An FHA loan is a very popular way to get a mortgage, especially for first-time buyers. These loans are backed by the Federal Housing Administration (FHA) and require that you put less money down – as little as 3.5% – than a conventional loan through a mortgage lender, which usually requires 10% or even 20%, depending on your credit.
To understand an FHA loan, first you have to remember than conventional mortgages are made through banks or private financial institutions. The reason most lenders require a substantial down payment is to protect their investment. A mortgage is a collateral-backed loan, with your home as collateral. If you cannot pay the bank back, they instead will take assume the ownership of your house and sell it to get their money. Because they cannot always sell the home for what you paid for it and they have to factor in administrative costs, they normally only lend 80% of a home’s value.
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FHA loans, however, are backed by the government. This reduces the risk if a borrower defaults on the loan, allowing them to be offered with much smaller down payment requirements. This also means people with poor credit or credit blemishes like bankruptcies, will likely qualify. But that doesn’t mean there aren’t factors that determine if you qualify for an FHA loan. Here are some requirements that will help you determine if you qualify for an FHA loan:
Steady employment. Borrowers must have a steady employment history or worked for the same employer for the past two years. If you have recently found a new job, you may still qualify, depending on the lender’s requirements and your overall employment picture.
US citizen or legal resident. Borrowers must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
Minimum down payment. Borrowers must pay a minimum down payment of 3.5%, though more is certainly possible. The money can be gifted by a family member.
Only primary residence. New FHA loans are only available for primary residence occupancy. This means you can’t use an FHA loan to purchase a vacation home or investment property you plan to rent out from the beginning.
House payment of 31% or less. Your “front-end ratio,” which includes mortgage payment plus HOA fees, property taxes, mortgage insurance and homeowner’s insurance, cannot exceed 31% of gross income, though exceptional circumstances may allow you to be approved for as much as 40%. If your front-end ratio is higher than 31%, your lender will be required to provide additional justification.
Total debt of 40% or less. Your “back-end ratio,” which includes all debt (mortgage plus credit card payments, student loan payments, car loan payments, and child support) needs to be less than 43 percent of gross income. In this category, exceptions made be made for up to 50%, with justification from your lender.
Minimum credit score. Borrowers must have a minimum credit score of 580 in order to put 3.5% down. Buyers with a credit score as little as 500 may qualify by putting at least 10% down. A lender may have other qualifications to determine a borrower’s credit-worthiness, but typically, FHA loans have the lowest credit requirements of any mortgage product.
Two year time frame for bankruptcy. Most borrowers need to be two years away from any bankruptcy, and have improved their credit in the meantime. Exceptions may be made if your credit has drastically improved or if there were extenuating circumstances for the bankruptcy, but in all cases, you will have to wait at least one year after a bankruptcy to qualify.
Three-year time frame for foreclosures. If you previously had your home foreclosed on, you usually need to wait three years before being approved for an FHA mortgage, with some extenuating exceptions. If you have drastically improved your credit, even if it hasn’t been three years, you may still qualify.
Appraisal. The property must meet certain minimum standards at appraisal, and be appraised by an FHA-approved appraiser. If these appraisal standards are not met, the seller needs to make the repairs. If not, you will be responsible for making them immediately in order to meet the terms of your loan.
Now that you know the basic requirements for an FHA loan, are you ready to move forward and get qualified? A real estate agent can help you through the entire home buying process, including getting you set up with an FHA-approved mortgage lender. Contact me today to discuss your options. And remember, friends don’t let friends buy homes without Agent Lady!
About Agent Lady: Cherise Wynne is a leading real estate agent in Philadelphia, helping home buyers and sellers navigate the City of Brotherly Love, with a special focus on first time home buyers. To chat about getting started with your first time home buying experience, click here.
