FHA Loan Qualifications: A Self-Assessment
It is best to know the FHA loan qualifications because being prepared is half the battle. Before you go to a lender or broker, you should have a basic knowledge of what you are looking for. The lender or broker can explain detailed information, but a general knowledge is necessary to understand the particulars of a FHA loan.
Has to Be Your Primary Residence
FHA will only insure a loan if it is it the borrower’s primary residence. Most people looking to obtain an FHA loan are those that are first time buyers. Investors, or those purchasing a home to rent it out, are not eligible for this type of financing.
There Are Loan Limits
The maximum loan amount guidelines are determined by the federal government. Each local area's costs and price ranges are assessed and a general loan amount, per state and county are provided for all lenders and brokers. The maximum loan to value ratios are also determined by the type of financing. Typically, FHA allows a 96.50 loan to value ratio. However, there are special circumstances that may require additional down payment, like when purchasing from a close relative.
FHA does not require a minimum credit score. The lender, however, will require a minimum credit score requirement. The credit score minimum is determined by the risk the lender will accept. This is why it is important to shop around and find a lender that suits your needs and that you can qualify with.
Another big part of an FHA loan is the employment requirements. This helps determine whether or not you will be able to pay back the loan appropriately.
FHA requires a 1 to 2 year continuous employment history. Job changes are acceptable, if they are in the same line of work. They also require that all employment gaps are explained. If a borrower is a recent graduate, FHA will accept a diploma in lieu of work history, provided the diploma is provided for the same type of work they secure.
For those self employed borrowers, the work requirement is two years. The lender will require 2 year’s of tax returns, and a current P & L statement (Profit and Loss). If you have not been in business for at least 2 years, you will have had to have prior work history in the same field as your self- employment venture.
Debt to Income: Ratios to Know
FHA established 41 percent as their guideline for debt to income ratio. They offer flexibility with this guideline and will sometimes to up to 45 percent. The debt used includes such things as your mortgage, student loans, car loans, credit card payments, and insurances.
Down Payment and Closing Cost Expectations
Your down payment on your home needs to be 3.5%. You are allowed to put more money down, but, many borrowers don't have a lot of funds to work with when they purchase. The seller is allowed to contribute up to 6% or the borrowers closing costs. This helps the borrower by making the out of pocket cash less expensive for a home.
The home also has to prove to be "habitable." This means it does not have leaky roofs, has running water, electricity and meets minimum property standards. If a property needs improvements, and the seller is not willing to make the improvements, the home may not qualify for an FHA loan.
If you have your papers such as pay stubs, tax returns, bank statements and know the requirements, you will be well on your way to attaining the FHA home loan you seek.