If you’re thinking about buying a home, you’ll want to familiarize yourself with the ins and outs of FHA loan requirements. This will help you decide whether this type of loan is a good option for you. Understanding how to qualify from the beginning may also help you avoid any unpleasant surprises after you apply.
How to Qualify for an FHA Loan
While FHA loans are insured by the U.S. Federal Housing Administration, they’re not actually issued by the United States government. Instead, you’ll apply for your loan through an FHA-approved lender.
Since the government protects the lender in the case of borrower default, it’s often easier to qualify for an FHA loan than it is to be approved for a conventional loan. Although the requirements are more lenient, the lender will still review basic information to determine your FHA loan eligibility. This includes your credit score, your debt-to-income (DTI) ratio and verification of your employment and income information.
During the verification process, you’ll need to provide your lender with documentation, including:
A valid government-issued ID (like a passport or U.S. driver’s license)
Up to two years of W-2 forms, pay stubs or tax returns
There may also be additional documentation depending on the FHA lender you choose. Your lender will inform you of this as you go through the underwriting process.
Thanks to the lenient qualifying requirements, FHA loans are great for first-time homebuyers. They can allow you to get into a home with far less cash than you would typically need for a conventional mortgage.
FHA Loan Requirements
The requirements for FHA loans are clearly outlined, making it easy to determine whether you’re likely to qualify.
In order to be eligible for an FHA loan, prospective borrowers will typically need to meet these requirements:
Have a credit score of 500-579 FICO with 10 percent down OR
Have a credit score of 580 FICO or higher with 3.5 percent down
Have an employment history of at least two years verifiable with pay stubs, federal tax returns and bank statements
Have a debt-to-income ratio (DTI) of less than 43%
Note: Since the Federal Association of Housing does not lend the money themselves, most lenders will set their own credit limits. Paddio currently looks for a credit score of at least 620.
What is the Maximum DTI for an FHA Loan?
In most cases, the maximum DTI for FHA loans is 57%. However, in some cases, it may be lower.
Your debt-to-income ratio is calculated by dividing your monthly debt payments by your gross monthly income. A high DTI can make it difficult to consistently make required payments and increases the risk that you'll default on your loan.
FHA Loan Income Requirements
When it comes to FHA loan requirements, it may be comforting to know that there are no minimum or maximum income requirements.
However, there are other financial requirements you must meet. Some lenders may want to see that you have at least two established credit accounts, such as an auto loan and a credit card.
You’ll also need to show the lender that you’re not delinquent on any taxes, federal debts or judgments, or debt related to past FHA-insured mortgages.
What Will Disqualify You from Getting an FHA Loan?
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
High DTI Ratio
Having too much debt can be a problem when you apply for an FHA loan. The handbook issued by the U.S. Department of Housing and Urban Development (HUD) states that the total of a borrower’s recurring monthly obligations and mortgage payment should not exceed 43% of their gross income. Some lenders will accept a DTI as high as 57%. However, if your DTI ratio is higher than this, it is more likely you won’t qualify.
You may be able to lower your DTI ratio by paying off some of your high-interest debt or by extending the duration of your loans, which would lower your monthly payments. If possible, you may also try lowering the interest rates on your outstanding debts or looking into loan forgiveness programs.
Another issue that can lead to denial of your FHA loan application is a low credit score. While the government recommends a minimum 500 credit score for FHA loan applicants, lenders aren’t required to follow this suggestion. This means you could be denied even if you have a score of 600 or more. If this happens, you may want to try working with a different FHA lender or taking steps to raise your credit score before applying again.
It’s also important to note that having a credit score below 580 will require you to have more cash on hand to meet the increased down payment requirements. This could cause you to have insufficient funds to purchase the home. Remember, many lenders will look for credit scores well above 580, and may not offer FHA loans to borrowers with poor credit.
Before approving you for an FHA loan, the lender will want to confirm that you have enough money to make the required down payment and pay all of the closing costs. You’ll need to provide bank statements showing you have the cash on hand.
If you do not have enough savings, you may want to seek out a gift from a loved one to help with the down payment or simply wait until you’re able to save up enough cash to meet the minimum requirements.
Is an FHA Loan Right for You?
While there are many benefits of using an FHA loan to purchase your home, you’ll want to make sure you’re able to meet the FHA loan requirements. It’s helpful to talk with an FHA lender before beginning your home search. This way, you’ll be sure you qualify before you fall in love with your dream home.
Need help weighing the pros and cons of FHA loans? The experts at Paddio are here to help. Contact us today to get started.