For over eighty-three years, American consumers have been buying a home with FHA loan financing. People who have less than stellar credit may be under the impression that they have to wait until they have 740 credit to buy a home. This is not true. Of course, there is no charge to complete an FHA loan application today. The Federal Housing Administration does not allow up-front FHA applications fees and there is never a penalty for paying off a FHA insured mortgage early. In this guide, we’ll outline specifically how to apply for a FHA loan without spending a dime on mortgage applications or lender quotes.
Learn Why So Many People Apply for FHA Loans to Refinance or Purchase a Home in Today’s Lending Market.
Today, there are options for people who have average to poor credit to buy their own home. With the advantage of government-backed mortgages such as the “FHA loan”, it is possible for borrowers with low-credit scores to buy a home. One of the main reasons that the Federal Housing Administration has a strong reputation in the lending community is that FHA loan qualifications are often more easily obtained.
The rules changed in 2018 for home buying with a FHA mortgage so take a few minutes and learn about the changes that could potentially impact the loan process.
Banks and mortgage lenders have simplified and automated the FHA loan application process, so borrowers can get approved quicker than in the past.
9 Reasons to Apply for FHA Loans This Year
The home buying market continues to roar in 2018 and many consumers are excited to stop paying rent this year. One of the first steps is to apply for FHA home loan financing so let’s explore the opportunities. Here are some great reasons to call your mortgage lender today and apply for FHA loan programs:
#1 Your Credit Can Stink
That is putting it a bit harshly, but why beat around the bush? One of the biggest reason you should submit a FHA home loan application is that you can have bad credit. In fact, it is feasible this year to find an FHA loan with a terrible score of 500. It is not easy: Of course, even with a bad-credit FHA mortgage, You have to show the direct endorsed underwriter that you are able to pay your bills and can afford the mortgage. You may be turned down by several approved FHA lenders, but it is possible to be approved with a 500 score.
If your score is 580 or higher, things get a lot easier. Borrowers who have a score in the 600’s are more likely to be approved. HUD Approved lending companies want to see that you have been paying your bills regularly for the last year or so, and have the income to pay the mortgage, before applying for FHA loans with poor credit. Check today’s FHA credit score requirements.
#2 You Can’t Find a Lower Down Payment Outside of FHA Finance Loans
After credit, the next biggest obstacle to buying a home today is the down payment. The days of 100% financing loans are long behind us, mostly. There are two exceptions:
- The VA home loan – 100% house financing is available for some military veterans and active military borrowers that meet the VA eligibility requirements.
- The USDA loans – if you buy a home in a USDA-designated rural area and have ‘low’ income and poor credit, you may get a 100% financing-loan.
But other than those two exceptions, the down-payment for FHA loans have the lowest requirement around. If you have a credit score of 580 or higher, you may qualify for just a 3.5% down payment. How many people can’t afford a 3.5% down payment? On a $200,000 loan, that is only $7500. If you cannot afford that, we would argue you probably shouldn’t buy a home anyway.
The low down-payment on FHA loan programs remains one of the most attractive features for new home buyers. The 3.5% down-payment required is very reasonable for the average borrower in 2018.
With an FHA loan and a 580+ FICO score, you could put down as little as 3.5% down to buy your home. You would be very hard pressed to put down less money on a home today. Only VA and USDA mortgages offer $0 down-financing today, but not everyone will qualify for those types of government-backed loans. With limited credit and no mortgage payment history, applying for a FHA mortgage is a safer bet.
#3 FHA Interest Rates Are Historically Low
In 2018 rates on FHA loans continue to hover in the low 4% range. Even though the Federal Reserve hiked its key interest rates three times in the last year or so, mortgage rates have not gone up a great deal. Yes, the rates rose in early 2018, but President Trump’s economic plans are beginning to show progress. If Obamacare remains unstable then this could be a positive sign for interest rate trends. These facts have introduced some economic uncertainty in the markets. On the plus side, it has kept the lid on mortgage rates. The current-FHA rates are incredibly low. They are in fact usually lower than conventional loan rates.
