The new handbook for FHA loans took effect in September of last year, and it’s now the “law of the land” for the government-insured mortgage program.
Among other things, HUD Handbook 4000.1 outlines the basic eligibility requirements for the FHA program in 2017. Much of these requirements are the same as last year, with a few exceptions. Still, a little refresher is probably in order.
Here’s a quick look at the 2017 FHA eligibility requirements for home buyers in particular.
At a Glance: FHA Eligibility Requirements for 2017
Basic eligibility guidelines for FHA loans can be found in HUD Handbook 4000.1, the Single-Family Housing Policy Handbook. Home buyers / borrowers should refer to Part II, Section A, which covers everything from loan-to-value limits to income requirements. The handbook was written for lenders primarily, but it’s fairly readable from a “layperson” or borrower’s perspective.
Generally speaking, FHA loans are available to borrowers who have credit scores of 500 or higher, and a down payment of at least 3.5%. Those are HUD’s primary requirements. But mortgage lenders can, and often do, set their own guidelines as well. And sometimes the lender’s standards can be higher than those established by HUD. It varies from one mortgage company to the next.
Down Payment Requirements
The minimum down payment for an FHA loan is 3.5%. It has been at this level for the last few years. In order to qualify for the 3.5% down payment, borrowers must have a minimum “decision credit score” of 580 or higher. According to HUD, borrowers with scores between 500 and 579 are only eligible for a loan-to-value ratio up to 90% (requiring a down payment of 10%). These funds can be donated by a family member or some other approved source.
Credit Score Requirements
HUD’s minimum credit-score cutoff for FHA borrowers is 500. As mentioned above, a score of 580 or higher is needed to take advantage of the 3.5% down payment option. Mortgage lenders can impose their own credit score requirements on top of HUD’s guidelines. Bear in mind that credit scores are just one part of the screening process. Lenders tend to look at the bigger picture, considering all aspects of a borrower’s financial picture. Learn more about scores.
Debt Ratio Requirements
Generally speaking, HUD prefers FHA borrowers to have a total debt-to-income ratio no higher than 43%. This means that your total monthly debts (including the mortgage payment) should use up no more than 43% of your gross monthly income. But there are exceptions to this rule, especially for borrowers with significant cash reserves and/or a history of making comparable payments successfully. So this requirement is not set in stone. With that being said, if your total debt-to-income ratio is significantly higher than 43%, you might have trouble qualifying for an FHA loan. Learn more about DTI.
Document / Paperwork Requirements
Verification of income, debts and assets has always been an important part of the mortgage underwriting process. But it’s even more important today due to new government lending standards. The Ability-to-Repay (ATR) rule, which took effect in 2014, requires lenders to obtain a variety of financial documents in order to verify the borrower’s ability to repay the debt obligation. This eligibility requirement applies to FHA loans as well. When applying, you will probably be asked for bank statements, tax returns, W-2 forms and the like. Here’s a document checklist.
Minimum Property Requirements
I don’t want to go too far into the details of property requirements here, because it’s the subject of another article entirely. And this article focuses on FHA eligibility requirements for borrowers — not properties. But suffice to say the home being purchased must pass an FHA appraisal which includes a basic home inspection. The appraiser is primarily concerned with the health and safety of the home buyer / future occupant. The house must meet certain safety and structural requirements set forth by HUD, and you can learn more about them here.
This article provides a very basic overview of FHA eligibility requirements in 2017. It is based on the minimum guidelines established by the Department of Housing and Urban Development, which oversees the FHA mortgage insurance program. To learn more about basic eligibility standards, contact a HUD-approved mortgage lender or refer to the handbook mentioned above.