FHA Loan Requirements
FHA Lenders have certain FHA loan requirements that have to be met in order for you to qualify for a FHA home loan. This article can give you a good understand of what may be required of you when getting a FHA loan. FHA Requirements can vary between lenders and you should contact your lender to see exactly what will be required of you.
FHA Credit Requirements
FHA loans and your credit score
Most FHA lenders require at least a 620 fico score to qualify for an FHA loan. In many cases however, FHA home lenders will issue an FHA loan to borrowers with less than a 620 credit score; sometimes as low as 500. If you are applying for an FHA loan and your credit score is lower than 620 you may still be able to qualify for the loan at a low interest rate if you can show the FHA lender some "compensating factors." What does that mean? Compensating factors are other aspects and considerations a lender may take into account if your credit score isn't so good. The FHA lender may look past your credit score if you have some additional money in savings, if you make more than enough money to qualify for the loan or have had a good history of paying your mortgage payments in the past.
The trade lines on your credit
Your "trade lines" are a history of the current credit accounts that are open on your credit report. FHA loan requirements state that you must have at least 3 open trade lines that are active for 24 months. This shows the FHA lender that you have credit history and helps them determine your ability to pay back a loan. If you currently have a mortgage on credit, most FHA loans require that you have a clean mortgage history (no 30 day late payments) for at least 12 months. If you've been late on your mortgage in the past 12 months you may still be able to get an FHA mortgage if you can provide a signed letter explaining why you were late.
Income/Employment Requirements
Work History
Most FHA lenders require applicants to provide a 2 year employment history. You will likely be required to provide 2 years of tax returns (consistent from the same employer) along with a couple of recent pay stubs to prove you are currently working for that employer.
Self employed borrowers are required to show 2 years tax returns as well in the same line of business.
FHA Income Requirements
FHA loan qualification is largely based in your income and your ability to meet your monthly FHA loan payments every month. The lender will work out a ratio of your income to monthly debt obligations known as a DTI (Debt to Income) ratio. Many FHA lenders require this ratio to land between 40 and 50. For example, if your gross income (adjusted gross for self employed borrowers) is $4,000 per month an FHA lender will require that your monthly obligations (mortgage payments, property tax, home owners insurance and revolving debt) not exceed $2,000 per month (or 50% of your monthly gross income.) The lower your DTI ratio, the better chance you will have of getting an FHA loan!
Self-employed borrowers don't forget that your FHA lender will qualify you based on your adjusted gross income, even if you pay yourself on a w2 form!
Assets and Reserves
In many cases, you are not required to have much money in reserve (in a savings account or investment fund) to qualify for an FHA loan. Having some additional money saved up however can increase your chances of getting an FHA loan by acting as a "compensating factor" if your credit score falls short of FHA loan requirements. If your lender needs you to prove assets in order to qualify, you will likely have to send them a few months worth of bank statements for the account to which your assets reside.
Home Down-Payment Requirements
FHA loans' main attraction is the low down payment option. FHA loans only require a minimum 3.5% down payment whereas conventional loans normally require anywhere between 10% and 20% down. Many American's who can afford to pay a mortgage but do not have a ton of money in the bank for a down payment usually turn to an FHA loan when buying a home. A portion of the down payment on a home can be a gift from an employer or family member and must be sourced (the source of the gift must be verified) and seasoned (the gift funds must be in your account for 60 days).
Home Appearance and Appraisal Requirements
FHA lenders can be a bit more strict when it comes to your home appraisal. Every lender is different and each appraiser will evaluate your home differently but if your home has known issues like a leaky roof or unfinished flooring, let your FHA lender know a head of time. Your home appraisal must be facilitated by a FHA approved appraisal management company that is HVCC compliant.