How to Qualify
Aspiring homeowners must meet FHA loan qualifications to secure a mortgage through this program. The Federal Housing Administration, or FHA, loosely defines these qualifications. However, it is up to the mortgage lender to determine specific criteria for approval. FHA loan requirements vary depending on the type of loan secured, such as a 203(b) or a 203(k).
Regardless of the type of loan for which a borrower applies, he or she must meet the general eligibility criteria. Contrary to popular belief, FHA loans are not restricted to low-income borrowers. FHA requirements are not as strict as conventional mortgage requirements, making the FHA loan an attractive option for all homebuyers.
Mortgage lenders must be approved by the FHA to offer these types of loans. Thus, most FHA home loan requirements are specific to each lender. These loans are not provided by the FHA. Rather, the government insures these loans, but funds are provided by private lenders across the nation. Approving a borrower for a home loan is up to the discretion of the lender.
Mortgage lenders consider many factors before approving or denying a loan candidate. These include the borrower’s credit score, income and debt ratio. For more information about these requirements and to determine if you are eligible for an FHA home loan, read through the sections below.
There are FHA loan credit score requirements held by nearly all mortgage lenders. A credit score is a numerical representation of a borrower’s creditworthiness. Lenders assess the borrower’s credit score to determine how likely he or she is to repay the loan in the stated timeframe. Credit scores include the individual’s credit history, representing figures like his or her on-time payments, missed payments and defaults.
Credit requirements for FHA loan eligibility differ slightly depending on several factors. For example, the type of FHA loan for which a homebuyer applies may require different credit score ranges than other types of mortgages. Furthermore, lenders may have varying credit requirements for the same loan type, so buyers must shop around before applying.
Generally, there are looser FHA loan credit requirements than there are for conventional loans. Many borrowers with low credit or derogatory marks on their records can still secure a loan through this program. However, most lenders will deny borrowers whose credit score is less than 500. The higher a borrower’s credit score, the better the chances of getting approved. Furthermore, borrowers with good credit typically qualify for lower interest rates on these loans.
For more information about the requirements of FHA loans, download our informative guide.
Another part of understanding how to qualify for FHA loan types is knowing the accepted debt-to-income ratios. Mortgage lenders consider a borrower’s income as well as his or her level of debt. It is important that all borrowers have the means to repay the loan in the stated timeframe. To evaluate their ability to pay the monthly installments, lenders use the debt-to-income ratio.
This is an assessment of the homebuyer’s monthly income in reference to his or her monthly debts. Also known as the DTI, it includes all sources of income, such as wages, salaries and self-employment earnings. It also includes all debt payments, including car payments, credit cards, mortgages or rental payments, mortgage insurance and homeowner association (HOA) fees.
The acceptable DTI for FHA loan eligibility may vary slightly between lenders. Likewise, DTI ratios may be less stringent for certain types of FHA mortgages. Generally, lenders offering FHA home loans do not approve borrowers with a DTI of more than 43 percent. The lower a borrower’s DTI, the more likely he or she is to get approved for an FHA loan.
Down Payment Requirements
A down payment is another part of the FHA loan requirements set by mortgage lenders across the U.S. While FHA loans are generally more attainable than conventional mortgages, buyers must still make a down payment. A down payment is a certain portion of the home price paid by the borrower up front. It is generally expressed as a percentage. The FHA loan down payment requirements are less stringent than conventional mortgage down payment requirements.
Whereas conventional mortgages may require borrowers to make a down payment of 20 percent, FHA down payments can be as low as 3.5 percent. However, not all borrowers will meet the criteria for this low percentage rate. Lenders often set a tier system to help borrowers find the down payment percentage rate for which they qualify. The exact down payment is influenced by mortgage insurance premiums, the borrower’s credit score, the price of the home and average market rates.
To learn more about down payment requirements, download our comprehensive guide.
Mortgage Insurance Premiums
FHA loan rules also include specific mortgage insurance requirements. Mortgage insurance premiums (MIP) are required for all FHA borrowers. These payments fund the entire FHA operation and help protect the lender in the event the borrower defaults on a loan. MIP typically lasts for the entire duration of the loan. Because of this insurance requirement, borrowers are permitted to make a lower down payment.
Per the FHA guidelines set by the U.S. Department of Housing and Urban Development (HUD), borrowers must make two types of insurance payments: upfront and annual. An upfront MIP a fixed rate for all borrowers. It is a percentage of the overall loan amount. Annual MIP is not a fixed rate; it depends on the borrower’s down payment, credit score and the loan term.
The HUD defines FHA approved homes through an appraisal process. All borrowers must have their potential property assessed by an approved appraiser. The mortgage lender orders this examination, which consists of federal health and safety inspections. The appraiser also verifies the home price by appraising the surrounding homes and arriving at an official purchase price.
To qualify for an FHA loan, the borrower’s property must pass the appraisal. This also includes an official confirmation that the home falls within the accepted types. FHA loans are not to be used for properties such as vacation homes; the appraiser must verify that the buyer plans to live in the home full-time.