How to qualify for an FHA loan
FHA eligibility basics
- You don’t necessarily have to be a first-time homebuyer to qualify for an FHA loan.
- Credit scores and your debt-to-income ratio are important factors in determining eligibility.
- Lenders often overlay additional credit requirements beyond the minimum standards established by the FHA.
The Federal Housing Administration (FHA) loan-guarantee program is among the most popular government-supported mortgage programs and is available to both first-time homebuyers and repeat homebuyers.
An FHA loan can be a good option for people with little money to put down on a house purchase, and also for people with thinner credit profiles or lower credit scores. FHA requires just a minimum 3.5 percent downpayment, which is on the lower end of all loan products that you will find. The eligibility guidelines also are somewhat looser than conventional loans purchased by Fannie Mae and Freddie Mac. For these reasons, FHA loans are popular with first-time homebuyers; however, you don’t have to be a first-time homebuyer to be eligible.
FHA doesn’t loan the money. Instead, you’ll apply through an FHA-approved lender. FHA insures the loan (an annual fee that is passed on to the borrower in monthly installments for the life of the loan) so that the lender is protected from losses in defaults. This enables a lender to provide the loan at a reasonable cost and to a greater percentage of the population.
Approved FHA lenders must, however, follow the guidelines established by the FHA that determine whether the borrower is eligible to be insured.
One important factor in determining eligibility is your credit score. In theory, FHA will allow borrowers with credit scores as low as 500. If you have a credit score within the range of 500-579, you must put at least 10 percent down on the home. If you are planning to put less than 10 percent down, you must have a minimum credit score of 580.
In recent years, lenders have typically layered on additional credit requirements beyond the minimum requirements of the FHA program. As of 2017, some lenders were still requiring FICO credit scores in the mid-600s. Since the housing recovery, however, credit scores have been gradually loosening. It is a good bet, however, that if you are close to the minimum range of the FHA requirements, you will have a hard time getting approved.
Another major requirement is that borrowers must demonstrate that they can afford the loan. FHA has established a maximum bar for debt-to-income (DTI) ratios. In other words, your debt payments each month can’t exceed a certain percentage of your gross income.
There are two separate numbers that are considered. One calculates your monthly house payment against your gross income. As of 2017, the house payment can’t exceed 31 percent of your gross monthly income.
The other number evaluates all your debt payments against your gross income. To qualify for FHA, your combined debt payments typically can’t exceed 43 percent. There are a few exceptions that can increase that percentage, such as making a larger down payment, showing a history of conservative spending and having substantial savings.
The other requirement is the down payment. Unlike loans guaranteed by the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture, which can provide 100 percent financing for eligible borrowers, FHA does require a minimum 3.5 percent down payment. The down payment is sometimes expressed as the loan-to-value of the home (LTV). In the case of the FHA, the LTV cannot exceed 96.5 percent.
FHA also has other standards. As with other federal loan programs, to qualify for an FHA loan, you’ll need to get a clear report from the government’s credit alert interactive voice-response system (CAIRS). This is a database created by the government that tracks people who have defaulted on direct or guaranteed loans, or have delinquent debts owed to federal agencies.