Before making an application for an FHA loan, it is very important to be aware of its eligibility requirements. It will help you in making prior arrangements for the same.
FHA (Federal Housing Administration) is not actually a loan. In fact, it is an insurance against the private loan a borrower has taken. The FHA is a government regulated body and provides insurance to private housing lenders as security against the defaulting parties. Once a borrower has met the FHA requirements, he can easily avail a loan and the lenders can be assured about the safeguarding of the money lent. It is a good credit option if a borrower is not able to obtain or qualify for a private mortgage insurance.
To avail an FHA loan, the borrower will have to approach the FHA approved lenders and be in a position to make a minimum down payment of 3.5% of the property value, without a loan. The down payment can be in the form of a gift or borrower’s own funding. The borrower will be eligible for approximately 96.5% financing of the housing loan and the eligible properties are ‘1 to 4’ unit structures.
Basic Requirements
1. Valid Social Security Number
2. Lawful Residency in the U.S.
3. Applicant must be of legal age prescribed by the state
Income and Employment Requirements
1. An FHA loan borrower will need to be steadily employed with preferably one employer for a minimum period of two years.
2. The borrower’s income needs to either be consistent or increase in the last two years.
3. The borrower’s FHA loan payment should not be more than 30% of his/her monthly income.
Documentation Requirements
1. Tax return and W-2 forms from the last two years need to be submitted or presented to the FHA.
2. The borrower will also need to submit his/her bank statements.
3. The borrower will need to reveal all the debt information like auto loans, any bills, credit card statements, etc.
Bankruptcy and Foreclosure
If the borrower has ever proceeded with filing for bankruptcy, it should be discharged before 2 years and no other credit default should be filed against him/her.
In case the borrower has faced foreclosure before, he can apply for an FHA loan only after 3 years of foreclosure. And, in these three years, the borrower’s credit record should be perfect.
Credit Score
The borrower’s credit report needs to have a minimum credit score of 620 and cannot have more than two ’30 Days Late’ marked.
Debt to Income Ratio
There are two ratios to calculate the debt to income ratio. One is Mortgage Payment Expense to Effective Income and the second is Total Fixed Payment to Effective Income. The maximum ratio for ‘Mortgage Payment Expense to Effective Income‘ is 29% and the maximum ratio for ‘Total Fixed Payment to Effective Income‘ is 41%.
There are pros and cons associated with getting an FHA loan. The low down payments, no prepayment penalty, and that they are federally insured and are lenient terms of contract highlight its pros, but a borrower must also keep in mind the cons associated with it. The cons include necessity to have a good credit score and a good debt to income ratio, insurance premium which has recently been increased from 1.5% to 2.25%, and the down payment amount which has increased. The laws and eligibility pertaining to the FHA loans have now been made stringent. A borrower will have to have a clean credit record, though FHA loans are also granted on the basis of the recent repayments of debt.
If you meet the above mentioned requirements, you will easily be able to avail the FHA loan. Also, if you have had some defaults in the past, apply for the loan after you have crossed the required post-default period. Plan the application keeping a good amount of time in hand for making the required arrangements like the down payment amount and the documents required. Also, if you’re planning a job change, be sure that it is not hampering your chances of getting the loan.
