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Even with a credit score of 640, you can qualify for an FHA home loan with a down payment as low as 3.5%. As these loans are insured by the Federal Housing Administration, the chances of qualifying for one are much higher. Although these loans are government-backed, it is still important to do some shopping around for the best mortgages as FHA loans are supplied by private lenders with varying terms and requirements.
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Are FHA loans only for first-time homebuyers?
Absolutely not. Despite what many people believe, FHA loans are not meant for first-time home buyers only. FHA loans have generally more flexible qualification requirements than traditional mortgages.
This what makes the FHA loans more enticing to borrowers with bad credits or smaller down payments, which are some of the main challenges that first-time homebuyers face. However, any individual, including repeat buyers or homeowners planning on refinancing a mortgage, can take out an FHA loan provided that they meet the following eligibility requirements.
Taking out an FHA loan is usually one of the available options when looking for a mortgage.
FHA loans are offered by private lenders, who include credit unions, banks, and online lenders – however, they are guaranteed by the Federal Housing Administration, which is a government agency. This guarantee protects lenders against losses in case the borrower defaults, meaning that if you don’t have good credit, or if you don’t have a big down payment, then it will be easier for you to qualify.
Many first-time homebuyers prefer FHA loans, however, you don’t have to be a first-time buyer to qualify for one. Any borrower can take advantage of the easier qualifying process, provided that you are purchasing a house or a multifamily residence where you’ll stay for the majority of the time.
However, you should know that there are some drawbacks to taking out an FHA loan: The amount that you can borrow is capped – and in case you are looking for an FHA loan to benefit from the low down payment, you’ll need to take out mortgage insurance, and this can make FHA loans more expensive than other kinds of mortgages.
Keep on reading to find out what you need to know about FHA loans.
Requirements to Qualify
• A credit score of at least 640 to get 3.5% down payment
• Buying a primary home
• Documented proof of employment to establish income stability Mortgage insurance requirements
• Upfront and annual mortgage insurance premiums
What Exactly is an FHA loan?
An FHA loan is a special kind of mortgage that can be used to buy a home, refinance a current home loan or rehab a home.
The name FHA loans came about due to the fact that the Federal Housing Administration offers insurance to lenders that provide these loans. These loans are the United State’s government’s “flagship initiative” that is meant to provide cheap home financing to borrowers.
When it comes to FHA home loans, in case you are unable to pay the mortgage, the lender has the option to file a claim with the FHA to get payment for the balance that remains after the foreclosure is complete. As lenders have this option fall back option, there are usually more inclined to offer you this loan even when your qualifications are below that of a good borrower. The approval criteria isn’t as strict as it would be in case you obtained a loan with no government backing. Loans with no government backing are usually known as conventional loans or conventional mortgages.
However, it is crucial to keep in mind that borrowers aren’t protected by the FHA guarantee. If you fail to pay your mortgage, you will still face foreclosure – and the insurer won’t pay you anything for the losses you suffer.
FHA loan requirements
- A minimum credit score of 640
- Debt to income ratio of 55% or below
- If your credit score is 580 or higher, a down payment of 3.5% is required
- The house should be your primary residence and must be according to FHA’s minimum property requirements.
FHA Guidelines on Debt to Income Ratio
No matter the kind of mortgage that you obtain, lenders will be more interested in your debt-to-income ratio. Also referred to as DTI, the debt-to-income ratio is used to measure the percentage of your pretax income that is spent on monthly debt payments, which include student loans, credit cards, mortgage, amongst other obligations. You can utilize a debt-to-income ratio calculator to determine your situation.
Brian Sullivan, who is a public affairs specialist for the U.S. Department of Housing and Urban Development which runs the FHA, suggests that a debt-to-income ratio of 55% or less is required by the FHA. The DTI requirements might vary based on your credit rating amongst other factors.
MORE: How debt-to-income ratio influences your mortgage
FHA home loan income requirements
There is no high level or low level of income that will qualify you or restrict you from obtaining an FHA insured mortgage. But you must meet the following requirements:
- Have a minimum of two established credit accounts. For example, a car loan and a credit loan.
- You shouldn’t have a delinquent federal debt or judgment, whether tax-related or any other, or debt relating to previous FHA-insured mortgages.
- You must account for cash gifts that assist down payment. The donor should verify the gifts in writing, sign and date them.
FHA documentation
The following are some of the documentation required when looking to get an FHA home loan:
- Provide proof of a Social Security number.
- Give original pay stubs, W-2 forms or valid tax returns, as needed.
Obviously, there exist other provisions, however, an FHA-approved lender will guide you on the details in case other requirements apply in your case.
MORE: Checklist of documents required for a mortgage FHA requirements for PropertyApart from the borrower qualifications, the house itself is expected to satisfy certain requirements before one can qualify for an FHA mortgage.
- The house shouldn’t be an investment property.
- The loan must be for a primary home, and at minimum, one of the borrowers should occupy the property within 60 days of closing.
- An appraisal by the FHA including a strict inspection, evaluating the home both on value and also on minimum property standards.
- The property shouldn’t be a flip, which means that you can not purchase a house within 90 days of a previous sale.
- At settlement, you should the title to the property in your own name or alternatively, in the name of a living trust.
The Take-Away: Is an FHA loan the best option for you?
An FHA loan may be the perfect choice if you want a low down payment, if your credit score isn’t perfect, or if you otherwise can’t qualify for a conventional loan. But be aware that mortgage insurance costs may make an FHA loan slightly more expensive than a conventional mortgage.