It seems hard to believe that rates for a bad credit borrower can be under 4%. But FHA guarantees these loans against default. So to some degree, brokers and lenders can afford to risk giving loans to people who might not otherwise qualify. People who have bad credit might think that they are stuck with a high rate mortgage. FHA mortgages can be a serious lifesaver. Even with a credit score in the low 600’s, you may be able to lock in a very low interest rate.
The reason you can do this with bad credit is FHA loans are guaranteed by the US government. Default on your mortgage, and the government pays off the lender. It is to the mortgage company’s benefit to offer more flexible credit terms to bad credit borrowers in this situation.
It may be possible in 2018 to still get an FHA loan rate in the 4% range according to Zillow reports, and this could be even lower than conventional interest rates. That is a great deal for a borrower with a sub-par credit score. FHA loan qualifications are more attainable than at any time of the last decade. Check for fixed and adjustable rates that are available on most FHA mortgage programs.
There are FHA loan lenders standing by, ready to help you qualify for a FHA loan that gets you into the home of your dreams.
You can get either a fixed or adjustable rate mortgage, depending upon your financial situation and risk tolerance. You do not have to get a fixed rate if you would prefer an adjustable five or seven-year mortgage. This can save you a good deal of interest. Not all government finance programs offer such a wide variety of mortgage terms. The ARM’s ranging from one to seven years and the fixed amortized options offer the choice of a fifteen or thirty-year term.
#4 FHA Loans Can Be Assumed
Not only are FHA loan limits high, but FHA home loans are assumable as well. This is a little benefit that most people do not know about. An FHA loan can be assumed by another borrower. When it is time to sell your home, your assumable FHA loan can be taken over by another borrower, as long as they qualify.
FHA and the Power of the Assumable Home Loan: Many people are well aware of the major benefits of the FHA loan, but there are other benefits that do not get as much press. If you are thinking of buying your own home in 2018, you should become familiar with both the well known and less well known benefits of the FHA loan program. One of the most underrated benefits of the FHA loan program that many people don’t know about is the fact it’s an assumable loan. Yes, it is a very unusual benefit of FHA financing is that it can be assumed. This means that when you sell your home, your buyer can ‘take over’ your FHA loan if they qualify.
Why would people want to take over another party’s loan? Because interest rates change. As of 2018, interest rates on 30-year, fixed rate FHA loans are at or below 4%. It is not likely that rates are going to be this low forever. The Fed continues to slowly ratchet up its key interest rate. As the economy picks up steam in the Trump administration (hopefully, if the Congress passes tax cuts), we can assume that interest rates in the next five years will be higher than today.
If you decide in five years to sell your home, and the rates are 1% higher than right now, your potential buyer may be able to assume your FHA loan. In a 5% rate environment, that buyer may be able to get a 4% loan. Now that is a great deal! The assumable loan feature would make it easier in theory for you to sell your home in a rising rate environment.
This isn’t a big deal in a low rate environment sometimes. But if rates spike in the next five years, having a super low sub-4% rate could help to get your house sold fast. Don’t underestimate the value of having an assumable mortgage insured by the FHA. Can you imagine if you took out a FHA loan at fixed 4% rate and three years later you went to sell your home and the competitive interest rate was 7%? In theory, this could provide you a serious asset when negotiating with the perspective house buyer. Most mortgage programs in today’s marketplace are not assumable, so the fact that FHA loans are assumable is a very significant benefit in the right situation.
When you sell your home, the mortgage company would need to qualify the new buyer and approve them for an FHA loan. When the house sells and the loan closes, the buyer would assume the obligations of your assumable FHA mortgage.
Another advantage of an assumable FHA loan that many do not know is that this arrangement avoids most closing costs on a new mortgage. Every time a new mortgage is issued, there are thousands in closing costs. Assuming a mortgage means most of these fees are avoided.
