How To Qualify For An FHA Loan

Now that you are ready to buy a home, your next step will be to find a mortgage loan for which you qualify. If you are like many potential homebuyers, you will be taking a close look at getting an FHA loan. One of the most popular loans for first-time homebuyers, FHA loans often have requirements that are less stringent than those of other traditional mortgages. If you want to qualify for an FHA loan, here are some of the basics.

What is an FHA Loan

An FHA loan is a type of home mortgage. It enables more people to be able to purchase a home. Unlike most home mortgages, it is a government-backed mortgage. This gives security to the mortgage provider in case the borrower can’t make a payment. One thing that makes this loan so common is that you can often still qualify for the loan despite having a high debt to income ratio, a lower credit score, and in some cases, you can even get an FHA loan with bankruptcy or financial issues.

Due to the risk that is inherent with this type of loan, it is common for these loans to have a higher interest rate. This high-interest rate would result in paying thousands of dollars more over the time of the loan compared to that of a lower interest rate. That being said, you can usually get approved with a much lower down payment compared to that of a conventional loan. Because of the lower down payment, the loan typically has mortgage insurance built into the loan, so that can be an additional cost.

FHA loans, as of 2021 typically range from $356,000 – $822,300 for single-family homes, depending on your state and county. If the home is located in a low-cost area, then the amount you can get approved for is typically much lower than that of a high-cost area. This amount typically changes for the type of property as well. For example, if you are trying to get approved for a multi-unit property, you are likely to get a higher lending option than that of a single-family home.

Minimum Credit Score of 500

Credit scores are an essential part of getting any type of loan but especially for a home loan. Unlike most other mortgage loans where you are required to have a credit score of at least 620 and often higher, you can qualify for an FHA loan even if your credit score is as low as 500. Though most FHA loans requirements are closer to 580. Part of this is because a lot of first-time homeowners have a shorter credit score and thus it can be more challenging to get a higher credit score. In order to increase the accessibility of getting a loan, many banks and mortgage providers will accept a lower credit score for FHA loans. However, you should remember that even though these loans allow for lower credit scores, some FHA lenders will require higher credit scores from applicants. Thus, always shop around with various lenders when seeking such a loan.

3.5% Minimum Down Payment

If there is one thing to like about an FHA home loan, it is that the minimum down payment you will need for your new home may be as little as 3.5% of the purchase price. When you seek a traditional mortgage loan, the down payment requirement may be as high as 20%, so this can be a difference-maker in whether or not you get the home you desire. To get the 3.5% down payment rate, your credit score will need to be 580 or higher. Otherwise, you will need a down payment of 10%. 

One thing that is becoming more common for FHA loans is that the money doesn’t have to come from a savings account. The amount can also be gifted to you. Additionally, some states and cities provide down payment assistance in the form of grants, zero-interest forgivable loans, zero-interest deferred-payment loans, and other low-interest loans. These types of assistant programs are usually for first-time buyers or for someone who hasn’t owned a home for the past three years. Many of these programs are targeted at teachers, police officers, emergency responders, and city employees so keep an eye out for those requirements when trying to find the right program for you.

Since the downpayment is lower, you will be required to pay mortgage insurance for the entire term of the loan. This can cause more money to be spent on the mortgage for the entirety of the loan, which should be considered when looking into an FHA loan.

50% or Less Debt-to-Income Ratio

When seeking an FHA loan, lenders will examine your debt-to-income ratio to determine if they believe you will be able to afford your monthly payments. With this ratio, lenders look at how much of your pretax income is spent on credit cards and other debt. If your ratio is 50% or less, you’re likely in the clear. Debt is typically related to your auto loans, student loans, or monthly payments on credit cards. As a student, you may not be making payments toward your student loans, however, it is still considered a debt. When you are repaying your home loan, the amount is typically considered 5% of the loan total for the ratio. Whereas, a loan in deferment typically gets calculated as 1% of the total loan for your debt to income ratio.

Established Credit Accounts

While you will not need to meet any minimum or maximum salary requirements to obtain an FHA loan, you will need to show you have at least two established credit accounts in your name. For most people, this will be a credit card and an automobile loan. Also, your lender will need to determine that you do not have any past judgments or debts associated with prior FHA loans.

By shopping around for the best FHA loan, it will not be long until you are moving into the home of your dreams.