What is an FHA Loan?
An FHA loan is a home loan that the U.S. Federal Housing Administration (FHA) guarantees. Private lenders like banks and credit unions issue the loans, and the FHA provides backing: If you don’t repay your loan, the FHA will pay the lender instead.
FHA loan applicants are now required to have a minimum FICO score of 500 to qualify for the low down payment advantage, which is currently at around 3.5 percent.
The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930's to provide mortgage lenders with insurance and to help stimulate the housing market by making loans accessible for people with less than stellar credit or a low down payment.
FHA Loan Requirements
The minimum FHA credit score for a home loan dropped to 500 a couple of years ago. The credit score and down payment amounts are just two of the requirements of FHA loans.
Here’s a complete list of FHA loan requirements, which are set by the Federal Housing Authority:
- Steady Employment History
Borrowers must be able to demonstrate a steady employment history or have been working for the same employer for the past two years.
- Social Security Number
Borrowers must have a valid Social Security number, lawfully reside in the U.S. and be of legal age to sign a mortgage in their respective state at the time of application.
Borrowers must put a minimum down payment of 3.5 percent, which can be gifted by a family member.
- Owner-Occupied Residence
New FHA loans are only available for primary residence occupancy. You must live in the home as your primary residence after purchase. FHA Loans are designed to encourage home-ownership. The owner-occupancy requirement prevents investors from buying the homes and renting them out.
- Property Appraisal
Borrowers are required to have a property appraisal from a FHA-approved appraiser. The property must meet certain minimum standards at appraisal. If the home you want to purchase does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
- Front-End Ratio
Borrowers are generally required to have a front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowners insurance) of less than 31 percent of their gross income. Sometimes, you may be approved with as high a percentage as 40 percent but your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must then include any compensating factors used for loan approval.
- Back-End Ratio
Borrowers are required to have a back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) of less than 43 percent of their gross income. Sometimes, you may be approved with as high a percentage as 50 percent but your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
- Minimum Credit Score
Borrowers are required to have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent. Borrowers are required to have a minimum credit score of 500-579 for maximum loan-to-value (LTV) of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders determine on a case-by-case basis an applicants’ credit worthiness.
Borrowers must be two years out of bankruptcy and have re-established good credit. Some exceptions can be made if there were extenuating circumstances beyond your control that caused the bankruptcy and you have managed your money in a responsible manner.
Borrowers must be three years out of foreclosure and have re-established good credit. Some exceptions can be made if there were extenuating circumstances and you’ve improved your credit. Not being able to sell your home because you had to move to a new area does not qualify as an exception to the three-year foreclosure guideline.
- Loan Limits
The Federal Housing Authority is the one that sets maximum mortgage limits for FHA loans that vary by state and county. Loan limits range from $275,665 to $721,050 for a 1 living-unit property depending upon where you are buying a home.
FHA Loan Credit Score is available in the following areas/cities
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