Are you in the market for a new home but have very little to put down or less than perfect credit? An FHA loan may be worth considering as they have more lax qualification criteria than other mortgage products.
However, figuring out if you meet the minimum requirements to qualify isn’t always cut and dry. So, we’ve provided the answers to some common questions to help you wade the murky waters.
What’s the minimum credit score to qualify for an FHA Loan?
The minimum credit score needed to qualify is 500. But keep in mind that lenders often require a higher score to underwrite a Federal Housing Administration (FHA) loan, so that number could be a bit higher.
A better idea: aim for at least a 580 or higher so you can reduce your down payment if needed. (More on that shortly.) And remember, the higher your credit score, better. You don’t need a 750 FICO score to get approved, but a safer bet that will get you through the gates with most lenders is at least 620.
If you aren’t quite there but are eager to buy your first home, you can:
1. Work diligently to improve your credit score.
- Review your report and dispute errors and dated negative information that has passed the reporting timeline.
- Get and stay current on all delinquent accounts.
- Continue making timely payments on all other accounts.
- Ask creditors for goodwill adjustments to remove late payments.
- Negotiate pay for delete agreements for collections and charge-offs.
- Refrain from applying for new credit to avoid credit inquiries.
Most importantly, understand that some lenders may deny your application if you have open but delinquent accounts. This rule also applies to collections and charge-offs, so you want to take care of these even if the collection agency isn’t budging before applying.
Here’s a handy guide to get you started.
2. Shop around to find lenders that will accept a lower credit score.
They’re out there, but the legwork could be a bit more than expected. And don’t be surprised if you’re asked to put down a huge chunk of cash.
How much of do you need for a down payment?
The U.S. Department of Housing and Urban Development (HUD), which houses the FHA loan program, is pretty cut and dry on this one. If your credit score is:
- Between 500 and 579, you’ll need to put 10 percent down.
- 580 and higher, you only have to put down 3.5 percent.
But keep in mind that you’ll still have to pay mortgage insurance if you put down less than 20 percent. And if you’ll be getting help with the down payment, the lender will also want this in writing, signed and dated by the donor.
How much income do you need to qualify?
Worried you make to much or too little to qualify for an FHA loan? Don’t be as there aren’t any set amounts, but you will need two active credit accounts to be approved.
The lender will pull your credit report to review your credit history, but be prepared to provide pay stubs W-2 forms and tax returns from the past two years to prove your income.
In addition, you’ll need a clean track record, with regards to FHA home loans, to qualify. This means that you can’t have any outstanding judgments or debt from the federal government stemming from FHA loans you had in the past. So if this is your first rodeo with FHA-insured properties, you have nothing to worry about here.
What’s the debt-to-income ratio requirement?
If you’re carrying a heavy debt load, you want to get it to at or below 50 percent of your income to qualify. But here’s the catch: that amount must include the amount of your new mortgage payment.
To illustrate, let’s say you have the following debt payments each month:
- Auto loans: $850
- Credit cards: $400
- Student loans: $155
- Personal loan: $255
The new mortgage payment will be $1,500 per month. To qualify, you’re gross monthly income will need to be at least $6,320.
Quick note: some lenders may require that the debt-to-income ratio be lower, so it’s best to inquire so you know what to expect before applying.
How much can you borrow?
Assuming you meet the income, debt and down payment criteria, you can borrow up to $294,515 for a single-family home. However, this number increases to $679,650 if you’re considering an area with a substantially higher cost of living than normal.
What criteria does the property need to meet?
Even if the property is below the FHA loan limits, that doesn’t necessarily mean it will qualify. For starters, the FHA will order its own appraisal to ensure the property meets their standards and is actually worth what it’s on the market for.
HUD also places restrictions on borrowers to prevent them from engaging in flipping or generating investment income by not allowing investment properties to be purchasing and prohibiting the purchase of a home that was sold within the last 90 days.
You must also certify that the home is for a primary residence and actually reside in it for the first 60 days.
Is an FHA loan right for you?
It depends on your unique financial situation. An FHA loan may be a good fit if:
- You’re a first time home buyer with less than perfect credit.
- You can’t afford to make a large down payment.
On the other hand, you may want to steer clear if:
- You’re afraid you won’t meet the qualification criteria in time (but keep in mind that manual underwriting may be a viable option).
- Your credit score is high enough to qualify for a conventional loan product because you could qualify for lower interest rates.
- You can afford a higher down payment (which will help you avoid the mortgage insurance premium that will apply for the duration of the loan).
- You can qualify for a VA loan.
If you decide to go with an FHA loan product, don’t rush through the process. Instead, save up enough money so you can afford the down payment and still have ample amount of cash to fall back on should a financial emergency arise.
Also, address any credit issues to give yourself the best chance of qualifying for competitive interest rates that will save you money for years to come.