Qualifying for a Federal Housing Administration (FHA) loan can be much easier compared with a conventional one. Borrowers will need a valid Social Security number, and be a lawful resident of legal age to be able to sign an FHA loan. Qualifying for a loan requires a minimum credit score of 500 in addition to a FHA-approved property appraisal and a favorable debt-to-income ratio.
- What are the Major Requirements for an FHA Loan?
- Changes to FHA Guidelines for 2018
- Guidelines for FHA Streamline Refinance
What are the Major Requirements for an FHA Loan?
Since FHA loans are backed by the government, requirements for loan approval tend to be easier than most other loan types.
Credit Score and Minimum Down Payment: Those who have a FICO credit score above 580 can get a loan with a 3.5% down payment. A lower score means your down payment will increase and lessens the chance you’ll find a lender that's willing to process your loan. For example, a score of 500 requires a down payment of 10%. If you want to lower your down payment, you may be better off waiting until you can bring up your credit score.
Income Requirements: There are no minimum or maximum income requirements to get an FHA loan, but you'll need to prove that you have an income and a steady employment history. As part of this requirement, you must have a minimum of two established credit cards or loans. You’ll also need to show that you have no delinquent federal taxes or debts. Finally, the FHA requires borrowers to account for any cash gifts that go towards the down payment. Such gifts must be verified in writing by the donor.
Debt-to-Income Ratio: Your total debt-to-income ratio should be 50% or less after including the new home loan. For example, if your gross monthly income is $2,500 and your monthly car payment is $500, then your FHA loan payment will come out to $700 and your debt-to-income ratio will be 48%.
Property Requirements: The property you intend on purchasing must be your primary residence and at least one borrower needs to live there within 60 days of closing. As well, this cannot be an investment property and you cannot flip the home, meaning you cannot purchase another house within 90 days. Before a loan can be approved, you’ll need an FHA appraisal on the property to assess its value and minimum property standards.
Mortgage Insurance: FHA loans require that borrowers pay a mortgage insurance premium of 1.75% of the loan amount. You can pay this upfront when you close on the loan or add the entire amount to your loan balance, increasing your monthly payment. You’ll also be required to pay an annual premium, which is paid out monthly. This amount depends on your loan term, how much you borrowed and your initial loan-to-value ratio.
Changes to FHA Guidelines for 2018
Forecasts predict that there may be higher loan limits in 2018, though that has not been confirmed. For now, maximum national loan limits are capped at $625,500 for single family homes in high cost areas and $275,665 for low cost areas. Keep in mind that maximum limits vary based on location. To get a more accurate prediction, enter your data in the FHA mortgage limits webpage. You can see the median sales price for a specific area to help determine loan limits.
Other requirements that remain the same include rates and mortgage insurance premiums. According to the FHA, lowering insurance premiums has been suspended or possibly delayed. For now, annual premiums for a 30-year loan are 0.85% for down payments under 5% and a 15-year loan is 0.70% for down payments lower than 10%.
It’s important to note that even though the FHA insures your home loan, the lender is the one who must approve your application and fund the mortgage. This means that different lenders may have different requirements on their loan limits, minimum credit scores and loan-to-value ratios. It’s best to shop around various lenders before you commit.
Guidelines for FHA Streamline Refinance
Streamline refinance is the ability to refinance an existing FHA loan. This process can lower both your mortgage rate and monthly payments, without the need for a rigorous qualification process. Its requirements are more relaxed than an initial FHA purchase loan because borrowers do not need to verify their employment, income or credit history. There’s also no need to go through a home appraisal to be approved for a refinance. However, lenders may have minimum credit requirements, though these may be less strict than for a first-time FHA loan.
To qualify, you need to currently have an FHA loan and have a good payment history. If your loan is less than 12 months old, you'll also need to have made all your payments on time. For loans older than one year, you cannot have been more than 30 days late on any of payment. And for any FHA streamline refinancing, you’ll need to show proof of on-time payments for at least three months prior to your refinance application.
Borrowers will also need to receive a net tangible benefit from refinancing their loan. This varies by lender, but the term generally means that you’ll need to have your monthly payments significantly lowered in order to qualify. For example, if you get your combined rate—interest rate plus insurance premium—down by 50 basis points with a fixed-rate mortgage, you may qualify for a refinance. Requirements for net tangible benefits vary depending on the refinance type, so it’s best to check with a lender to see if you qualify.