Home loans guaranteed by the Federal Housing Administration (FHA), FHA loans are designed to meet the needs of borrowers who might struggle to gain approval for a conventional loan. FHA loan requirements make it easier for those with modest means and little or tarnished credit to secure a competitive mortgage and purchase a home. Could an FHA loan be the right choice for your needs?
Exploring FHA Loan Requirements
A variety of FHA loan products are available (source). Borrowers can choose between adjustable-rate and fixed-rate loans, equity loans, and assorted refinancing options. While each of these products have their own rules, there are certain basic FHA loan requirements that must be met if you hope to utilize any FHA loan product.
Before getting into any financial details, there are a few basic legal requirements that potential borrowers must meet. As Investopedia reports, you must be a lawful U.S. resident of legal age with a valid Social Security Number to get approved for an FHA loan.
According to NerdWallet, you’ll need a FICO credit score of at least 500 to qualify for an FHA loan. Although a low credit score won’t necessarily prevent you from getting the loan, it may be worth your while to spend a little time polishing your score before seeking an FHA loan. Borrowers with a score of at least 580 have the option to make substantially smaller down payments, and a stronger financial picture often means more choices and better interest rates.
FHA loan requirements make putting together a down payment as easy as possible (source). Borrowers with a credit score of 580 or more need a down payment of just 3.5 percent; those with a credit score between 500 and 579 need a 10 percent down payment. Plus, all or part of the money for the down payment may be gifted to the borrower by a family member or other acceptable giver. Parties involved in the sale of the home cannot gift funds.
FHA loans are designed for borrowers with limited means, but they are open to people at all income levels. While there is no set threshold for income, would-be borrowers must be able to demonstrate their ability to pay back the loan (source). A steady employment history and a good credit history can help with this.
According to the FHA Handbook, lenders like to see a debt-to-income ratio of no more than 43 percent when considering whether to extend an FHA loan. However, if various compensating factors are present, you may be able to secure a loan with a debt-to-income ratio of up to 50 percent.
Bankruptcy or Foreclosure
Do you have a bankruptcy or foreclosure in your past? As Zillow indicates, you may still be able to secure an FHA loan. The FHA generally requires that borrowers who have dealt with one or both of these issues in the past re-establish their credit and be at least two years out from bankruptcy and three years out from a foreclosure before they can borrow an FHA loan.
Although past problems can be overlooked, being delinquent on certain financial responsibilities makes you ineligible for this form of financing. Anyone who is behind on their federal student loans or their income taxes will be unable to secure an FHA loan (source).
FHA loans are designed to promote homeownership, so it makes sense that they can only be used to purchase a primary residence. As The Mortgage Reports explains, you cannot use an FHA loan to buy a vacation or rental property. However, you are allowed to purchase a multi-unit property as long as you plan to make your home in one of the units.
How much can you borrow with an FHA loan? The limits for these loans vary from county to county and reflect the area’s median home values. While high-cost areas will have higher limits, most of the country falls under the standard limits. According to U.S. News & World Reports, the standard limits are as follows:
- $424,100 for a one-unit property
- $543,000 for a two-unit property
- $656,350 for a three-unit property
- $815,650 for a four-unit property
An FHA-Approved Lender
The FHA insures loans, but it does not originate them. Anyone hoping to secure an FHA loan must seek out an FHA-approved lender (source). It’s worth noting that the FHA sets the basic guidelines for these loans, but it also allows lenders to establish their own standards. As a result, it’s important to review the standards set by your lender to ensure that you can meet their requirements.
Do you have questions about the requirements for FHA loans or other home loan products? PrimeLending of Springfield, Missouri, can help. Our team of home loan experts focuses on making every step of the home-buying process simple, transparent, and rewarding. With our expertise and commitment to clear and timely communication, we can guide you through the mortgage process from application to closing. To get started, please call 417-616-0777 or contact us online. We look forward to hearing from you!