Having the ability to assume a FHA house loan is especially valuable, experts say, for those who sell their home from three to seven years from when they bought it. Under three years, it is unlikely that rates will be much higher than now. After seven years, the benefits of an assumable loan are reduced because you have paid down more of the mortgage, and home appreciation also is a factor. Still, being able to assume a FHA mortgage is a major advantage worth knowing when you are applying for a FHA home loan.
#5 You Can Have Foreclosures or Bankruptcy and still Qualify for FHA Loans
One of the most persistent myths in the home buying and mortgage world is that you cannot buy a home for seven years after a foreclosure or bankruptcy. We wish that we could bury that myth once and for all, but it continues to rear its head every day!
Here’s the truth: If you have a foreclosure and/or a bankruptcy on your record, it is true that it will stay on your record for seven years, most likely. After seven years, it will drop off your credit report (if it does not, you should contact the credit bureaus and ensure that it does drop). But there are many mortgage companies that will give you a home loan with these black marks on your record. In FHA’s case, you may get a loan in as little as one year after a bankruptcy or foreclosure. But two years is more common.
FHA will want to verify that your finances have recovered and you have the means to pay your mortgage. But it is certainly possible to get approved for a FHA loan with these black marks on your credit report.
#6 Streamline Refinance with FHA Loans If Rates Fall
FHA has a great feature called the FHA-streamline. If the rates drop, you may have the option of doing a simple refinance into a lower rate. You cannot pull out cash, but you can get into a lower rate mortgage with a streamline refinance. There is no credit check or income verification, and you can even use your old appraisal.
As long as you have paid your long on time for at least the last six months, you may be eligible to refinance with a FHA streamline and save big on your monthly payment. Verify that you already have a mortgage insured by the Federal Housing Administration and then complete an application for a FHA streamline loan.
#7 No Income Limits on FHA Loans
FHA loan programs continue to be advertised with their low rates and down payments are available to people with both low and high incomes. Some special loan programs out there have maximum income limits that means many working-class buyers are locked out. Unlike, the USDA program, FHA loans are available for all income ranges.
#8 Gift Payments OK with FHA Home Loans
Do you not have enough cash for your down payment? FHA allows you to get all of your down payment from the gift of a family member or friend. So, in theory, you could get into a home with no money down. It is very common to get help from family and friends when you a buy a home, and not all finance programs allow borrowers to use gift-funds as the source of a down-payment. This is another amazing benefit of buying a house with a FHA loan this year.
#9 Flexible Debt to Income Ratios on FHA Loans
FHA has very flexible criteria for your debt to income ratio. They want as many people as possible with sufficient income to be able to buy a home. At this time, FHA wants to see a front-end ratio of 31%; this means that your payment for mortgage principal, interest, taxes and insurance should not exceed 31% of your gross monthly income.
For back end ratio, FHA wants to see 43%. This means the total sum of all of your monthly debt obligations should not exceed 43% of your gross income. FHA underwriters have the discretion to to approve a FHA application even if you to have higher debt-to-income ratios. In most instances, the FHA underwriter will expect you to have good credit or require you to put more money down.
The Silver Lining with FHA Financing
If you are considering buying a home this year, we suggest you apply for FHA loan. The U.S. Congress and the Department of Housing Development have come together to make sure that there are great deals in 2018. You should certainly submit a FHA loan application and check with your mortgage lender today to see if you can qualify.
How to Qualify for a FHA Loan with a Competitive Rate in 2018
Like any mortgage, there are a lot of steps that applicants need to take to submit a FHA loan application successfully to qualify for a FHA loan with a competitive interest rate with reasonable lending fees. No home financing process would be considered fun, but the Federal Housing Administration has made an effort to simplify the process while making it as painless as possible. We suggest that applicants get organized and have their income documentation, completed residential loan application and letters of explanation for employment gaps and credit blemishes prior to shopping for rates and FHA lenders. Most FHA mortgage companies are looking for 2 years of employment history, 2 years of income, multiple trade lines without late payments on the credit report, bank statement indicating you can afford the FHA down-payment requirements and a rental history for the last 12 months. FHA Underwriters like to verify that the loan applicant was able to pay their rent on time every month.
