Purchasing a home can be daunting, especially if you do not have a large down payment. While it is possible to get a conventional loan and cover all your expenses, the requirements needed may weigh you down. This is why FHA loans are available for first and second time buyers with no equity and who cannot afford the large down payment to qualify for a loan.
FHA loan requirements are constantly changing. The minimum required down payment for FHA financing is 3.5%. They require a minimum fico score of 580 and your debt to income ratio doesn’t have to be perfect.
District Lending recommends that home buyers consider FHA loans if they do not have a large down payment and have average credit scores. Read on to discover how to qualify for an FHA loan and the requirements needed.
What Is an FHA Loan?
An FHA loan is a mortgage loan insured by the Federal Housing Administration that offers borrowers low down payments and lower monthly mortgage payments. The FHA insures both first-time homebuyers and repeat buyers who have fallen behind on their mortgage payments.
It is also worth noting that the maximum amount of loan you qualify for will depend on the state you live in, your credit score, and your income report.
Benefits of Choosing an FHA Loan
Here are a few benefits of taking FHA loans to finance your new house;
It is Easier to Qualify for the Loan
Unlike non-conforming loans, which are pretty difficult to qualify for, FHA makes it easy for borrowers to qualify for their loans. This is because the requirements needed are not too overwhelming. You can still qualify for this loan even if you have a bad credit score. This makes it easy for new home buyers to get their desired house.
Many conventional loans require high-interest rates, which can be very hard for average home buyers to afford. Thankfully, FHA loans come with lower interest rates, allowing you to pay monthly house payments without being strained.
However, District Lending allows you to close your deal with adjustable payment terms, which is a great advantage for those who need higher loan limits with a reasonable interest rate payment program.
FHA Looks at All Kinds of Credit History
This may sound like a disadvantage, but it is actually an advantage for many people with poor bank credit history. FHA does not only focus on your cr
edit card. It also looks at student loans, utility bills, rent, etc. If you have been reliable in paying your rent or utility bills, the Federal Housing Administration may consider you for a loan.
What Credit Score Do I Need for an FHA Loan?
The FHA credit score requirement 2022 is 580. This is the minimum Fico score you must have to qualify for an FHA loan. When you meet this FHA FICO requirement, you can start with a down payment of 3.5%. While this is the case, it is crucial to remember that the FHA will also check for other credit histories, including bankruptcy and foreclosure.
This does not mean you will not qualify for an FHA loan if you have been bankrupt before. The lenders check for these things to determine your ability to repay the loan. Even if you have a credit score that is below 580, you might still be considered for an FHA loan, but you will need to begin with a down payment of about 10%.
When you want to apply for a loan, it is crucial to review your credit three to six months earlier to ensure that you clear any issues present. You can boost your creditworthiness by paying debts and ensuring anything related to your credit card is accurate.
Remember, the stronger the credit score, the more chances you have of qualifying for the mortgage.
The Requirements of an FHA Loan
To get an FHA loan, there are some requirements that you must meet. They Include;
- A Down Payment: This is among the first things to look at before applying for a loan. Do you have enough money for a down payment? Almost all loaning companies usually ask for a down payment as a requirement. For example, at District Lending, we ask for a down payment of 3.5%. When it comes to FHA mortgages, you must start with 3.5% of the amount you want to qualify for. The closing cost can sometimes go up to 10%, but that is if your credit score is below 500.
- A Well-Established Credit History: As mentioned above, FHA is interested in checking your credit history, which cuts across all major payments you have. This could range from rent, student loans, bank loans, utility bills, etc. If you have a good credit history and a minimum FICO score of 580, it will be easier for you to get an FHA loan.
- Debt-to-Income Ratio (DIT): Many loan firms require that you have a Debt to income ratio of 43% to 45%, but you can qualify with a DIT of 50%. The debt-to-income ratio is always calculated by dividing your monthly debt payments by your gross income. If the lenders find that you have a DIT of more than 50%, they may decline your request because a high DIT score shows a possibility of defaulting on the loan. The good thing is that the lenders do not pay much attention to FHA loan income limits. They only use DIT to see if you qualify for a loan.
