Despite last decade’s housing market crisis, economists still say that homeownership is one of the keys to buildingwealth.
As the old saying goes, it takes money to make money. For many years, the need to put up 20% down payment to qualify for a mortgage served as a barrier to families looking to buy their first home.
Fortunately, there are many programs that exist today to make homeownership achievable. Federal Housing Authority (FHA) loans are one main example.
Let’s take a closer look at what the FHA home loan requirements are for 2019.
What is an FHA Loan?
An FHAloan is one backed by the Federal Housing Authority. The government guarantees the loan, which means that if the borrower is unable to repay it, the government will cover the balance.
For this reason, banks will give FHA loans to borrowers who they may otherwise have considered “riskier”. This option makes FHA loans accessible to borrowers who may not have qualified for a conventional loan. Many young people and first time home buyers find FHA loans to be an accessible option.
What are the FHA Home Loan Requirements?
Due to the fact that the federal government backs FHA loans, they have some specific requirements related to credit score, income level, financial status, and property condition.
Credit Score and Credit History
As with most loans, there is a minimum credit score for FHA loans. The credit score you need depends, in part, on how much of a down payment you are willing to put down.
Typically, the lowest down payment for an FHA loan is 3.5% of the home’s value. To qualify for this down payment, you must have a credit score of at least 580.
If you have a slightly lower credit score between 500 and 579, you can still qualify for an FHA loan if you put down a 10% down payment. Also, keep in mind that if you apply for a loan with a spouse or a partner, both partners will need to have the qualifying credit score.
Your credit score is not the only thing looked at for an FHA loan. It is also important to have diversified lines of credit. FHA borrowers must have at least two types of credit, such as a credit card and a student loan payment, or a credit card and a car payment.
Income and Income History
Lenders use credit score to determine the borrower’s history of paying off loans. They also want to see a history of employment and income to prove that the borrower has a steady stream of income with which to repay the loan.You can verify this income through pay stubs, tax returns, and bank statements.
Unfortunately, the government will typically not approve a loan for someone who has only started working recently. For an FHA loan, you must show a stable 2-year history of employment. You have to show that you had enough income to cover your financial obligations for the entire prior 2-year period.
Debt to Income Ratio
Lenders want to see more than a steady income. They also want to know that the income is enough to cover their debt. To do this, they calculate the debt to income ratio.Your debt to income ratio is what it sounds like: what is the ratio of the monthly debts you owe compared to the monthly income you bring in?
For an FHA loan, the lender will calculate front-end and back-end debt to income ratio. Front-end is the ratio of your mortgage payment to your income, and back-end is your mortgage payment plus other debts. Your other debts include credit card debt, student loan payments, auto loans, and others.
To qualify for an FHA loan, you front-end debt to income ratio generally must not exceed 31%. In some cases, a lender may allow it to extend up to 40%. Similarly, the backend ratio typically cannot exceed 42%, but some lenders may allow up to 50%.
There are some other factors in your financial history that may impact whether you can qualify for an FHA loan.
If you have filed for bankruptcy, you must wait 12 months before you can qualify for an FHA loan. If you have had your home foreclosed on, you usually must wait three years. Again, some lenders may make exceptions for borrowers with extenuating circumstances.
Use of the Home
The purpose of an FHA loan is to help families achieve home ownership. For this reason, borrowers can only use an FHA loan to buy a home used as a primary home. Second homes, vacation homes, and rentals do not qualify for FHA loans.
Since the goal of an FHA loan is to help families afford a primary home, the lender wants to ensure that the home is livable. They also want to ensure that the home will not need major work for it to be habitable.
Major home repairs lower the chances that the borrower will pay back the loan. They also increase the likelihood that the homeowner will be unable to live in the home at some point in the future.
To qualify for an FHA loan, an FHA-approved property appraiser must check out the home to make sure it meets all HUD guidelines. In some cases, an appraiser will not allow approval of the loan unless issues get fixed. The appraiser will also want to ensure that the amount approved for the loan is not higher than what the house is worth.
Private Mortgage Insurance
To guarantee loans, the Federal Housing Authority must have access to funds to repay the lender in the event that a borrower defaults on their loan. These funds come, in part, from Private Mortgage Insurance (PMI) that is paid on all FHA loans.
Private mortgage insurance gets calculated as a percentage of your monthly mortgage payment. All FHA borrowers have to carry PMI for the life of the loan.
Qualify for an FHA Home Loan Today
Now that you know what the FHA home loan requirements are, it is time to take action.
Are you ready to learn about your home loan options? Contact us today.
7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with every phase of each mortgage transaction. If you are searching for a home loan in New Jersey, Pennsylvania, Virginia, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.