How to Get an FHA Home Loan
FHA Loan Requirements, Debt-to-Income Ratio and Credit Score
Sep 11, 2009
FHA loans were introduced in 1934 to help increase home ownership in the middle class during the great depression. Since then they have served as an excellent tool for middle and low income families to fulfill the American dream of owning a home.
FHA loans are insured by the HUD. Since the loans are insured by the government, lenders are often willing to give better rates for FHA. In fact interest rates for FHA loans are comparable to those of conventional loans.
FHA Loans for First-time Home Buyers
First-time home buyers are one of the biggest benefactors of FHA loans. Most first-time home owners find it difficult to come up with the 20% down payment requirement for conventional loans. Without the 20% down payment they are forced to go for private mortgage insurance which can be costly. FHA loans require a minimum down payment of 3.5% of the loan amount, which can even be gifted by a family member, employer or a non-profit organization. Read FHA loans for first-time home buyers to know more about the pros and cons of taking an fha loan while buying a house for the first time.
FHA loans for Borrowers with Less Perfect Credit History
FHA loans are also ideal for people with a less than perfect credit history. With tightened mortgage requirements nowadays, borrowers with a poor credit score are unable to get a conventional loan. Credit requirements for FHA loans are not strict as those for conventional loans. For borrowers whose homes have been foreclosed or who have gone into bankruptcy, FHA will allow a home purchase two years after a bankruptcy and three years after a foreclosure.
Debt-to-income Ratios
Borrowers with a high debt-to-income ratio, especially first-time home buyers who often have student loans and credit card debt, find it difficult to qualify for conventional loans. Fannie Mae and Freddie Mac prefer a maximum of 28% debt-to-income ratio for conventional loans but for an FHA loans it can go as high as 41%.
Limitations of FHA Loans
FHA sets limits on how much a borrower can borrow based on the state and county in which the property is located. FHA loans became less popular in the period from 2000 to 2007 when the relatively low limits of FHA loans could not keep up with the surging home prices. Another disadvantage is the upfront mortgage insurance premium (usually 1.5 percent of the loan amount) which FHA charges and which is included in the closing costs.
To know more about the pros and cons of FHA and Conventional loans, read Comparing Conventional and FHA loans.
FHA Loan Requirements
FHA loan requirements are more lenient than those of conventional loans. The following are some of the requirements for getting an FHA loan.
- Steady employment for two years, preferably with the same employer.
- Borrower should have a minimum credit score of 580 or no credit score at all.
- FHA will allow a home purchase two years after a Bankruptcy and three years after a foreclosure, but the borrowers should have perfect credit score since bankruptcy/foreclosure.
- Debt-to-income ratio less than 41%. Monthly payments must be no more than 30% of the borrower's income.
- Stable Income for the past two years.
The HUD site is a good source of information for borrowers looking to get more information about the FHA insured loans.
FHA loans are a great help for first-time home buyers and for people with a modest credit rating. Although a borrower with a good credit history and enough resources for down payment can get better rates with conventional loans, it is good alternative to sub-prime loans and zero-down payment loans.
FHA Loan Requirements
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