Mortgages insured by the Federal Housing Administration (FHA), more commonly known as FHA loans, are designed to help people become homeowners. With low down payments, low closing costs, and no need for stellar credit, these home loans can be a fantastic option. What do aspiring homeowners need to know about qualifying for FHA loans?
Qualifying for FHA Loans
Because FHA loans are intended to help people buy homes, the FHA makes these loans accessible to would-be borrowers. In fact, there is some flexibility when it comes to qualifying for FHA loans. For example, if a borrower falls a bit short in one area, it’s possible that compensating factors will still allow that person to secure an FHA loan.
To decide if this type of financing is a good fit for your situation, investigate the basic criteria for qualifying for FHA loans.
If you have imperfect credit, an FHA loan could be your ticket to homeownership. While not everyone will qualify, these loans have some of the most forgiving credit standards available. In fact, the FHA instructs lenders to look beyond a potential borrower’s credit score to consider the borrower’s complete credit history. As Investopedia explains, borrowers generally must have a minimum credit score of 500, be at least three years removed from a foreclosure, be at least two years removed from a bankruptcy, and be current on any federal student loans or income taxes. Borrowers with problem credit should also be prepared to show how they are working to repair their credit.
A borrower’s debt-to-income ratio is a look at the amount of debt owed in comparison to the person’s overall income. As FHA Handbookreports, lenders tend to look at two ratios. The front-end ratio looks exclusively at housing costs and gross income and should be no more than 31 percent. This means that the new monthly mortgage payment should be no more than 31 percent of the borrower’s pretax income for a manually underwritten FHA loan. The back-end ratio looks at how all of a borrower’s recurring monthly debts compare to their income and is found by dividing the total amount of these debts by their gross monthly income. To qualify for an FHA loan, this should be no more than 43 percent for a manually underwritten FHA loan. FHA loans with automated underwriting approvals frequently allow for higher debt ratios.
Borrowers without much cash in hand can still swing a house purchase if they secure an FHA loan. A down payment is required for an FHA loan, but the amount needed is extraordinarily low. The Truth About Mortgagereports that borrowers with a credit score of 580 or more can put down just 3.5 percent of the purchase price. Borrowers with a credit score between 500 and 579 will need a down payment of at least 10 percent, although few lenders offer FHA loans with credit scores in this range. To make these loans even more affordable, closing costs can be rolled into the loan’s total. Plus, gift funds can be used to cover both the down payment and the closing costs.
Although there is no minimum requirement for income when qualifying for FHA loans, lenders do need to see a pattern of stable employment to approve an FHA loan. According to Investopedia, borrowers should have an employment history of at least two years. What about self-employed workers? It’s best if they can show at least two years of professional success through their tax returns, a current year-to-date balance sheet, and a current profit and loss statement.
Like many government-backed loans, FHA loans set standards for both the borrower and the property. According to NerdWallet, any property being purchased with an FHA loan must pass an FHA appraisal and must be used as a primary residence with at least one borrower moving into the property within days of closing. Additionally, borrowers must take title to the property in their names or that of a living trust. Finally, the property cannot be a flip; anyone using an FHA loan cannot purchase a home that was the subject of a prior sale within the last 90 days.
The amount that can be borrowed with an FHA loan isn’t infinite. Higher totals are possible in certain markets. The amounts available vary depending on the borrowers’ location because they reflect the pricing seen in local real estate markets. Borrowers interested in learning about the loan limits in their area can learn more by visiting the U.S. Department of Housing and Urban Development’s FHA Mortgage Limits.
Today, aspiring homeowners face a dizzying array of mortgage programs. Every home loan program has pros and cons, so talking with a financial professional who can help you sort through the possibilities to find the options that best suit your unique situation is incredibly helpful.
Contact PrimeLending today if you live in the Kansas City area. Our committed team will help you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes, and we’re more than happy to navigate you through the process of buying your first home. When you’re ready to get started, please give us a call at 844-701-5626.