The Federal Housing Administration (FHA) insures its approved mortgage lenders against losses on mortgages made in accordance with FHA 's requirements. FHA loans are designed to help prospective homeowners who can't qualify for conventional mortgages; FHA loans require lower down payments and FHA loan guidelines allow for more lenient credit underwriting.
FHA-approved mortgage lenders require the following information when you apply for an FHA loan:
- Social Security number and proof of legal U.S. residency (not citizenship) for each borrower
- Proof that you and any co-borrowers are of legal age to sign mortgage documents in your state
- Proof that you're not on the federal government's list of people with certain unsatisfied judgments against them or who are delinquent on federal debts including taxes and student loans.
FHA lenders also verify income, assets, debts and credit history for you and any co-borrowers. Here's what you need to know:
FHA Loan Guidelines Offer Flexibility
FHA home loan underwriting requirements include:
- Down payment: FHA requires a minimum down payment of 3.5 to 10 percent of your home's purchase price. This amount does not include closing costs or mortgage insurance premiums.
- Debt-to-income ratio: Estimate this ratio by adding your estimated PITI (principal, interest, taxes and insurance) to your monthly debt payments. Divide the total by your monthly before-tax income. FHA guidelines generally allow a maximum debt-to-income ratio of 43 percent, so if your monthly gross income is $5,000, your housing plus other debt payments can't exceed $2,150 ($5,000 * .43). If your other payments for other loans and credit cards equal $400, that leaves you $1,750 a month for PITI.
- Credit scores and history: FHA lenders review your credit reports to determine your creditworthiness. In addition to considering your credit score, FHA underwriters evaluate your credit history to see if you are managing your debts in a responsible way, and if your credit is improving or getting worse. In general, a minimum credit score of 580 is required for FHA loan approval, but FHA loans maybe approved with lower credit scores if certain compensating factors exist.
FHA may allow your lender to consider certain factors in addition to your application. Compensating factors include cash reserves equal to one or more payments after your down payment, closing costs, and pre-paid costs are paid. Compensating factors provide FHA lenders flexibility to approve your mortgage. FHA lenders determine if compensating factors are needed for your application and if they can be used in your situation.
If you have little or no credit, FHA mortgage lenders may be able to help. FHA recognizes that moderate-income and first-time home buyers may not have traditional credit histories and credit scores. FHA allows mortgage lenders to substitute sources of non-traditional credit in place of usual FHA loan qualifications.
Get Approved for Your FHA Loan
These steps can help you find and get approved for an FHA home purchase or refinance loan:
- Request mortgage quotes from several FHA lenders. Mortgage rates, lender fees and credit requirements vary.
- Discuss your mortgage needs in detail with FHA lenders. This helps lenders find appropriate FHA loan options based on your situation. For example, if you own or are buying a home that needs renovation, an FHA 203(k) mortgage can help with rolling renovation and home purchase or refinance costs into one loan.
- Don't give up if your first FHA loan application falls through. Although FHA provides lenders with its approval guidelines as a starting point, FHA allows lenders to add their own loan approval requirements to FHA guidelines. It's worthwhile to shop multiple lenders to compare differences in loan approval requirements and costs -- when speaking to lenders, ask them what their "underwriting overlays" are -- that's what those extra requirements are called.
Help Is Available
FHA lenders can explain FHA loan approval requirements in detail and may suggest ways to meet loan approval guidelines based on your circumstances. You can also contact HUD-approved housing counselors for information about FHA loan programs and loan approval requirements.
Be specific when discussing FHA loans with mortgage lenders or housing counselors. Tell loan officers or housing counselors that you're short $1000 for a down payment instead of saying that you can't afford an FHA loan. Lenders and housing counselors can look for potential resources and solutions based on details you provide.