Basic Standards to Be Approved for a FHA Loan Program:
- Mortgage Insurance Required – FHA requires monthly mortgage insurance. Premiums range from .85 to 1.35% of the FHA loan amount for the life of the term of the loan.
- Credit – The minimum credit score is 500, but down-payment requirement ranges from 5 to 10% The minimum fico score is of 580 with a 3.5% down-payment.
- Down-Payment – The minimum an eligible borrower must come up with is 3.5% and the source of funds must meet underwriting requirements.
- Income – Direct Endorsed Underwriters are looking for applicants with debt to income ratios below 45%.
- Pass CAIVRS – FHA requires that borrowers clear the Credit Alert Interactive Verification Reporting System. Essentially, this is a background check that verifies the applicant is not delinquent or in default on government-backed financing such as, the FHA, VA and USDA.
- Property Eligibility – Properties allow 1-family units and be considered “marketable” and meet federal and/or state building codes. The FHA approved properties may include condos, town-homes, duplexes and 1-family homes. In some cases, FHA financing is available for home buying or refinancing manufactured house. HUD also requires that FHA loans be used specifically for primary residences.
Top 6 Reasons Not to Choose a FHA Loan Program
Getting a home loan in 2018 could be easier than ever, due in part to FHA loan products. FHA financing is guaranteed by the Federal Housing Administration if you meet the HUD and lender mortgage requirements.
They feature low interest rates, down payments of 3.5%, and they allow for credit scores as low as 500.
A credit score of only 580 is needed for the lowest FHA loan down payment.
As great as the FHA program is, not everyone should apply for FHA loans. If you are in the market for a home loan, here are some good reasons you may not want to choose an FHA loan:
1. FHA Loans Have Mortgage Insurance Premiums
To pay for the FHA guarantee of the loan in case of default, all FHA loans have mortgage insurance premiums. Each borrower is charged an annual MIP of as much as 1.35% of the loan balance, but it can be less. This fee is added to your monthly mortgage payment. You also have to pay a 1.75% upfront fee, which can be added to the balance of the loan.
So, if you get a $200,000 loan, you will pay approximately $150 per month for your mortgage insurance, plus an upfront fee of $3500. If you keep the loan for 10 years, this would cost you about $30,000 in mortgage insurance costs.
This is a good deal more than what a borrower pays for PMI on a conventional loan.
Also note that most FHA loans today require you to pay mortgage insurance for the life of the loan. This is the case for most loans closed after July 3, 2013. If you put down more than 10%, you can cancel MIP after 11 years, however. After a while, homeowners grow weary of paying mortgage insurance every month, especially when you build up equity in your home.
2. You Have Enough Money for a 20% Down Payment
One of the most common reasons that people get an FHA loan is that they don’t have enough money for a large down payment. FHA loans can have a down payment as low as 3.5%.
However, if you have enough money to put down 5%, 10% or even 20%, you should consider a conventional loan if you have good enough credit. There is no reason that you should be paying for mortgage insurance with an FHA loan if you have a 20% down payment.
If you have more than 3.5% to put down but less than 20%, you still should consider a conventional loan. Mortgage insurance costs less with a conventional loan, and it can be waived once you reach 78% LTV with a conventional loan. Most FHA loan approvals must have mortgage insurance for the life of the loan.
3. You Have a Credit Score of 620 or Higher
The minimum credit score for a conventional loan will vary considerably based upon the lender you select. Some conventional lenders in 2018 will consider you with a 620+ credit score, while others want to see a 680+ credit score.
Generally, if you have a credit score above 680, we recommend that you look at conventional loans. FHA loans are best suited for people with credit problems, and credit scores below 620.
4. You Don’t Have Any Major Negative Credit Problems
FHA loans are fantastic for borrowers who have had a recent foreclosure or bankruptcy. These borrowers may be able to qualify for an FHA loan after only a year or two from a bankruptcy or foreclosure.
