What are Requirements for an FHA Loan Approval?
FHA loans have been helping people become homeowners since 1934
What is an FHA Loan?
A Federal Housing Administration (FHA) loan is a mortgage that is backed by the federal government. Banks or Mortgage lenders issue the approved loan. FHA loans have been helping people become homeowners since 1934.
The FHA Loan was designed to help more Americans become homeowners particularly moderate and low income families and also reduce risk to lenders.
FHA loan Eligible Requirements As of 04/18/2022
Debt To Income Ratio (DTI)
The maximum debt to income ratio is 43% or less (some loans can be higher). The break down for your Front-End DTI (monthly mortgage payments only) is 31% or less and your back end DTI (ALL monthly debt) is 43% or less. The monthly debt would include any accounts reporting on the credit report.
Example: With $5,000 monthly income you would have a maximum mortgage payment of $1,550 (31%)......Your total DTI would be a max $2,150 (43%) Mortgage Payment and all other debt.
Minimum Down Payment
The minimum down payment is 3.5% and 10% for those with lower credit scores. FHA will fund 96.5% of the value of the property. So if the property is selling for $110,000 and the appraised value is $100,000 FHA will only provide $96,500 for the loan. You can either try to negotiate with the seller to bring the price down or you would have to cover the difference.
Minimum Credit Score
The minimum credit score Required is 580 for a 3.5% down payment. You can be approved with a score below 580 but the down payment maybe higher, sometimes 10% or more. The lender also looks at items reporting on your credit and not just your credit score. A Repossession or unpaid Rental properties are just a few of the items that can cause a denial regardless of your credit score. Borrowers with a bankruptcy can apply 2 years after a Chapter 7 discharged and 1 year after a Chapter 13 filing. Any unsettled civil judgments can also cause a denial.
An Appraisal is the estimated value of the property. FHA does require an appraisal of the property. Depending on your lender this is paid for by you the borrower or the lender. In some cases the seller may opt to. Appraisals usually cost a minimum of $300 or more.
FHA loans are less strict on employment history. There is no specific requirement although at least 1 year employment history is preferred.
Reserves are when most mortgage lenders require a certain amount of money to be in your bank account for set period of time. FHA guidelines do not require reserves to qualify for an FHA loan. However, if you have a low credit score or a high debt to income ration, FHA lenders may ask for up to two months' reserves.
FHA Requires you to live in the property at least 1 year before you can rent or sale. They also require you to move in within 60 days
FHA Loans are generally easier to obtain than conventional loans. Their underwriting guidelines are less strict than conventional loans. Most lenders provide FHA loans although some do not. If you are denied for a conventional home loan then you should definitely try an FHA loan. Your chances off approval will be higher.
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