Some FHA borrowers sail through the mortgage lending process with no issues whatsoever. If you’re lucky, you’ll be one of them. Other borrowers encounter FHA loan problems that can delay the closing process or, at worst, derail it entirely.
Awareness is the first step to avoiding such problems. By understanding what can go wrong during the lending process, you’ll have an easier time reaching the finish line. This article explains three of the most common FHA problems that borrowers encounter along the path to loan approval and closing — and what you can do to avoid them.
1. Too Much Debt in Relation to Income
When you first apply for an FHA-insured home loan, the lender will check your debt-to-income ratio (DTI). They do this to find out how much money you earn each month, relative to the amount you pay toward your recurring debts.
The rule of thumb for FHA loans is 43% or lower. This means that most lenders will want your total debts to be no greater than 43% of your gross monthly income. “Total” in this context includes your monthly mortgage payments. This number is not set in stone. Some lenders will allow higher DTI ratios, while others set the bar below 43%.
The bottom line: If your debt is too high relative to your income, the lender will consider you to be a bigger risk. This can hurt your chances of qualifying for financing. This is one of the most common FHA loan problems borrowers run into these days.
Possible Solutions
There is a simple solution to this FHA problem. Reduce your debt load. Granted, this can be easier said than done. But if you want to qualify for this mortgage program, you’ll need to have your debt under control.
The best-case scenario is to keep your total debt-to-income ratio below 43%. Below 40% is even better. Below 30% is great. If you are unable to achieve this, you could always purchase a more affordable home. This would require a smaller loan, and would therefore improve your DTI ratio.
2. Not Enough Income to Qualify for a Loan
This is another common problem among FHA borrowers. If the lender thinks you won’t be able to afford your monthly payments, based on the amount you are trying to borrow, you probably won’t get a loan for that amount. It makes sense.
This has always been a potential problem for borrowers. But it’s a bigger issue in 2014 – 2015. This is because of new government rules that require lenders to verify a borrower’s ability to repay the loan obligation. The bottom line is that lenders today are more concerned with your repayment capacity.
Possible Solutions
There are two solutions to this FHA loan problem: (1) increase your income, or (2) decrease the amount you are trying to borrow. Both of these would put you in a more favorable light, where your income is concerned.
Of course, one solution is easier to achieve than the other. You can’t snap your fingers and increase your monthly income. If only! But you can certain apply for a smaller loan. (Refer to the general rules for debt-to-income ratio under problem #1 above.)
3. Credit Score Too Low by Lender’s Standards
Credit scores are a common problem for borrowers seeking an FHA loan — or any other type of mortgage, for that matter. A low score makes you a riskier borrower, which in turn makes lenders less inclined to approve you for a loan.
Thee days, most mortgage lenders use FICO credit scores in particular, when considering FHA borrowers. The FICO scoring range goes from 300 to 850, with 850 being the highest and best. A higher score gives you a better shot at getting approved for a loan. It also helps you secure a lower interest rate, which could save you money over the long term. A lower score has the opposite effect.
According to the Department of Housing and Urban Development (HUD), the minimum score for this program is 500. To qualify for the 3.5% down payment, you would need a score of 580 or higher. But lenders can set their own minimums above those issued by HUD, and they often do. Most lenders today want to see a credit score of 620 or higher for FHA loan approval. This number is not set in stone — it’s just an industry trend.
Possible Solutions
Visit AnnualCreditReport.com to request a copy of your credit report from all three reporting agencies. Check your reports for errors, because they can drag down your score. Dispute any errors you find to have them corrected. You can do this online, through the reporting company’s website.
If the reports are accurate, and you simply have a low credit score, you’ll have to work on improving your credit. Pay your bills on time, and consider reducing your credit card debt if it’s high. In time, this kind of financial responsibility could help you increase your credit score.
Other FHA Loan Problems
These are certainly not the only FHA loan problems you could run into. There are plenty of other issues that could delay or derail your closing. These are just three of the most common issues borrowers encounter. Nor is this article meant to scare you away from the FHA mortgage program. If you have good credit, steady income, and a manageable level of debt, you have a good chance of getting approved for a government-insured home loan.