To qualify for an FHA loan, you’ll need to meet a few requirements. These requirements usually include:
Let’s look at these one at a time.
You’ll need 3.5% of the purchase price as a down payment to qualify for an FHA mortgage loan. If your credit score is especially low, you may need to put more down. This means that for every $100,000 you plan to spend on a home, you should have $3,500 to put toward a down payment.
In addition to the down payment, FHA loans have closing costs. This includes your lender’s origination fee, prepaid taxes and insurance, discount points, appraisal fees, and the FHA mortgage insurance premium. If you’re working with one of the best lenders for FHA mortgages, your lender will be glad to answer any questions about closing costs associated with your mortgage.
Having said that, there are ways you can potentially lower your out-of-pocket costs — even with the best FHA loan lenders.
Here are three ways to save money on your FHA loan:
- All or part of your down payment can come from a down payment gift. The down payment doesn’t necessarily need to be your money.
- You can roll many of the closing costs of an FHA loan into the loan itself.
- You can ask the seller to pay some or all of your closing costs (as much as 6% of the purchase price) as part of your purchase offer.
The minimum credit score to qualify for an FHA loan is 500. That’s if you can afford a down payment of 10% or more. If your down payment is less than 10% of the purchase price, you’ll need a minimum credit score of 580.
FHA loans are designed to provide mortgage loans for borrowers with bad credit. So either way, the credit score requirements are lower than those of conventional mortgages. The requirement for those typically start at a minimum of 620.
One thing that’s important to point out is that you have a different FICO® Score using information from each of the three major credit bureaus (Equifax, Experian, and TransUnion). The best lenders for FHA loans will check all three bureaus. Typically, your middle score will be used to determine whether you qualify.
Debts and income
I’ve grouped debts and income into one category because lenders look at these two things together.
If you earn a high salary but have tons of credit card and other debts, you might not be able to afford a mortgage payment. And if you earn a relatively modest salary but are otherwise debt-free, you could be in a strong position to take on a new mortgage. The metric that is used to quantify your debt is known as the debt to income ratio, or DTI.
The best lenders for FHA loans typically look at two numbers here. Your front-end DTI is your proposed mortgage payment as a percentage of your total pre-tax income. Your back-end DTI is your proposed mortgage payment plus all of your other monthly debt obligations as a percentage of your total pre-tax income.
The back-end DTI is the one that most lenders focus on. Many of the best FHA loan lenders look for a back-end DTI of 43% or less. This means if your pre-tax income is $5,000 per month, your total monthly debt obligations (including the new mortgage payment) should be no more than $2,150.
Having said that, different lenders may have different DTI requirements. Some FHA lenders will make loans to borrowers with DTI ratios as high as 50%. Others may be a bit more conservative.
FHA lenders typically want to see at least two years of steady employment in the same field. That doesn’t necessarily mean you need to be at the same job for two years — just the same field. And there’s an exception if you were in school for some of the time. For example, if you graduated from college one year ago and have been steadily employed since then, you could still potentially qualify. Lenders just want to know that your income is likely to continue for years to come.
FHA loans are designed for properties you’re going to live in. Before an FHA loan can be finalized, the property must meet set standards for safety, security, and soundness. Your new home will need to be approved an FHA appraiser.
While there are some specific requirements that need to be met, the general idea is that the property shouldn’t be hazardous to its occupants. Your new home should already be a secure place to live, and should be free of any structural issues or major problems.
That’s not to say that you can’t do renovations or repairs before you move in. As I mentioned earlier, there’s actually a type of FHA mortgage loan specifically for that. However, the property needs to meet certain minimum standards.
View more information: https://www.fool.com/the-ascent/mortgages/best-lenders-fha-loans/