Everything You Should Know About FHA Loans

When it comes to FHA loans, it can sometimes be confusing to fully understand everything involved. So, we’ve decided to break down the basics of FHA loans to make it easier for you.

 

First off, what is an FHA Loan? An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). FHA loans help buyers with limited savings and lower credit scores obtain their dream of homeownership. This government-backed loan is significant because it protects lenders like banks and credit unions in the event the loan goes into default. This governmental assurance is the layer of comfort that many lenders need in order to offer terms that are favorable to borrowers, especially those who may not quality for other home loans.

How are FHA Loans Different from Conventional Loans?

Typically, FHA loans require a minimum of 3.5% down payment and a credit score of at least 580 or higher. Because of these requirements, these types of loans are typically more popular with first-time home buyers who may have limited savings and/or poor credit. But FHA loans aren’t just for new home buyers. They can also be used for refinancing, new construction, or multi-family condos/units.

 

FHA Loans are typically easier to qualify for than a standard conventional loan. FHA loans typically:

  • Allow for a borrower with a lower credit score of anything 580 and above
  • Require a lower down payment of 3.5%
  • Can tend to require lower monthly mortgage payments
  • Lean a bit more liberally on the rules regarding gifts of down payment money (in the case of family, employer, or charity contributions)

How to Qualify for an FHA Loan?

There are some basic requirements to qualify for an FHA Loan. These are the very basics. It is important to note that some lenders may have additional stipulations.

Credit Score:

Your lender will have their own standards in terms of minimum requirement. COVID and recession has impacted this number and many FHA lenders have raised their minimum requirement credit score requirement to be around 620. In reality, the minimum credit score that one needs for an FHA loan can dip as low as 500, depending on the lender. If you have a score in the 500 – 579 range, you can still potentially qualify for an FHA Loan, but you may be required to provide a higher down payment. For a good rule of thumb, estimate a credit score of 580 – 650 in order to qualify.

Down Payment for FHA Loans:

The typical down payment for an FHA loan is 3.5% if you have a credit score of 580 or higher. As mentioned above, if you have a score that falls below this number, you can expect to be required to produce a minimum of 10% for your down payment.

Debt-to-Income Ratio:

The debts you carry will come into play in order to qualify for an FHA Loan. The FHA requires that your debt-to-income ratio is less than 50. In layman’s terms, what this means is that your monthly debt payments cannot be more than 56% of your pretax income. This also includes debts that you may not be actively paying on.

FHA Loan Property Approval:

This is one factor that is beyond your control. FHA Loans require that the property that you are trying to purchase meets the minimum property requirements. This type of loan mandates an appraisal that is additional and different from the standard home inspection. The reason for this extra step? To ensure the investment, the FHA want to be sure that the home is worth what you’d be paying for it. It needs to meet standards for livability. To be considered for Property Approval in middle Tennessee, a property must:

  • Have an undamaged foundation or roof
  • Not contain loose wiring or exposed electrical systems
  • Have a working permanent heating system that can eat the property adequately
  • Surfaces should be free of chipping or peeling paint
  • Free from wood destroying insect infestations
  • No broken or non-functional windows, blocked doors, or steps without a handrail
  • No presence of lead-based paint
  • Water must drain away from the foundation
  • All appliances must function properly

Work History:

To qualify for an FHA loan, you must have the following:

  • At least 2 years of work history. This does not have to be at the same employer, and it can even include gaps in employment. If you have an employment gap that is larger than 6 months within the last 2 years, you also need to verify:
    • The borrower has been employed at the current job for at least 6 months
    • A 2-year work history prior to the absence from employment. This does not have to be the most recent two years, just two years in your entire lifespan.
  • No more than three employers within the last year
  • Must be with your current employer for at least 1 pay cycle or start with employer within 30 days of closing (employment offer letter required)

Not all FHA Loans are created equal!

While FHA loans may be more favorable and easier to obtain, it’s important to note that not all FHA Loans are created equal. The type of loan and its subsequent loan limits will depend on the loan you are seeking. Everything from Basic Home Mortgages to Construction Loans to an Energy Efficient Mortgage can fall under the umbrella of an FHA Loan.

 

No matter what terms for your FHA loan, you will have a ceiling or cap on the mortgage limit. The cap on the limit will vary based on location. You can reach out to your lender for more information on what the cap is in your area.

 

The first step to ensuring that you have the best FHA Loan for your needs is to choose the best lender. It’s important to note that ONLY an FHA-approved lender can issue an FHA-insured loan. Contact us today to get started on your FHA loan journey