If you have not had this type of negative credit event, you should probably think about a conventional loan. People with good credit above 700 and no major negative credit history are good candidates for a conventional loan.
5. You Have a Debt to Income Ratio of 30-40%
The DTI or debt to income ratio is used by lenders to determine how much of your income is being used just to pay debt. The higher your DTI, the more likely you are in too much debt.
Conventional lenders like to see a DTI of less than 30%, but 30-40% is possible. FHA loan lenders can allow DTI up to 50%. This means that your total monthly debt payments cannot exceed 50% of your gross monthly income.
6. You Have a Higher Income
FHA loans are often very suitable for people with a lower level of income. If you have an income above $100,000 per year in your house, a conventional loan could be better.
FHA has very good loan programs that are suitable for many Americans today. But FHA insured loans are not the best choice for some borrowers. FHA loans cost more than conventional loans, so there really is no point to choose FHA financing if you can qualify for a conventional loan.
Also note that there are some conventional loans available today with a down payment of 3-5%. So, we recommend that better credit and higher income borrowers first look at conventional instead of FHA loans.
Expert House Buying Analysis with FHA Loan Financing
Many first time and low credit score home buyers opt for an FHA loan. The FHA program is backed by the Federal Housing Administration. It offers buyers a low-down payment, low interest rate mortgage loan. It is often the best choice for the borrower who does not have a lot of cash to put down and has had past credit issues. If you are considering buying a home with an FHA loan, below is what you need to know to do your house buying analysis with FHA mortgage financing.
What is the Down Payment Requirements for an FHA Loan?
One of the biggest assets for the FHA program is that you only have to put down as little as 3.5% when you buy your home. Many conventional programs require a down payment of 20%.
Many lower income borrowers, especially first-time home buyers, cannot afford that type of down payment. The FHA loan provides the chance to get out of renting and buying your own home with only 3.5% down. To get a 3.5% down payment through an FHA loan, you must have at least a 500 FICO score, and it is better to have a 580 score or higher.
FHA Limits on Income
There is no income limit with an FHA loan program. The program is available to people with higher incomes who have credit problems. Other competing programs, such as the innovative 1% down program available through Quicken Loans, only allow you to have an income that is no higher than the median income for your area. If you have an income above the median for your area and bad credit, you may want to consider an FHA loan.
There are some requirements however to qualify for this program beyond a 500-credit score:
- You must have at least two credit accounts established, such as a credit card and a car loan. If you have no credit history at all, you cannot qualify for the program.
- You cannot have any late federal tax payments or judgments. It is fine to have a payment agreement with the IRS, but you have to be current on your payment plan.
- If you are getting the down payment as a gift, you have to have a separate bank account to accept that gift.
Update FHA D.T.I. Requirements
The FHA program allows you to have a higher debt to income or DTI ratio than some programs. Your maximum DTI cannot be above 50%. This means that the sum of all monthly debt payments cannot be more than 50% of your gross monthly income.
Understanding Debt to Income Ratio and Residual Income Requirements with FHA Loan Programs
The FHA loan is a great option for home buyers who have lower credit scores, less money to put down, and higher debt to income (DTI) ratios. People who have difficulty getting a conventional home loan with their higher credit and DTI standards may be able to stop paying rent much sooner if they can be approved for an FHA loan. But even though FHA loans have quite flexible approval requirements, there are certain standards that you must met.
One of the most important for an FHA loan is your DTI ratio. When you submit your application, the FHA-approved lender will review your DTI ratio to see if you can be approved for the loan. If you have too much debt compared to your income, you could be turned down. On the other side, if you have a reasonable amount of debt, you probably can get approved.
As of this year, the DTI ratio for FHA loans is 31% for your house related debt, and 43% for your total debt. This means that your total mortgage related debt each month compared to your monthly income cannot exceed 31% of your gross. For the other ratio, your total debt payments each month cannot exceed 43% of your gross monthly income. Fortunately, FHA lenders do have some flexibility in approving people who have slightly higher ratios. It depends upon the lender and your individual application.
