Guidelines and Requirements for an FHA Mortgage LoanMany aspiring homeowners have seen their dreams crumble after speaking to conventional mortgage lenders. With typical loan qualifications, including lofty incomes and above-average credit scores, the majority of buyers is now left to fall through the cracks created by a faltering economy and job markets still struggling to recover from past setbacks. If you’ve been affected by any of these factors, you may want to consider applying for an FHA loan. This alternative to the more stringent mortgage loan is designed for lower income households and families afflicted by sub-par credit scores. While such loans do hold their own sets of prerequisites, FHA loan qualifications can be much easier to meet than those of other lenders.
- Acceptable Credit Profile
- Minimum of 3.5% Down Payment
- Ability to Repay the Mortgage Loan as Set Forth by HUD Guidelines
Though a credit score of 720 or greater is what typical lenders consider good, hopeful home buyers can potentially qualify for an FHA mortgage with a score as low as 580. That being said, most borrowers approved by the FHA held average scores of around 690. This particular mortgage program looks at the reasons behind your credit score rather than the numbers alone. If you have yet to establish a credit history, you’re not automatically disqualified as you would be in the eyes of most lenders. The FHA will then consider your track record for past rent and utility payments. Past due payments on taxes and student loans, however, will leave you ineligible for this loan option.
For those who are just establishing credit, a non-traditional trade line can be used. Payments made on auto insurance, utilities, phone, etc. can be used as a factor or as an “alternate trade line” to satisfy the minimum trade line requirement to qualify for an FHA loan.
Being able to prove you can make your monthly payments is among the criteria of almost any lender, and the FHA is no different. The FHA loan requirements dictate you have to be able to provide documentation of at least two years of employment in the same line of work up to the point when you submit your loan application. Your job must also be expected to last three years or more beyond being granted a mortgage loan. In most cases, only full-time employment is acceptable; the exception is generally part-time work lasting two years or more. If you’re self-employed, you need to be able to show proof of bringing in a consistent income, such as tax returns, profit and loss statements, and balance sheets.
Acceptable Debt-to-Income Ratio
The FHA requires your debt-to-income ratio is no more than 50 percent going into a loan. This means all your current monthly bills cannot add up to more than half your monthly household income before taxes are deducted. AMCAP Mortgage goes up to 55% debt-to-income ratio, all the way to 57% with compensating factors. If you have a credit score closer to the minimum requirement of 580, you may need to have a lower ratio in order to be eligible for a loan. There are other restrictions imposed on a loan for borrowers with a middle FICO score under 640. This is often referred to as a “lender overlay”. Ultimately, it is the lender who dictates what score they require to approve a borrower for an FHA loan.
Qualifying for an FHA Loan is generally easier than gaining approval through other avenues. Down payment is also lower than the norm, just 3.5 percent (3.5%) of the sales price. Although they hold you to their own list of requirements, a number of would-be home buyers have reached their dream through the FHA after being turned away by other loan programs available in the market.