People who want to own their own home are at the heart of the American Dream. Some might think that after the last financial downturn, you need to have a high credit score to buy a home. This is actually not really true. It did get more difficult to buy a home with poor credit after the financial crash. But these days, it is possible to get a home loan through the Federal Housing Administration program without a great credit score. Regardless of the flexibility that FHA offers with home financing in 2018, it is imperative to check all the boxes properly before submitting a FHA loan application to a HUD-approved mortgage lender or bank. Before making offers on the house of your dreams, you need to understand the FHA mortgage requirements to decide if is the right fit.
FHA insures many of the home loan approved in America today. FHA does not actually lend you the money; the agency simply provides a guarantee for the lender who issues you the mortgage. If the borrower does not pay the mortgage, FHA will reimburse the mortgage lender. Consequently, more mortgage lenders are likely to offer loans and credit to people with marginal incomes and credit scores.
If you are interested in applying for a FHA loan, there are several things that you will need:
#1 Acceptable Credit Score
You still need to have a minimum credit score to get approved for a FHA mortgage. The absolute bear minimum credit score for a FHA loan is 500. That is a very bad score; there are people who have had several foreclosures in the last three years that do not have a score that low.
A 500 score will make it difficult however to get a loan. Most lenders will not work with someone with that low of a score, but the few that do will likely require a 5 to 10% down-payment. You are better off if you have a credit score of at least 580. That credit score is the minimum required to get the lowest possible down payment. It’s truly amazing that a borrower with a 580-credit score can buy a home with a 3.5% down-payment at a competitive interest rate.
#2 Steady Financial History Recently
A major factor with FHA is your current financial stability. FHA understands if you had a negative event that damaged your credit. You might have lost your job or had your hours cut. This could lead to missing payments on a home loan or car payment. Maybe you even had a foreclosure.
These events by themselves do not preclude qualifying for a FHA loan. What the Federal Housing Administration wants to see is that you are back on your feet financially. The agency and the lender want to see that you have been making your housing, car and other debt payments on time for a year or more. You must demonstrate to the underwriter that you are able to afford the FHA home loan that you are applying for. The bank, underwriter and ultimately the Federal Housing Administration want to make sure that you are not a high risk for delinquencies or a default.
If you can show that you are financially stable after the financial problem you suffered, you could have an FHA loan approval in your future.
#3 Fully Documented Income
There is a good chance that someone with average income and credit score can get a home loan in the United States of America in 2018.. However, the chances will just about vanish if you cannot clearly document your income on paper. One of the major problems that led to the mortgage meltdown of 2007-9 was there were far too many loans given to people with undocumented income sources. These were called ‘no doc home loans’, and it is now very difficult to get a loan without full income documentation.
Lenders are legally required in the US to make a full good faith effort to make sure you can afford your loan payments. This means you need to provide the following documents in most cases in your FHA loan application:
- At least two or three months of bank statements.
- W-2s going back two years
- Tax returns for the last two years
- At least a month of two of pay stubs
- For the self-employed, you need to show tax returns for two years, and a to date profit and loss statement for the current year
- Source of down payment – you can get your down payment in the form of a gift, too. But this also needs to be fully documented.
#4 Clear CAIVRS
CAIVRS is an acronym for the federal government’s Credit Alert Interactive Verification Reporting System. This is a federal database that shows people who are defaulting on federal loans, or owe back taxes. If you are on this list, you need to get it cleared before you can get a loan.
If you owe back taxes, it is ok: You simply have to set up a payment plan with the IRS and make your payments on time. In this way, you can still get an FHA loan with back taxes owed.
#5 Down Payment of 3.5%
A major benefit of the FHA program is that you do not need to have much money to put down. With only a 580-credit score, you may be able to put down as little as 3.5%.
By putting down so little money, it makes it much easier to buy your own home. You can save that money to fix up the property.
#6 Acceptable Debt to Income Ratio
FHA has flexibility on your debt to income ratio to be approved for a home loan. However, you will need to have a front-end ratio – just your total monthly housing debt payments – that do not exceed 43% for those with under a 580-credit score. If you have a score above 580, you should be able to have a higher DTI in many cases.
You may be able to qualify for a higher DTI if you have more down payment, a higher credit score, or higher cash reserves.
You can probably get approved for an FHA loan if you follow the above guidelines carefully, and enjoy the American Dream in 2018!