Compensating Factors to Consider When You Go Online and Apply for FHA Loans to Buy a House
HUD gives FHA loan lenders some leeway to give the green light to borrowers with DTI ratios above the ones mentioned earlier. If the lender can show that you have significant compensating factors, it is possible to be approved with a higher Debt to Income ratio.
Below are some of the common compensating lending factors that may get you approved:
- Down payment: HUD requires you to make at least a 3.5% down payment to buy a home with an FHA loan. Making a down payment that is higher than the minimum could allow you to have a higher DTI ratio. For example, if you can put down 10%, you may still qualify for an FHA loan even if your DTI ratios are above 31% and 43%.
- History of payments: If you have been successful in making mortgage payments in the past that are the same or greater than your new proposed loan payment, you may still get approved.
- Savings: If you have a conservative attitude towards using credit and have savings built up, your DTI could be less important. You should have a few months of mortgage payments in reserve here.
- Decent credit: You can apply for a FHA loan with a 500-credit score, but if you have high DTI, you should have a credit score in the mid to high 600’s at minimum.
- Small increase: If the loan that you want to get will only cause a small bump in your monthly housing expense, you may still qualify for the loan.
Note that you do not have to meet all of the above to apply for a FHA mortgage with a higher than average DTI ratio. If you have one or two of these compensating factors, this could be enough to get an approval.
Limits on FHA Loan Amounts
There are limits on the value of the property you buy. For homes in lower cost areas in 2018, the maximum value is $275,600. For high cost areas in California, the maximum is $636,100. It is imperative to know what the maximum FHA loan amount is before making offers on a property. If your home is above the maximum amount for your area, you cannot use an FHA loan. See what FHA limits are in your region.
Property Requirements for FHA Loans
Some of the requirements for a property bought with an FHA lien are:
- The property must be your primary residence, so no investment properties are allowed. The only exception is a duplex, triplex or quadplex. In those cases, you can use an FHA loan for the purchase and live in one of the units yourself.
- The property is not allowed to be a flip; this means that you cannot purchase the home within 90 days of a sale.
- You have to take title to the property in your name; you also can take it in the name of a living trust.
- You must occupy the home within 60 days of closing.
- The home has to be appraised by an appraiser approved by FHA. The home must appraise for the amount being borrowed or more, and also must meet the minimum quality standards of FHA.
FHA Documentation Requirements
If you want to apply for a FHA loan, you have to have proof of your SS number and also have pay-stubs, tax returns and W-2’s. The self-employed will need tax returns and a profit and loss statement.
Factoring In FHA Loan Costs and Fees
Yes, there are hard costs involved with FHA loan financing that the borrower is required to pay prior to escrow closing. These FHA costs include lender fees, home inspection fees, appraiser costs, prepaid interest, and in some states, attorney fees. Most of the FHA loan programs allow lenders, brokers banks and home sellers to pay some and in many instances, all the home buyers closing costs. Ask your FHA loan lenders what is permitted in your state with your proposed purchase.
Requirements for Approved FHA Lenders
FHA insures the loan, but the lender makes the final call on whether to grant the loan. The lender can have higher and stricter requirements than FHA. For example, FHA has a 500-minimum credit score requirement, but your FHA finance company may require a 620-credit score. You have to find a lender who is willing to work with you based upon your credit score.
How to Decide If an FHA Loan Is Right for You
The FHA program is ideal for the lower income borrower who cannot put a lot of money down. This is a great program for the first-time buyer who does not have equity in another property. It also works well for buyers with credit problems.
Traditionally, FHA loans have very annual percentage rates, but remember there is a cost. Every FHA borrower has to pay expensive mortgage insurance premiums. You must pay an upfront mortgage insurance premium when you buy the home. You also need to pay a yearly mortgage insurance premium as part of your monthly payment.
