How to Qualify for FHA Loans

If you are buying your first house or if you are unsure you can afford a home, one option to look into is an FHA loan.

What is an FHA Loan?

An FHA loan is a loan which is issued by a regular lender, but is insured by the Federal Housing Administration. This insurance allows banks to trust that the payments will be made. This makes them more willing to lend to you.

Generally, these loans require a lower minimum down payment and credit score than conventional loans. This makes them the ideal choice for people with a short credit history or a higher debt-to-income ratio. While some conventional loans do have a lower down payment, they are generally only available to people with excellent credit scores and savings.

How Do You Qualify for an FHA Loan?

First of all, you will need a minimum credit score of 500. If possible, you want to get your credit score to 580. However, borrowers with lower scores have to make a higher down payment of 10%.

As long as your credit score is 580 or better, the down payment is only 3.5%. However, you will need to meet certain requirements:

1. You need verifiable income.
2. You do need to have a credit history. There are various ways to build good credit history. You will need at least two lines of credit to show your credit history.
3. Your mortgage payment must not be more than 35% of your pre-tax income. Additionally, your total debt-to-income ratio (the amount of your income that goes towards debts) cannot be more than 48%, and 43% is better. If you have more debt than that, it’s best to focus on paying it down first.
4. The house must not cost more than the FHA loan limit for your area. The limit varies according to the typical cost of housing in your county. However, in very expensive areas, this limit can actually be higher for conventional loans. This makes FHA loans an excellent option.
5. You have to live in the house as your primary home. You cannot get FHA loans for second or investment properties. Furthermore, you cannot take an FHA loan then flip the house (sell it within 90 days).

If you meet these requirements, you can get an FHA loan. Be aware that FHA loans require mortgage insurance, which is paid on top of the premium. Additionally, they can’t be canceled unless you refinance into a conventional loan.

How do You Find an FHA Loan?

Once you believe an FHA loan is right for you, you will need to find an approved lender. Some people believe the FHA makes loans. This is not true, they partner with banks and other lenders. Talk to your bank about which option is going to work out as cheaper for you…in general if your credit score is 720 or higher a conventional loan will cost you less.

You can get pre approval on an FHA loan just the same as with a conventional mortgage. This is a good idea as it tells you what your budget is before you start serious house hunting. Also, it will help you know you can afford the payments, as approved lenders will not push you to borrow more than you can afford.

Once you have pre approval, you can find a suitable home within your budget. The home will need to be appraised, and the appraisal tends to be tougher than conventional appraisals, as they also include an inspection to ensure the house is sound and meets code.

To talk to one of our brokers about whether an FHA loan is right for you and start the pre approval process, contact Atlantic Mortgage today.