For individuals who have limited credit or unique credit history, qualifying for a traditional mortgage may not be possible. Luckily, the Federal Housing Administration (FHA) loans may be an option. These loans are offered through FHA approved mortgage lenders and are a popular choice for first-time home buyers thanks to the low down payment and credit score requirements. They’re not just for first-time buyers though; anyone who meets the eligibility requirements can apply, and like conventional loans, there are multiple loan types. This includes fixed and adjustable interest rate loans, with various loan terms. Here are some of the qualification requirements for an FHA loan:
Income Must Be Verifiable
Lenders want to see that you have a history of working for at least one to two years, preferably with the same employer. Some lenders will accept a shorter work history. Your income should be verified through pay stubs, tax returns, and bank statements.
Able to Pay a Down Payment
The minimum amount required for a down payment on an FHA loan is 3.5% if your credit score is 580 or higher. This down payment jumps to 10% for a credit score between 500 and 579.
Establish a Credit History
At least two types of credit account must exist to show an established credit history. These could include a credit card, a car loan, or a student loan.
If you’ve declared bankruptcy, you must wait between one and two years before applying. In the case of a foreclosure, this waiting period extends to three years. Some lenders will make exceptions under certain circumstances.
FICO Score Requirements
The FHA sets the minimum FICO score at 500 to be eligible for the loan program.
Able to Afford Debt and Housing Payment
Lenders will specifically look at your debt-to-income (DTI) ratio to determine if you can afford to purchase a home. The DTI measures the percentage of your income before taxes that you spend each month on your debt payments. That includes housing expenses, credit cards, student loans, and other obligations.
A higher DTI may still be eligible with certain documented compensating factors. There are many DTI calculators available online to help you calculate your ratio.
Home Valued Within FHA Loan Limits
The home that you want to purchase with an FHA loan can’t exceed the FHA loan limit. This limit will vary from county-to-county. Each county in the U.S. has a slightly different loan limit, set according to regional factors. Since these limits are calculated at the county level, you’ll want to check the limits for the counties in which you are considering buying. The HUD website has a county-by-county breakdown for you to review.
Have All the Documentation
You will need to have your pay stubs, W-2, and other tax return documents when you’re applying for an FHA home loan. A social security card must also be provided. There might also be other documents that your lender requires.
Satisfy FHA Property Requirements
Even if you’ve satisfied borrower qualifications, there are still property requirements that must be met. The home you’re purchasing must be your principal residence and occupied within 60 days of closing by at least one borrower. The home cannot be used as an investment property or be flipped. A new home can’t be purchased within 90 days of a prior sale.
The home must undergo an FHA appraisal that assesses its value and also ensures that it meets minimum property standards. The title for the home must either be in your name or the name of a living trustee during settlement.
Other Potential Requirements
As with conventional loans, the lender holds the final decision on whether to approve you for an FHA loan, meaning they may have different requirements and standards that you must meet in addition to those listed above.
If you still have questions about how to qualify for an FHA loan or want to know more about applying, contact NASB. We are expert FHA lenders who can help you get answers. Call us at 844-334-4739, or get a free rate quote here.