Whether this is a good program or not for you comes down largely to the mortgage insurance requirement. The insurance on FHA loans remains pricey. If you have more to put down than 3.5% and have a 680-credit score, you may be better off getting a conventional loan with lower mortgage insurance costs.
FHA loan qualifications also require you to pay mortgage insurance for the entire length of the loan, even after you reach 20% equity. The only exception is if you put down 10%; in that case, you can cancel MIP after 11 years.
Borrowers with higher credit scores who can put down at least 5% may want to opt for a conventional loan because of the lower mortgage insurance cost. You also can cancel PMI as soon as you reach 78% LTV.
What If You Are Rejected for a FHA Loan Application?
It is easy to get an FHA loan in 2018; that is one of the reasons the FHA loan is so popular with people with past credit problems. If you have difficulty being approved for a conventional loan, an FHA loan is your best bet. Why is this? FHA loans are backed by the Federal Housing Administration. This means if you do not pay your mortgage, FHA will reimburse the lender. So lending standards are more flexible with FHA loans, including down payment, debt to income ratio and credit score. But as easy as getting an FHA loan is, people are still turned down. Below are some of the common reasons to be rejected for an FHA loan, and what to do.
#1 Not Enough Saved for the FHA Down Payment
FHA applicants need to have at least a 3.5% down payment to buy a home. If you do not have that much, you generally cannot get an FHA loan. The other option is to get the down payment from a friend or relative as a gift. But absent that, you cannot get an FHA loan without at least 3.5% down.
If you come up short on down payment, you have two basic options: Wait until you have the money saved or get a smaller and/or less expensive home so you need less money to put down.
#2 You Don’t Have Money for Closing Costs
The down payment is part 1 of the money you will need to get an FHA loan. You also must pay closing costs; this can add up to as much as 5% of the loan amount in some cases. FHA will allow the seller to contribute some closing costs, but you will still need to come up with closing costs yourself.
It is getting harder to rely on sellers to help buyers out with closing costs; the demand for houses is high in much of the country. It is unlikely but possible that a seller will contribute to closing costs in 2018.
Another option is to look at a no closing cost loan. This type of loan will either roll most closing costs into the loan, or will charge you a higher interest rate. This type of loan can be worth doing, but if you are going to stay in the home for many years, you will pay a lot of interest on those closing costs as well as with the higher rate.
#3 You Have a Lot of Debt
The debt to income ratio for an FHA loan is flexible; it is possible to have a debt to income ratio as high as the high low 40s or even 50% in some cases. The lender will look at what your gross monthly income is and compare it to your mortgage payment as well as the payments for all other debt each month.
Many buyers will need to have a DTI of 43% unless they have major compensating factors such as more money down. If you have a DTI too high, you could be denied.
Fixing this is simple. Either increase your income, decrease your debt or do both.
#4 Your Credit Score Is too Low
FHA lenders have flexible criteria, but if your score is too low, you can be denied. FHA says the bare minimum credit score is 500, but few people are approved with a score that low. You will usually need a credit score of 580 to be approved by very many lenders. 580 is also the minimum score for a 3.5% down payment.
Also, if you have a FICO score below 620 and DTI above 43%, your file will be more rigorously vetted in underwriting.
You can boost your credit score by paying your bills on time, reducing debt, and not making any new inquiries on your credit report for a year.
#5 You Had a Foreclosure This or Last Year
If you had a foreclosure in the past two years, you will probably be turned down by FHA. At least two years need to have passed, possibly three, and, you need to show you have reestablished your credit. This means paying your bills on time, including utilities, credit cards, student loans and car payments.
If you just had a foreclosure, you might need to keep renting for another year. But don’t worry: If you wait at least two or three years and show you are reestablished with your credit, you can probably get approved next time.
What Are Direct endorsed Underwriters looking for to sign off on FHA loan applications?
How does an Underwriter Determine Income on a FHA Mortgage Loan?