- The Property for Purchase: One of the most common FHA loan restrictions is that you are not supposed to use the loan for vacation homes or investment properties. The loan is strictly for purchasing an existing or a new home. FHA will also check the area you are planning to purchase your home and ensure it is safe and secure before offering you the loan.
- Work History: As a first-time home buyer, you may not be aware that your employment history also plays a vital role in the qualification process. You must have a 2-year employment history to get an FHA loan.
- FHA Loan Limit: When borrowing for an FHA loan, it is also wise to consider the limit. FHA won’t just give you any amount you ask for. There are a few key factors that determine how much you will qualify for. One is the location. The loan limits differ depending on state and county. This is because some areas are more expensive than others. Another thing they will also check is the value of the property to ensure the house you are purchasing is worth the requested amount.
- Mortgage Insurance Premium: Paying MIP is important if you want an FHA loan. This is because it safeguards the lender if you fail to repay the borrowed amount.
- A Fully Documented Income Report: FHA lenders always want to ensure that your income will manage to cover your loan, including the interest rates. The loan lenders check your income report by looking at tax returns, pay stubs, and bank statements.
How Hard is it to Get an FHA Loan?
Sometimes it can be very tricky to get an FHA loan, especially if;
- You have no credit history
- Your credit score is low
- You have experienced foreclosure – While this is not the main factor in getting disqualified for an FHA loan, it can sometimes affect the qualification process. It can take up to 3 years to qualify for an FHA loan if you get a foreclosure.
- Late Payments and bankruptcy can also affect the FHA loan qualification process.
What Should I Do If I Do Not Qualify for an FHA Loan?
You’ve just realized that you cannot qualify for a loan even after applying and reviewing the FHA guidelines 2022. So, what should be your next plan?
- Review the FHA decline notice: First, go through the notice sent to your email and understand why you couldn’t qualify for the loan.
- Review Your Credit History and Score: The credit score needed for an FHA loan is 580. So, if it is below, consider building it before applying for another loan.
- Apply for a Small Loan: Probably, the limit you indicated was way too much, and FHA couldn’t provide you with that for specific reasons. If this is the case, try to apply for a small loan.
- Shop around: District Lending also recommends looking at other loan companies to see if you can get a loan. Our company offers a loan of up to $1.5 million, and you can start with a down payment of 5%.
What to Do After Meeting FHA Loan Requirements
After meeting credit requirements for an FHA loan, among other things, it is time to send all your documents to the lender for review. Immediately begin the FHA loan application process and wait for their response to see if you will be approved for a loan.
Once property research has been done, and you have paid the closing cost, expect to get your loan anytime soon. When you get the loan, start thinking of how you will make monthly payments. The best way is to automate the process, so you never fall behind on your loan payments.
The FHA Loan Qualification Process: How to Apply and Qualify for the Loan
With advanced technology, applying for an FHA loan has never been easier. All you need is an internet connection and a laptop to connect with top FHA lenders. You can also go to FHA offices near you for more explanation. The following are the four main steps you should follow to qualify for FHA loans;
- Step 1: Find an FHA lender
- Step 2: Apply for the loan
- Step 3: Provide all the requirements needed, such as the credit score, work history, income report, etc.
- Step 4: Choose a loan estimate, which will be provided after three days. Finally, wait for a response.
Is FHA Only for First Home Buyers?
FHA loan for first-time buyers is what is mainly advertised because of low down payments. However, the loan is not only meant for first-time buyers. You can also apply for the loan if you have all the requirements needed.
If you do not qualify for the loan or want a high loan limit, choose other firms, like District Lending, and start with a closing cost of 5%.
What credit score should I have to qualify for an FHA loan?
You must meet a credit score of 580 and above to get an FHA loan. If you do not have this score, it can be hard to get a loan, but you can always provide your income report or make a larger down payment to qualify for an FHA loan.
Is It easy to get an FHA loan?
FHA is one of the easiest loans to qualify for, unlike other loans. This is because they ask for a low credit score and a down payment, which makes it easy for struggling home buyers to get the loan. Also, you can qualify for the loan even if you’ve had a foreclosure in the past or bankruptcy.