As our FHA mortgage info section points out, The Federal Housing Administration was established in 1934 by the United States government. Buyers will find that the qualifications for a FHA loan make it a highly practical option. Practicality is the name of the game for this mortgage option. This program actually came at a time when less than half of Americans owned a home. At the time, most lower and moderate income families were not able qualify for conventional loans, as loans would only provide for somewhere around 50% of a property’s value.
Historically, homeownership rates ebb and flow and whether or not the economy is in a recession factors greatly as it follows the effects of unemployment and interest rates.
Following economic downturns when market pricing is low, FHA loans are a great option for buyers because the barriers to qualifying are so comparatively low relative to conventional loans. Noting lesser requirements, buyers with low or no credit may still have a chance of qualifying for the home loan successfully.
If borrowers happen to have bad credit, there are contingencies in place such as lender overlays and other things that an individual may do to get approved.
What are the Qualifications For a FHA Loan?
Credit Requirements To Qualify
All homebuyers who are hoping to qualify for a loan should have a credit check. This check basically indicates the financial history to the lender who can decide whether you can be relied on to make future payments. The FHA loans are not as strict in having a good credit score as conventional loan requirements are.
In some cases, you can have a low or zero credit score and still qualify for the FHA loan if you have a cosigner to sign the credit. Usually, a first time homebuyer is allowed to cosign with a blood relative in a deal called as the Non Owner Occupied Co-Borrower.
The general credit score requirement for FHA loan approval is a 640 FICO; however, the score can go down to a minimum of 620 FICO but a score below this can lead to disqualification. Let’s say you are at the bare minimum, a 580 FICO Score and the mortgage gets approved… You should expect to pay among the highest interest rates on the market and lender overlays may be a certainty with any credible lender. To learn more about home credit score requirements, Click Here.
One of the primary benefits to FHA mortgages is that these types of loans have flexible income requirements. Although it is flexible for low or middle-income range families, it still requires having information about your income level so the lenders know that you have sufficient income to make monthly and yearly payments.
In our section on the 7 Documents You Need When Applying for a Home Loan we cover this in greater detail.
Debt To Income Ratio Requirements
According to the total income of the family, the FHA requirements include a fixed debt to income ratio (DTI) guideline that the family has to qualify for. This DTI ratio is a loan requirement that is set according to your total monthly income and all the monthly and annual costs like tuition, car payments, credit card payments and other debts. These expenses are subtracted from the total income and the total income you have left at the end of the month should be able to determine this ratio. Usually, there are two types of ratios:
Total Fixed Payment To Effective Income
The maximum ratio to qualify is 41%. This ratio calculated by the sum of total mortgage payments and all recurring revolving and installment debts then divided by the gross monthly income.
Mortgage Payment Expense To Effective Income
The maximum ratio in order to qualify is 29%. This ratio is calculated by the sum of all the mortgage payments divided by the gross monthly income.
MIP- Mortgage Insurance Premium
In order to get mortgage insurance from the FHA, you will need to make a mortgage insurance premium that is equal to the percentage of the amount the loan is closing on. The lender can also make this payment on behalf of the borrower, but a monthly premium may be applicable depending on the loan to value ratio.
Total FHA Loan Financing And Amount
Depending on the state you are living in, the total amount of loans given to homebuyers varies accordingly. Currently, the FHA mortgage loan is ranging from a highest of $729,750 to a lowest of $271,050. Usually, the amount of the loan is about 97.5% of the purchase price.
Summing It Up
The Federal Housing Authority is a reliable and practical solution for homebuyers who cannot afford to make a large down payment due to a middle or low ranging monthly income.
If you have any more questions about the general requirements of a FHA loan, click to learn about the home loan guidelines.