FHA loans are a good option for home buyers with lower income, credit scores and down payments. While you have to prove that you have the income to make your mortgage payment, the income required by FHA underwriters is more reasonable and flexible than the standards used for conventional loans. One of the first things that the FHA underwriter will look at is your gross monthly income. This is the total income you and any co-borrower earns in a month. The major basis for the loan approval or denial is based upon the gross monthly income the borrowers have. This is all of the money earned in a month before taxes, and includes commissions, overtime, dividends, etc. You are required to show that this income has been approximately stable for the past two years.
Your monthly housing cost is called your housing expense or front-end ratio by the FHA underwriter. The underwriter generally is looking for a front-end ratio of 29% on your monthly housing payment. Remember that this 29% includes mortgage principal and interest, property taxes, mortgage insurance and homeowner’s insurance. So, if you have a gross monthly income of $5,000, your new monthly mortgage payment should not exceed $1,450 according to typical FHA underwriter guidelines.
However, FHA understands that some people may need to stretch a bit early in their lives as home owners, especially when they are first time buyers. Many people’s incomes rise as they get older and gain experience. So, FHA loan guidelines allow for some borrowers to spend up to 35% of their monthly gross income on their mortgage. That is, as long as everything else in the application looks reasonable. This means you have an acceptable down payment, credit score and financial stability to have your FHA loan application approved.
FHA also will look at your current housing expense compared to your projected housing expense when you have a mortgage. If you have had no trouble paying for your current rent of $1,450 per month, you should not have any problem paying the same for your new loan payment. If your current rent payment is higher than $1,450, this makes your loan application even stronger. The FHA underwriter will then look at your back-end debt ratio. This is the total of your monthly debt expenses compared to your gross monthly income. The current limit for the back-end ratio on FHA loans is 43%. You could be approved with a higher back end ratio if you can show that you have more cash reserves or will make a higher down payment. Having more money down will reduce your monthly mortgage payment.
FHA Income and Work Requirements
The underwriter must see that you have income stability to approve the loan. The financial sector meltdown of a decade ago was largely fueled by no doc and stated income loans that did not carefully verify what people’s true monthly income was. The major criteria for these loans was a strong credit score. Many people who claimed a certain income actually made less and were counting on a refinance and pulling out cash to keep afloat as long as property values were rising. When values stopped rising, people could no longer refinance, and they defaulted on their loans.
Today, you must have proof of income to get most mortgage loans in the US. The underwriter will want to see your tax returns for the past two years. He also wants to see your pay stubs for the past two months. If you are self-employed, getting a loan is not a problem. But you need to show stable income for the past two years within 10-20% of your current income and must have a current profit and loss statement for the quarter. If you are able to prove your income has been stable for the past two years, you should have a strong chance of approval. It also is very desirable to have been in the same job for the last two years, or at least the same industry.
The bottom line is you need to meet FHA standards on debt and income today, and this must be proven with financial documentation. But FHA loan standards are quite flexible, so your FHA underwriter can often work with you to get your FHA loan application, so you can buy your home.
The Bottom Line When Applying for a FHA Mortgage
Getting an FHA loan is easy, but the above factors can stop you from getting approved. But once you have at least a 580 FICO, reasonable DTI and have waited at least two years after a foreclosure, you should be able to get approved by FHA for your loan.
FHA in the News:
As FHA capital reserves dwindled in 2017, many housing industry sectors began questioning whether mortgage insurance rates would be lowered in the foreseeable future. Will Trump or HUD Reduce Insurance Premiums on FHA Mortgages?
According to Zillow Senior Economist Aaron Terrazas in a press release, “Mortgage approval data point to both progress and stubborn inequities in the American housing market.” Getting qualified for a FHA mortgage is an important part of the home financing equation. Read FHA Loan Denials in 12 Cities Across the USA from the National Mortgage News.
FHA mortgage companies approved financing to about 9,500 ineligible borrowers with delinquent federal debt or child support. FHA Admits to Errors When insures $1.9B in Loans to Delinquent Borrowers