FHA loans are an ideal way to finance the purchase of your home. Their low credit and down payment requirements, coupled with flexible guidelines, make them popular choices among first-time homebuyers and those with poor credit histories.
How to Qualify for an FHA Loan
In order to be approved for an FHA loan, you’ll need a good credit score, enough down payment and enough income to cover monthly mortgage payments. Your debt-to-income ratio (the percentage of gross income that goes toward housing costs) must also not exceed 43 percent according to federal government guidelines.
Once those forms are filled out, your lender will review your finances to determine if you qualify for an FHA loan. Be prepared with a detailed budget, tax returns and pay stubs as proof of income.
Additionally, you’ll need to create a list of your assets, such as checking, savings and retirement accounts. A mortgage affordability calculator can be helpful here in estimating your monthly budget and determining how much you can afford to spend on a new home.
Affordability is the key factor in determining your mortgage rate and terms. Your lender will use factors like budgeting and debt-to-income ratio to decide how much loan you qualify for.
Conventional mortgages require a minimum 20% down payment, while FHA loans allow for down payments as low as 3.5%. You can fund this from various sources such as your own funds or gifts from family members or employers.
Many lenders offer preapproval processes for borrowers who meet FHA qualifications, which typically takes one day to finish and approve or deny. Doing this before starting house hunting can help focus your search and guarantee you don’t overpay for a home that falls outside your price range.
Your FHA mortgage limits are determined by where you live and the number of units in your home. To find out what those limits are in your area, use HUD’s FHA Mortgage Limits tool on their website.
If you have a substantial down payment, your lender may be able to reduce or even waive the need for mortgage insurance. On the contrary, if you only have 20% equity in your home or no equity at all, then mortgage insurance will likely still be necessary.
Some home sellers are willing to finance the purchase of their houses through owner-financing. Although these loans may be easier to qualify for than traditional mortgages, they may not provide the same level of security.
Additionally, a seller’s lender might not require inspections or title insurance, which could add to the closing cost of your purchase. In such instances, it’s wise to have a real estate attorney review all details before signing anything.
FHA minimum credit requirements are low: 580 for a 3.5% down payment and 500 for a 10% down payment. This makes it possible for underwriters to approve mortgages even to applicants with poor credit histories, those who have recently reestablished their credit, and potential homebuyers with bad credit but good financial habits.