The FHA home loan program is one of the most popular loan programs in California. If you have a credit score above 620, a 3.5% down payment (which can be gifted), and a job with a steady income you might qualify for a FHA loan. Some qualify with below a 620 credit score.
The FHA home loan program is the loan program of choice for:
- First Time Home Buyers
- Homeowners considering a refinance
- If you’re looking to do major renovations (FHA 203k program)
- Those with a credit score below 700
- Buyers with less than a 10% down payment
Qualifying for a FHA home loan is a fairly easy process compared to years ago provided you work with an experienced and knowledgeable Loan Officer who can help guide you through the process.
What Do I need To Qualify?
Keep in mind that FHA home loan guidelines and qualifications can change at any time so be sure to ask your Loan Officer for updates when you obtain your quote and apply for the loan. If there have been any changes a knowledgeable and experienced Loan Officer will be able to give you an update on the current qualifications for a FHA home loan.
Your credit score is a big part of the underwriting process. The good news for those applying for a FHA home loan is that your interest rate does not significantly increase the way it does on a Conventional loan. This is beneficial for those with less than a 700 credit score because under the FHA home loan guidelines your interest rate is the same if you have a 780 credit score and if you have a 690 credit score. With a Conventional home loan, the person with a 690 score would be paying a much higher interest rate.
There are a few levels to be aware of when it comes to your credit score and FHA home loans. The first being the 580 credit score level. If you want to put 3.5% down (or do a refinance with 3.5% equity) then you’ll need a 580 or higher credit score (source HUD). If it’s 579 or below you’ll need to increase your down payment.
The second level is not a consistent set in stone level as it may change from lender to lender. While the FHA home loan program allows for credit scores below 620 some lenders do not go below that level, and most lenders do not go below the 580 level. If you have below a 580 credit score talk with your Loan Officer about what you can do to increase your credit score so you can qualify for a FHA loan.
If you have a 580 or higher credit score you’ll need at least a 3.5% down payment to qualify for a FHA loan. The 3.5% is based on the appraised value of the home or the purchase price – whichever is less. So if the home appraises for $300,000 then you’ll need to provide a down payment of at least $10,500. the down payment can come from your own savings, you can borrow against your 401k or the down payment funds can be gifted to you by a family member. In the event you want to borrow from your 401k please be sure to speak with a financial advisor as to the implications of this and also make sure the process is complete two to four weeks prior to applying for the FHA loan.
To qualify for a FHA loan you need to have a steady income. Both self-employed and W-2 employees can be qualified under the program. If you are self-employed you’ll need to provide your most recent two years of tax returns along with a Year-To-Date Profit and Loss statement. If you are an employee then you’ll need to provide your two most recent paystubs along with your most recent W-2 forms.
The amount of debt you have and the housing expense you’ll be taking on is an important factor in the mortgage approval process. Under the FHA home loan program, a borrower can have a “front end” Debt-To-Income ratio of 31% and a “backend” Debt-To-Income (DTI) ratio of 43%. “Backend” refers to your housing related debt and the “front end” refers to your total debt (housing and consumer debt).
Are there exceptions to this? Yes; there are instances in which a borrower was approved with a higher DTI than what’s listed above. Those approvals are case-by-case basis and there has to be compensating factors (ie a good amount of liquid asset reserves). These DTI levels are set by HUD and approvals above these levels are dependent on obtaining an automated approval from the Desktop Originator (or Desktop Underwriter) Automated Underwriting System (AUS) from Fannie Mae.
Home Appraised Value:
When you apply for a FHA home loan you’ll eventually have to do an appraisal. The homebuyer (or homeowner if you are refinancing) pays for the appraisal and generally the cost is between $400 – $600 (a lot depends on the area and how fast you need the appraisal report). The appraisal will determine if the purchase price (or estimated home value for refinances) is the current fair market value for the neighborhood. And in the case of the FHA loan program, the appraisal report will determine if the home meets the minimum FHA appraisal requirements. These requirements are mostly safety items that every home should have.
How To Obtain A FHA Home Loan
Many lenders offer the FHA home loan program. It’s important to keep in mind that FHA does not lend directly to a borrower. What they do is set up the underwriting guidelines for lenders to be able to lend money to those who wish to access the program. So if you would like to obtain a FHA home loan for your next transaction then contact a mortgage company that offers the loan program.