FHA Loan Requirements and Guidelines

FHA Loan Requirements - Easier to Qualify

FHA loans are a popular government-backed mortgage program. Three reasons to consider an FHA mortgage to purchase a home are:

1. Low credit score requirements
2. Low down payment requirements Lenient debt-to-income requirements.
3. Lenient income and debt-to-income requirements

The FHA does not issue loans. The FHA is part of the U.S. Dept of Housing and Urban Development (HUD), which insures residential mortgages. The FHA does not fund the loan for a refinance or purchase mortgage. By guaranteeing the loan, the FHA gives lenders confidence the loan will be paid even if the borrower defaults. This allows more Americans to qualify to purchase a home and allows mortgage loans backed by the FHA to have lower interest rates.

General FHA Loan Requirements

With an FHA mortgage or mortgage refinance, underwriting guidelines are less strict than conventional mortgage loans. When a lender reviews an application for an FHA insured loan, they will be more flexible when considering household income and debt-to-income ratios. However, an applicant must meet specific requirements that FHA has established to qualify. The following are general qualification guidelines, according to the HUD handbook - 41551HSGH:

• The borrower must meet standard FHA credit qualifications.
• The borrower must have a valid social security number, lawful residency in the United States, and be of legal age to sign on a mortgage.
• The borrower is eligible for approximately 96.5% financing. The borrower can finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.
• Eligible properties are one-to-four unit structures.
• FHA mortgage programs do not typically have maximum income limits. However, you must have sufficient income to qualify for mortgage payments and other debts. Verification of income, assets, liabilities, and credit history for all borrowers is required.

FHA Loan Income Requirements

To qualify, FHA borrowers must demonstrate an ability to pay the mortgage. Even if you think that you can afford the scheduled monthly payments, the FHA program has numerous rules regarding income verification, how to determine your income and debt levels, and measuring acceptable debt-to-income (DTI) ratios.

It is very important to work closely with your lender in order to submit all of your relevant income documentation. In general, the lender “must document the Borrower’s income and employment history, verify the accuracy of the amounts of income being reported...(The lender) may only consider income if it is legally derived and, when required, properly reported as income on the Borrower’s tax returns".

If your sole source of income is a salaried employee, then your salary slips, W2 form and 1040 tax returns are sufficient. If you are self-employed, then determining your income is more complicated. For example, the lender can use self-employed income based on two years.

FHA Loan Requirements - Debt-to-Income Ratio Guidelines

DTI requirements are complicated. Lenders need to carefully follow FHA rules in setting both the amount of your stable monthly income, as well as your monthly debt obligations.

FHA loans require the lender to measure two types of DTI:

• Front-end DTI: The 'front-end' ratio divides a person's monthly gross income by the sum of the mortgage payment's principal and interest, as well as the monthly costs for property taxes and homeowner's insurance. The ratio is expressed as a percentage, the percentage of a person's gross income that the various payments utilize.
• Back-end or Total DTI: The 'back-end' ratio divides a person's gross income by the sum of the mortgage payment, property taxes, and homeowner's insurance, as well as the monthly costs for debts like car payments, credit card debts, personal loans, student loans, and child support or alimony obligations. The ratio is expressed as a percentage, the percentage of a person's gross income that the debts utilize.

In general, the FHA Loan guidelines allow for a front-end DTI of 31%. That means that your total monthly housing expenses, mortgage principal and interest, mortgage insurance, property taxes, and property insurance cannot exceed 31% of your total gross monthly income. In addition, your total DTI cannot exceed 44% of your total monthly income.

More FHA Loan Requirements

FHA Loans and Delinquencies

The presence of 30-day late payments to other creditors does not disqualify a borrower. The risk of not qualifying increases when a 60-day late payment appears. The FHA is looking for a pattern of responsible bill paying, which if established, can override an earlier period of serious delinquency.

NSF checks are not likely to affect qualification. They rarely appear on a credit report and are not expected to be a topic of conversation in the FHA application process.

While more relevant to borrowers who refinance a mortgage, it could also possibly apply to home purchasers, a borrower can be disqualified from an FHA loan due to late payments on a previous mortgage within the last 12 months. If there is only one late mortgage payment in the past year and the borrower can provide a satisfactory explanation, the loan may be approved. FHA Loans and Bankruptcy

Regarding a Chapter 7 bankruptcy, the bankruptcy must have been discharged for 24 months, before an FHA loan will be approved. Please be aware that the discharge date is not the filing date. The discharge takes place after the bankruptcy court ordered all debts included in the Chapter 7 bankruptcy to be liquidated and then issued a notice of discharge.

A borrower can qualify for an FHA loan, even in the middle of a Chapter 13 bankruptcy! The payments to the bankruptcy trustee must be made as agreed for a one year period, the bankruptcy trustee must approve the loan payment, and the borrower must demonstrate job stability.

FHA Loans and Collection Accounts or Judgments

Minor collection accounts do not need to be paid in full to qualify for the loan. Judgments, on the other hand, must be paid in full.

FHA Loans and Federal Debt

Any borrower with a federal tax lien or who has delinquent federal student loans will not qualify for an FHA loan.

Non-Purchasing Spouse

A married borrower who wishes to purchase a home without his/her spouse, still must include the debts of the spouse on the application, if the borrower resides in a community property state. A non-purchasing spouse may be required to sign a document acknowledging the transaction and relinquishing his/her rights to the property.

FHA Loan Appraisal Requirements

FHA loans require an appraisal of the property's value to be made by an FHA approved licensed appraiser. An FHA appraisal is comprehensive. It checks for the soundness of the structure as well as for health and safety issues. It is important for a borrower to keep in mind, however, that the FHA's acceptance of the appraisal does not protect the borrower; the FHA is not guaranteeing the condition of the property. If the home has a problem after the purchase, the borrower is solely responsible. You should consider paying for a separate home inspection, which is not the same as an appraisal.