FHA loans were intended to make home buying easier; however, the requirements can be strict.
FHA loans are loans that are insured by the Federal Housing Administration, and were established to make home buying easier for families. A variety of lenders participate in FHA loans; however, the standard FHA requirements are the same, regardless of which lender you use. Your employment, credit score, debt ratio, downpayment and property appraisal, which are all used to qualify you for a FHA loan, can also disqualify you for the loan.
Employment
To qualify for an FHA loan, you must have been employed at least the last two years. Your employment will have to be verified before getting approved for an FHA loan. FHA underwriters like to see applicants with two years of employment history with the same employer. If not, switching jobs but having the same position, may still pass employment requirements for an FHA loan.
Credit Score
FHA requires a 620 credit score as a minimum credit requirement. While all three credit bureaus (Equifax, Experian, TransUnion) may be pulled, generally, your Equifax score must meet the 620 credit score requirement. Collections, bankruptcies, foreclosures, repossessions and late payments can all negatively affect your credit score and prevent you from meeting this credit requirement. If you have a bankruptcy on your credit, you can only qualify for a FHA loan if it has been discharged for two years and you have had perfect credit since. If you have a foreclosure on your credit, it must be at least three years old before you can qualify for a FHA loan. Failure to have at least a 620 credit score can cause your FHA loan to be denied.
Debt Ratio
To ensure you have the capacity to repay the mortgage debt, you must meet the debt ratio requirements to qualify for a FHA loan. Your PITI, payment, interest, taxes, and insurance, must be no more than 29 percent of your monthly gross income. If you meet this requirement, you must also meet a back-end debt ratio requirement of 41 percent. This debt ratio will include your current and future house payment, as well as any automobile loans, student loans, personal loans, credit card payments, child support, alimony and tax lien payments. To calculate the ratio, the accounts are only used it you have at least nine months or more owing on the account. If you fail to meet the debt ratio requirements, you can be deemed that you do not have the capacity to repay the debt based on FHA guidelines.
Downpayment
FHA will not finance 100 percent of the house you purchase. The maximum FHA will finance is 98.15 percent of the purchase price or appraisal value, whichever is less. However, you may have to put down as much as 3.5 percent of more depending on what the purchase price or appraised value is. The FHA lender will be able to let you know how much the downpayment is before closing. You must be able to show proof that you do have the money to meet the downpayment requirement.
Property Appraisal
While you may meet all the credit and income qualifications for an FHA loan, you may still not be able to purchase the home you found because of the property appraisal on the home. The FHA lender will have to have an appraisal of the home, which assesses the value of the home that the lender may be able to recover in the event that you default on the mortgage loan. If the price of the property is higher than the appraised value, you will have to come up with additional money to cover the costs of the home. If you are not able to, you may be disqualified for the FHA loan. If the appraisal comes back and the house has some maintenance issues, they will need to be fixed before closing, or you may also be disqualified for the FHA loan.
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