For some new home buyers, an FHA loan is easier to get than a private mortgage, due to less-stringent requirements. A buyer needs a 3.5% down payment, adequate credit and a steady income. Compared with conventional lenders, fha loan requirements evaluate more of the borrower's financial situation, rather than exclude them for failing in one area.
Background on FHA Loans
FHA funds aren't given by the Fair Housing Administration directly; rather, the borrower gets the money from an approved lender. Having an FHA-backed loan is convenient, but some lenders may turn certain borrowers down because their lending requirements may not meet FHA guidelines.
Generally, FHA-financed properties must be a primary residence where the owner lives. These loans are not to be used for rental or investment properties, and most housing types are eligible. The maximum amount a borrower can get, assuming that they meet income requirements is the lesser of these two options:
The legal limit for the home's geographical area
The maximum LTV (loan to value) ratio for the property
Limits are connected to Freddie Mac guidelines, and can change at least once per year. Limits are higher in areas with a high cost of living, such as California, Hawaii and Alaska.
The FHA credit score minimum is 500, which is low; most lenders consider anything under 620 to be subprime. With that, a low-score borrower can be denied based on credit activity, such as late bill payments. Lenders often have higher credit requirements, and the average FHA borrower has a score of 688. FHA lenders look at other payment histories in addition to credit reports.
Employment and Income
Only provable, stable income can be considered in determining eligibility for an FHA loan. Lenders prefer to see at least two years of stable employment before an application, with a maximum one month employment gap. Jobs must be projected to continue for three years after getting the loan.
FHA's underwriting methods offer considerable flexibility in evaluating a person's ability to repay the loan. If a borrower's situation isn't included above, that doesn't mean they can't get a loan. With a look at the complete financial picture, most fha lenders will approve even a low-credit borrower.