Deanna Picinich December 19, 2023
Securing financing is a critical step in the journey to homeownership. For many, Federal Housing Administration (FHA) loans offer a lifeline, particularly for first-time homebuyers and individuals with less-than-perfect credit. Backed by the government, FHA loans provide a pathway to homeownership with more flexible eligibility requirements than conventional loans, making them an attractive option for a wider demographic.
So, who exactly qualifies for an FHA loan? Let's dive into the key criteria and eligibility standards.
Credit Score: FHA loans offer a lower barrier to entry, requiring a minimum credit score of 500 for approval. For those with a score between 500 and 579, a 10% down payment is needed, while a score of 580 or higher allows for a minimum down payment of just 3.5%.
Employment History: Lenders typically look for a stable employment history spanning the last two years, verified through pay stubs, tax returns, and employer statements. This stability ensures a consistent income stream to support loan repayment.
Debt-to-Income Ratio (DTI): With a preference for a debt-to-income ratio under 43%, the FHA ensures that monthly debts, including the future mortgage payment, do not exceed 43% of gross monthly income. Exceptions can be made with compensating factors, such as a larger down payment or substantial cash reserves.
Property Requirements: The property being purchased must serve as the primary residence and meet specific safety, security, and soundness standards. An FHA-approved appraiser must inspect and approve the property for FHA insurance.
Loan Limits: FHA loan limits vary by location and property unit count. In most areas, the limit for a single-family home is $356,362 for 2023, with higher limits in high-cost areas reaching up to $822,375 like the area in which I help. In addition to these main criteria, there are other important factors to consider. Applicants must have a valid Social Security number, lawful U.S. residency, and meet the legal age requirements to sign a mortgage in their state. It's also necessary to have at least two lines of credit, such as a student loan and a credit card, to qualify. Notably, even individuals with past bankruptcy or foreclosure experiences may still be eligible for an FHA loan. For bankruptcy, a minimum of two years must have passed, followed by responsible credit use. In the case of foreclosures, a waiting period of three years is required.
In conclusion, FHA loans play a pivotal role in expanding access to homeownership by offering more inclusive options to individuals who may struggle to meet the requirements of conventional loans. As with any significant financial decision, it's advisable to seek guidance from a mortgage or financial advisor to fully understand your options and determine the best course of action for your specific situation.
One of my favorite loan advisors is Cameron Murray with Movement Mortgage: https://movement.com/lo/cameron-murray Talking to a lender, is the first step in realizing your homeownership journey.
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