What is an FHA loan and who qualifies?
An FHA loan is a home mortgage that is insured by the government. A bank that is approved by the Federal Housing Administration (FHA) will actually serve as the lender, but since they are insured by the FHA, it is much easier for lower-income borrowers to gain approval for the loan. The bank doesn’t actually bear the risk of FHA loans, the FHA does.
FHA loans are designed to help lower-income borrowers or those with less-than-perfect credit scores secure a home loan.
FHA Loan Requirements:
In order to qualify for an FHA loan and borrower may need to meet the following:
- Proof of income – paystubs and at least one year of W2s
- Current debt information
- A debt-to-income ratio of less than 43%
- The home considered must be appraised by an FHA-approved appraiser, and inspected
- The home considered will be used as a primary residence, and you must occupy it within 60 days of the closing
- Credit scores 580 and above will require a 3.5% down payment, while those between 500-579 will require a down payment of 10%
How exactly does an FHA loan work?
An FHA loan works much like a conventional loan, the process isn’t much different. The loan won’t come from the Federal Housing Administration itself, but rather from a lender approved by the FHA. Conventional mortgages are not backed by the government and therefore are harder to obtain for those without the resources for a full down payment and high credit score. The FHA essentially takes on the risk for the lender in the event that the borrower is unable to make payments and defaults on their loan.
What will disqualify you from an FHA loan?
There are a few things that can disqualify you from obtaining an FHA loan:
Having a credit score that is too low: while the FHA recommends a score of 500 or higher, lenders are allowed to set their own standards, meaning that they like to see a score of at least 600
Too much debt: for the best chances of being approved for your FHA loan, it is important that your debt-to-income ratio falls below 43%. For more information on what a debt-to-income (DTI) ratio is and how to calculate yours, click here
Insufficient income: even though FHA loans only require a down payment of 3.5%, you will need to have that payment ready at the time of purchasing your home. Many borrowers also forget to factor in closing costs, which are needed to secure the loan. Additionally, if certain criteria aren’t met, the lender may require a higher down payment of 10%