For a potential borrower to succeed in getting an FHA loan, specific standards have to be met. Known as one of the friendliest loan programs—if not already the most helpful and the most lenient—the Federal Housing Administration continues to attract future and existing homebuyers alike because of how attainable their standards are when stacked against other loan programs.
Basic FHA Loan Requirements
A borrower must have at least two trade lines with a minimum of 12 months pay history. It could be a revolving account, e.g. a credit card; or an installment account, like a car note.
DTI or debt-to-income ratio
The standard DTI ratio for an FHA loan is 31/43. A front end of 31% is the cap for most borrowers. The back-end ratio of 43% is a given for most home loans including FHA loan. However, the back-end ratio requirement varies from one lender to another. Some lenders can go up to 57% back-end ratio with compensating factors.
No Defaulted Federal Debts
Borrowers must not have unpaid and defaulted federal debts like a student loan, or previous loss from any government entity. In order to secure an FHA loan, an applicant must pass a CAIVRS screening. CAIVRS stands for Credit Alert Interactive Voice Response System. It is a database that contains federal delinquency history created by the federal government.
To qualify for FHA’s minimum (and glorious) 3.5% down payment, one’s credit score must not be less than 580. Still, borrowers who are unable to meet that FICO score requirement may still be eligible for an FHA loan with FICO scores are as low as 500. Borrowers whose credit scores are in between 500 to 579 can purchase homes under the FHA but will need to put in a 10% down payment and some restrictions will apply.
Although the FHA does not require a minimum income, borrowers are required to present their current 30-day paycheck stubs and tax returns to prove that they’re financially capable of keeping up with monetary commitment.
All this aside, it’s important to note that the FHA doesn’t sign checks or release cash themselves. They simply insure loans that are given out and facilitated by FHA-approved lending firms.
Mortgage Insurance Premium (MIP)
Contrary to conventional loans that forego loan insurances when borrowers reach a certain level go home equity over debt, the FHA calls for their borrowers to keep up with the MIP up until the loan ends. The MIP is for the life of the loan and cannot cancel.
FHA Loan versus Conventional Loan
At the end of the day, the FHA—like many loan programs—also has its own sets of pros and cons. It’s vital to know that each loan program caters to specific demographics with varying financial capabilities. What makes the FHA such a crowd favorite is its capacity to accommodate more people because of such attainable standards.
- Down payment
Conventional loans require that borrowers have at least a FICO score of 620. Most lenders require an even higher mid-FICO score of 640 before they can extend a home loan. FHA on the other hand only requires a 580 mid-FICO and can extend a mortgage to borrowers with a FICO score all the way down to 500.
- DTI ratio
As mentioned earlier, FHA loans only call for a DTI ratio of 31/43, whereas conventional loans require a 26/45 debt-to-income ratio. Both loan programs can go higher in respect to the back-end ratio. However, the final factor that will determine the borrower’s maximum DTI will be their credit score, loan-to-value, and reserves.
FHA loans are very much assumable. What this means is an FHA borrower can pass on his or her loan obligations should something come up. Conventional loans, on the other hand, do not offer such an advantageous feature.
To know more about the requirements of FHA loans, click the link!