Sheltering our growing families or investing early for our future are just two of the admirable reasons why we dream of owning a home.
The mortgage industry has definitely prepared for this need, providing different types of mortgage financing.
This is where an FHA loan comes into play.
Because a home is one of the most expensive investments you will ever make in your lifetime, we will help make applying for an FHA loan a little easier for you.
Read on to know the FHA loan credit requirements, rates, limits, eligibility, and closing costs so that you will be better equipped with the knowledge in applying for an FHA loan to know if it’s the best option for your mortgage.
FHA Loan Application Requirements
The Federal Housing Administration, a government agency, provides mortgage insurance on loans made by FHA-approved lenders.
FHA.com, an online publisher of timely news and information pertaining to home mortgage products outlined the FHA Credit Requirements for 2020 which includes:
- FICO Score and Credit Requirements If you are applying for an FHA loan, the minimum FICO score is 580 for a low down payment advantage of 3.5%. However, if you have a credit score below 580, you will have to pay a down payment of 10%. There are a number of lenders who require a 620 credit score in order to qualify for an FHA loan since the FHA cannot force lenders like banks to lower FICO requirements. In this situation, you can call the FHA for assistance at 1-800 CALL FHA to talk to an FHA-approved counselor who can teach you how to raise your credit score. Your credit score considers your payment history, amounts owed, length of credit history, your credit mix (credit cards, retail accounts, installment loans, finance company accounts, mortgage loans), and your new credit. Credit performance that will have a negative effect on your loan eligibility include:
- No Credit History
- Late Payments
- Collection, Judgements, and Federal Debt
- Down Payment AS mentioned earlier, if you have a credit score above 580, the required down payment is 3.5%. But with a credit score below 580, you will have to pay a 20% down. But, don’t worry if the down payment is a financial challenge for you. Applying for FHA loans also comes with down payment assistance programs that require you to complete homebuyer education courses. These programs provide financial help in the form of:
- Non-repayable grant
- Forgivable loan
- Low-interest loan
- Family member
- Employer or labor union
- A close friend with a clearly defined and documented interest in the borrower
- A charitable organization
- A government agency or public entity with a program providing homeownership assistance to low- or moderate-income families and first-time buyers
- Loan Limits or FHA Lending Limits The FHA calculated the maximum loan amounts (calculated and updated annually) depending on the state where you will be purchasing a property and the type of home you are buying. For Low-Cost Areas, the 2020 FHA Limits are:
- Single – $314,515
- Duplex – $403,125
- Triplex – $487,250
- Four-plex – $605,525
- Single – $726,525
- Duplex – 930,300
- Triplex – $1,124,475
- Four-plex – $1,397,400
- Debt-to-income Ratio The FHA requires a DTI of less than 50 which means you should not be spending more than 50% of your pretax income in paying total monthly debts.
- Property Appraisal The FHA requires that the home you will be buying meets all the FHA home requirements and safety standards including rules and regulations in your state. FHA requirements for property approval are:
- Mortgage Insurance If you pay a down payment less than 10%, you will have to pay mortgage insurance upfront (equivalent to 1.75% of the loan amount) which can be rolled into the total amount of the loan, together with monthly payments throughout the life of the loan. If you paid a 10% down, you will only be required to pay mortgage insurance for 11 years.
- Closing Costs There are allowable closing costs that you can be charged with when you are applying for an FHA loan. The specific costs and amounts will vary and are determined by each local FHA office. Check the fees that FHA allows lenders to charge borrowers to make sure that you are not being ripped off.
FHA Loan Application Requirements and Process
Applying for an FHA loan follows the process required by other mortgage loan applications which include meeting the above-mentioned requirements on credit score, down payment, and closing costs.
You should be ready to comply with all the necessary documentation or paperwork. The only significant difference in the process of applying for an FHA loan with other types of loans is that the mortgage broker must be authorized to make FHA loans.
When you have met all the requirements and submitted the necessary documentation, the mortgage lender’s underwriter will analyze your paperwork and income to determine if the loan is sound.
Once the underwriter decides that your FHA loan application is sound, having met the FHA and your lender’s guidelines, you can move on with the closing process and then receive financing.
Find an FHA-approved Lender
The first you will want to do when you are searching for an FHA-approved lender that can provide you with an FHA financing is to search through the HUD website for FHA-approved lenders in your area.
Choose several lenders in your area who offer the best rates and terms. Ask them questions that will reveal their level of experience with FHA loans.
You can apply for an FHA loan with more than one lender so you can determine the right FHA lender that will meet your home financing needs.
To learn more about FHA loans and other types of home loans, talk to us at Sprint Funding.