Are you thinking about applying for an FHA loan? If so, here’s what you need to know.
How Do You Get an FHA Loan?
Getting approved for an FHA loan depends on a few factors. These include your credit score, debt-to-income ratio, and how much of a down payment you can afford to pay. No single factor comes with a hard limit. Instead, the FHA will consider your situation in full based on a picture they can get from all the factors. So even if you don’t meet the minimum requirements, you might still be able to get an FHA loan. For example, if you have enough cash in reserve, you could qualify, even if you already have high debt. The first is your debt-to-income ratio (DTI). The second is your home-to-income ratio (HTI). The latter may also be referred to as your “payment-to-income ratio” (PTI) or “front-end DTI.” DTI shows your monthly debt payments divided by your gross effective income. HTI is your housing payment divided by your gross income. Your housing payment includes your mortgage payment, insurance, property taxes, and mortgage insurance. In the table above, the first number is your HTI, and the second number is your DTI. For example, if you have a credit score between 500 and 579, you cannot have HTI and DTI ratios higher than 31 and 43, respectively. If you’re buying an energy-efficient home, the limits go up to 33 and 45. “While these ratios were designed to help many first-time homebuyers, percentages are subject to change depending on your credit and financial profile,” Melinda Wilner, chief operating officer for United Wholesale Mortgage, told The Balance by email. “The better your credit and financial profile, the better your terms will be.” When your DTI ratio is too high, sometimes the FHA will allow other factors to help approve a loan. These could be showing that you can increase your savings or that you have enough cash reserves. Cash reserves can come from places like retirement accounts. You can also show that you aren’t often using your credit or that you have extra income (like food stamps) that is not part of your effective income. “But as a general rule, FHA lenders like to see lower DTI ratios,” explained Aaron Dorn, CEO of Studio Bank in Nashville, by email. “Banks and lenders pay attention to these numbers because it helps us help our homebuyers ensure that they won’t be saddled with an unsustainable debt burden,” he said.
Credit Score Requirements
“In general, a borrower with a FICO score as low as 500 can qualify for an FHA loan,” Wilner said. “Your credit score determines how much money you will need to put down on a home, and the higher your score, the better terms you’re able to receive.” This means that the higher your credit score, the lower your down payment can be. You only need a 3.5% down payment if your FICO score is 580 or higher. But if your score is in the 500-579 range, you’ll need to put 10% down. A higher credit score can also help you in other ways. “In general, a credit score of 740 or higher will get you the best mortgage rates and terms,” Dorn noted. “But right now [2021], due to the record low rates nationwide, even people with much lower credit scores are still able to get payment rates better than some of the high-credit borrowers of the past.” People who qualify for FHA loans have credit scores of all types. These can be as low as 500 or as high as 850.
Other FHA Requirements
The FHA loan limit for 2022 is $420,680 for single-family homes in low-cost areas. The limit increases to $970,800 in high-cost areas. In addition to credit score and DTI requirements, you’ll have to pay for mortgage insurance. How long you’ll pay for this insurance depends on your loan and your down payment. You may pay mortgage insurance for only 11 years. Or, you may need to pay it for the full term of your loan. The home also needs to meet minimum property requirements. It will also need to pass FHA inspections.
Application Documents
To apply for an FHA loan, you’ll likely need to submit:
Proof of Social Security numberDriver’s licenseOriginal pay stubsW-2 formsTax returnsBank statementsAccount statements from investments and interest-bearing accounts
How to Get an FHA Loan
When you get an FHA loan, you’re not borrowing money from the FHA itself. The agency insures loans from lenders around the country. Your loan comes from one of these lenders. When you submit your application to an FHA-approved lender, the application will be underwritten and then sent to the FHA for approval. But to get the loan, you have to go through a bank or other lender. This is the same process as any other mortgage application.
