to disqualification from the loan. Even if the loan gets approved, the interest rates will go higher once you start the process. If you don’t know what a FICO score is, you should learn about how they fit into the mix.
FHA Income Requirements
This is one of the more common questions. Although the FHA loan is flexible for low or middle-income range families, it still requires having information about your income level so the lenders know that you have sufficient cash flow to make monthly and yearly payments.With that said, it should be made clear that when speaking to income limitations and requirements, there is no set amount here.
To answer the question of there being a “minimum” income that the applicant must earn, FHA income requirements focus more heavily on an applicant’s ability to afford the home loan, the debt-to-income ratio, repayment history shown on the credit report, employer and income verification and select other variables. As a note, know that the dollar amount of your gross income is not as important as the amount of money left over from that monthly income once your bills have been paid.
Furthermore, FHA loan guidelines do not say that it’s possible to earn “too much” to qualify for an FHA loan–these loans are for any qualified borrower, not just people who cannot afford a conventional home loan.
There ARE loan guaranty limits associated with FHA mortgages, but that is related to the specific amount of the FHA loan (determined by your county) that the FHA will guarantee. A borrower may, depending on circumstances, be eligible to borrow more than the FHA loan guaranty limit, but the borrower would have to financially qualify and may be required to put more money down. Speak to a loan officer about situations where this may apply.
FHA Debt to Income Ratio Requirements
According to the total income of the family, the FHA has a fixed debt to income ratio requirement that the family has to qualify for. This ratio is set according to your total monthly income and all the monthly and annual costs like tuition, car payments, credit card payments and other debts. These expenses are subtracted your total income and the cash you have left at the end of the month should be able to determine this ratio. Usually, there are two types of ratios:
Ratio 1: Total Fixed Payment to Effective Income
The maximum ratio to qualify is 41%. This ratio calculated by the sum of total mortgage payments and all recurring revolving and installment debts then divided by the gross monthly income.
Ratio 2: Mortgage Payment Expense To Effective Income
The maximum ratio in order to qualify is 29%. This ratio is calculated by the sum of all the mortgage payments divided by the gross monthly income.
MIP- Mortgage Insurance Premium
In order to get mortgage insurance from the FHA, you will need to make a mortgage insurance premium that is equal to the percentage of the amount the loan is closing on. The lender can also make this payment on behalf of the borrower, but a monthly premium may be applicable depending on the loan to value ratio.
Total FHA Loan Financing and Amount
Depending on the state you are living in, the total amount of loans given to homebuyers varies accordingly. Currently, the FHA mortgage loan is ranging from a highest of $729,750 to a lowest of $271,050. Usually, the amount of the loan is about 97.5% of the purchase price and real estate values in your area will help set that limit.
The Federal Housing Authority is a reliable and practical solution for homebuyers who cannot afford to make a large down payment due to a middle or low ranging monthly income. If you have any more questions about the general requirements for FHA loans, feel free to contact the FHA Loan Search team and we will be happy to assist!