An FHA loan is a mortgage insured by the Federal Housing Administration and is probably the easiest type of home loan anyone can qualify for, so if you are looking into getting a home loan any time soon, consider these FHA guidelines before you apply for one.
FHA Loan Requirements
As mentioned earlier, an FHA is one of the easiest to qualify for as it does not require for the property you are getting to be in an eligibility map, as in a USDA or RHS home loan; or for you to have high credit scores and substantial down payment as in a conventional loan. In fact, you can qualify with a credit score of as low as 500 and a down payment of as low as 3.5%!
Borrowers hesitate when they feel they have less than stellar credit scores to present. With an FHA loan, a credit score of 580 is all it takes to qualify with as little as 3.5% down payment, but since the government backs it, lenders are more lenient and can allow even lower credit scores of 500 to 579 for a 10% down payment.
It is important to note, however, that credit scores of 500 are generally not acceptable in an FHA loan, but since the Federal Housing Administration stands behind it, borrowers are given a little more leeway as long as other criteria are satisfied. Always remember, the lower the credit score, the higher the interests will be, so if you are seriously considering getting this type of home loan, work on improving your credit score now while you have time.
- Debt-to-Income Ratio or DTI
Borrowers are seldom debt free, but if you have a manageable level of debt, your chances of qualifying for an FHA loan are good.
The FHA handbook defines a Debt-to-Income ratio or DTI as “a percentage that shows how much of a person’s income is used to cover his or her recurring debts,” and this is presently calculated using the borrower’s gross income or income before taxes. To be safe, aim for a DTI of at least 55% to qualify.
- Mortgage Insurance
Because FHA loans charge relatively lower rates, mortgage insurance is required when borrowers pay less than 20% down payment. This is done to protect the interest of lenders in case the borrowers default.
Whether it is a home loan for first-time buyers or not, all FHA home loans require borrowers to pay mortgage insurance premiums. There are two types of mortgage insurance premiums: upfront premium and annual premium.
- Upfront Premium
Currently, an upfront premium is 1.75% of the loan amount, so when you are borrowing $175,000, your upfront premium would be $3,062.50 and can be rolled out into your monthly payments.
- Annual Premium
An annual premium, on the other hand, is 0.45 to 1.05% depending on the term, amount and other factors. The amount is divided into 12 and is paid monthly.
Other Factors to Consider
In addition to your credit, income and other assets, qualified FHA lenders will also require for you to have a valid social security number and to be a lawful resident in the U.S.
Since this is a government-insured loan designed to make home ownership available to more people, including those with non-traditional sources of income or unconventional credit history, accredited lenders determine borrowers’ worthiness on a case-by-case basis.