Reader question: “I have heard that FHA home loans are perfect for home buyers who don’t have a big down payment saved up, which is the situation I am in. Is this true? Secondly, how can I find out if I’m qualified for an FHA loan in 2015? What are mortgage lenders looking for these days, in terms of qualifications?”
You have heard correctly. A mortgage loan that is insured by the Federal Housing Administration (FHA) allows for a down payment as low as 3.5% of the purchase price. Conventional home loans on the other hand typically require 5% – 20% down, depending on the lender. This is what makes the program so popular among home buyers with limited funds, like yourself.
So, on to the next question: Are you qualified for an FHA loan in 2015? To answer this question, you’ll have to apply for the program through an approved lender (more on this later). That’s the only way to find out where you stand.
With that being said, I can tell you what most lenders are looking for these days. You might be qualified for an FHA loan if…
- You have a credit score of 600 or higher (620+ is even better). Learn more here
- You can afford a down payment of 3.5% of the purchase price or appraised value, whichever is less.
- You have steady and stable income to cover your monthly mortgage payments.
- You have a manageable level of debt that does not exceed 45% of your gross monthly income.
If you check all of the boxes above, there’s a pretty good chance you are qualified for an FHA loan. But again, the only way to know for sure is to apply for the program. Let’s look at each one of these items in more detail.
Are You Qualified for an FHA Loan in 2015?
The first thing you need to realize is that the FHA does not lend money to borrowers. They only insure the loans made by “regular” lenders such as Wells Fargo, Bank of America, local banks, etc.
This is important, because it means you have to meet two sets of standard. You need to be qualified by the FHA’s standards, as well as the mortgage company’s standards.
Additionally, there is no “magic formula” used by all lenders when qualifying applicants. They use their own in-house guidelines, and these can vary from one company to the next. For example, one lender might reject a borrower for having too much debt (based on their own guidelines), while another lender approves that same borrower based on the bigger picture. It varies.
I offered a quick overview of debt, down payment, and credit guidelines above. Here’s some more information about those criteria. Are you qualified for an FHA loan in 2015? Consider the following:
- Good Credit — According to the Department of Housing and Urban Development (HUD), you could be qualified for an FHA loan with a credit score as low as 500. That’s the official cutoff for the program. But most lenders will want to see a higher score. Remember the two sets of standards we talked about earlier? This is one of the places where they come into play. In 2015, most lenders will be looking for a credit score of 600 or higher for FHA borrowers. But this is not set in stone.
- Manageable Debt — HUD also has certain requirements for debt. In short, borrowers should have a total debt-to-income ratio no higher than 43%. This means your total monthly debts (including your mortgage payment) should not use up more than 43% of your gross monthly income. But there are exceptions to this general rule as well.
- Steady, Sufficient Income — The lender will review your income-related documents, such as pay stubs and tax records, to ensure that you have steady and stable income every month. You need to earn enough money to cover your monthly payments, with a debt-to-income ratio that falls within their minimum guidelines (see previous item).
- Down Payment — You must have a down payment of at least 3.5% to be qualified for an FHA loan in 2015. There are no exceptions to this particular rule, as there are with some of the other criteria. This is a hard-and-fast rule. If you cannot come up with 3.5% down, you probably won’t qualify for the program.
Aside from the down-payment rules mentioned above, none of this is set in stone. There are exceptions to many of these guidelines, particularly in the area of credit scores and debt-to-income ratios. So don’t be discouraged if you fall short of any of these benchmarks. The only way to find out if you’re qualified for an FHA loan in 2015 is to apply for one. So let’s talk about that next.
Only One Way to Find Out: Apply
First-time home buyers are often intimidated by the mortgage application process. It’s understandable. A home purchase is typically the biggest investment in a person’s life. But the application is a necessary first step in the FHA process. It’s also the best way to find out where you stand in terms of qualifications.
Even if you don’t get qualified the first time around, you’ll at least find out what you need to work on (improving your credit score, reducing your debt, saving more money, etc.).
On the HUD website, you’ll find a list of lenders that are approved to participate in this program:
In closing, I would like to point out the difference between qualifying for an FHA loan and being able to afford one. Before you even start talking to lenders, you should put a monthly housing budget on paper. In particular, you should come up with a maximum amount you can afford to pay toward your mortgage each month.
Believe it or not, it’s possible to qualify for a loan that’s too big for you. That’s how people end up in foreclosure. So before you apply for financing, find out what you can realistically afford to pay each month. Stay within your budget, even if the FHA lender says you’re qualified for a higher amount.
Disclaimers: This article answers the question, Am I qualified for an FHA loan? This is just a basic overview of the application and approval process. Every lending scenario is different because every borrower is different. Qualification criteria vary from one lender to the next. This article includes general rules that are not necessarily set in stone. To find our if you are qualified for this program, talk to a HUD-approved mortgage lender.