When it comes to buying a home, there are tons of different kinds of mortgages to fund one. Federal Housing Administration (FHA) loans are great options for those who don’t qualify for conventional mortgages due to a lower credit score or income. Funded by the government, FHA loans make homeownership more accessible.
While securing an FHA loan is typically more flexible than a conventional loan, there are still some requirements in place to qualify.
What Are FHA Loans?
FHA loans were created to make homeownership more accessible by lowering down payment and credit score requirements. Down payments can be as low as 3.5%, as opposed to a conventional mortgage typically requiring 20% down. FHA loans do have occupation, purchase, and property limits, so it’s important to research and ask your lender if an FHA loan is right for your needs.
Securing an FHA Loan
While FHA loans are more accessible than conventional loans, there are still a few requirements for getting an FHA loan. On the bright side, you don’t need to be a first-time homebuyer; you can secure these loans at any time in your homeownership journey.
Credit Scores
While FHA loans feature a more flexible credit score range to appeal to more homebuyers, there are still some limits. A credit score of 580 or higher is required if you want a down payment of lower than 10% of the home purchase price. If your credit score is 500-580, your down payment requirements rise to 10% of the purchase price. Most FHA loans cannot be secured with a credit score under 500. Credit scores can inform lenders how reliable you are with finances, and a lower one means there may be repayment issues.
Mortgage Insurance
When down payments are lower than 20% of the purchase price, mortgage insurance is required. Whether you pay mortgage insurance upfront, monthly, or a combination of the two is up to you, but it will be required for an FHA loan if you put down less than 20%.
Bankruptcies
Since bankruptcy can be common with lower incomes, thankfully they won’t disqualify you from an FHA loan. However, you can’t have a bankruptcy in the past two years. If you do, then two years will need to pass before you can qualify.
Foreclosures
Similar to the bankruptcy qualifications, you typically won’t qualify for an FHA loan if you’ve had a foreclosed home in the past three years. However, this may be waived in some cases where the foreclosure was due to certain specific or extenuating reasons outside of reasonable control. It’s best to discuss with your lender about your options if this applies to you, as you may still be able to secure an FHA loan with certain foreclosure circumstances.
Debt-to-Income Ratio
If you want to apply for a mortgage, you’ll need to be familiar with your debt-to-income ratio (DTI). As the name implies, it is calculated by dividing your debts by your gross income. As a general rule, it’s preferred that mortgage payments don’t exceed around 30% of your total monthly income, and your mortgage combined with other debt shouldn’t exceed around 43% of your income. Typically, to qualify for an FHA loan, your DTI needs to be less than 43%.
Primary Residence
FHA loans are issued to those who need more flexible mortgages to secure a place to live for themselves or their families. Therefore, the property you buy with an FHA loan has to be your primary residence. It can’t be a second home or even a vacation home. Additionally, you can’t use this loan for real estate investment purposes by renting out the home to someone else.
Property Condition
With an FHA loan, you are limited as to the condition of the property you’re purchasing. It must meet the standards of the U.S. Department of Housing and Urban Development (HUD) requirements. In other words, you can’t buy a rundown shack to fix up; your new home must be structurally sound for safety purposes. They want properties to be a safe and healthy environment, and hardcore fixer-uppers are not guaranteed to be completed.
Income and Employment
Similar to conventional mortgages, you’ll need to prove that you have steady income and employment through verifiable documents such as W2 statements or tax returns. There are no limits to the income you make, however, your income still must adhere to the aforementioned DTI guidelines. Unlike a conventional mortgage, however, there is no length of time that the borrower must have held employment, but any gaps in recent employment history (the past two years) must be explained.
Conclusion
FHA loans are a great option for those who have trouble qualifying for a conventional mortgage due to their credit score or income thresholds. However, there are still requirements in place to qualify, such as a minimum credit score and debt-to-income ratio. There are also property limits in terms of occupation and structural safety. Generally, FHA loans are more flexible to secure, and consulting with a lender can help determine if these government-funded loans are right for you.
