What to Know About FHA Loan Qualifications
The Federal Housing Administration loan was borne out of the Great Depression, but it’s still a lifeline in the era of booming home ownership. Depending on your credit score, it may well be the best option available for buying your first home if you meet the FHA qualifications. Find out more about the terms, the minimum credit score required and how to qualify for an FHA loan.
The FHA Loan in a Nutshell
The FHA loan was launched in 1934 against a backdrop of huge foreclosures because of the Great Depression. The program now falls under the responsibility of the U.S. Department of Housing and Urban Development. It’s essentially a federally backed mortgage, although the loan itself is from an FHA-approved lender, such as a bank. The standout advantage of an FHA loan is the possibility of securing a loan with a down payment as little as 3.5%. You pay mortgage insurance premiums to the FHA, who pays the lender if you default.
Who Is the FHA Loan for?
Because it has a lower minimum down payment, the FHA loan is aimed at borrowers with lower-to-medium incomes or those with credit scores too low to meet the criteria for conventional mortgages. Although they offer a lower barrier to entry, they are not necessarily the cheapest loan option in the long term. FHA loans cannot be used for investment or rental properties. The target market is first-time buyers.
FHA loans also come with stringent requirements. You will have to pay an Upfront Mortgage Insurance Premium at closing to the FHA, equivalent to 1.75% of the loan amount, and an annual Mortgage Insurance Premium, which is due every month. These premiums range from 0.45% to 1.05% of the loan amount depending on the original Loan-to-Value ratio. These are payable for 11 years, or the life of the loan, which is set at a maximum term of 30 years.
How Do I Qualify for an FHA Loan?
As long as you have a minimum credit score of 580, you can typically qualify for an FHA loan with the 3.5% down payment. If your score is between 500 and 579, you might still be able to get a loan, but with a 10% down payment. Lenders are also looking for a debt to income ratio under 43%, which is lower than with conventional loans. Other restrictions apply:
You must also be:
At least 2 years out of bankruptcy (if applicable)
At least 3 years out of foreclosure (if applicable)
Free from delinquency on income taxes or student loans
The maximum loan amount depends on where you are buying. It is calculated based on the median house price in your area. You can check your limits using this FHA tool.
Tips on Applying for an FHA Loan
Approach an FHA loan application with the same due diligence as you would most other home loans. You will want a complete record of your income, outgoing payments, work history and savings. Clearly, achieving your best possible credit score is an important and effective step. Make sure it is up to date and resolve any errors or inaccuracies that might be affecting your score. Your lender will look at a range of factors, from your credit score to your work history and rent payments. As with any loan, ensure that your monthly payments are at a manageable level in relation to your income.
Bear in mind that an FHA loan is not the answer for all circumstances. Because of the extra insurance premium costs tied to the loan, a conventional loan may be the cheaper alternative should you qualify. Find out more about achieving your best future credit score with our range of resources and guidance.