Qualifications for FHA Loan

Qualifications for FHA Loan

Last Updated 12/9/2014

Who is Eligible for FHA Loans?

FHA mortgage loans are beneficial to home-buyers because it requires less upfront cash investment need to close on a home, and is also insured by the Federal Housing Administration (FHA) against loss if a borrow defaults. The FHA allows home buyers to secure their mortgage with down payments as low as 3.5%, and the underwriting requirements for the qualifications for FHA loan are generally less strict than with conventional loans.

However, who is actually eligible for FHA loans? It’d be a shame to pursue one, potentially for months, only to discover you can’t actually go through with the loan acquisition because of a particular technicality or overlooked qualification standard. Here’s what you need to determine if you’re eligible for FHA loans.

Since the FHA program founding in 1934, there had been a ceiling cap on the loan amount that could be insured. Recently, though, the FHA has shifted on this stance, taking regional income differences and market-by-market differences into account—thus widening the number of people who pass the qualifications for FHA loan.

Foremost, home buyers with credit scores of 580 or higher qualify for FHA loans with the 3.5% down payment (any lower, and this rises to 10%!). Home buyers applying for FHA loans must be able to provide a Social Security Number and proof of US residency (not citizenship, though) for every borrow involved. You must also provide proof that you’re of legal age to sign mortgages in your state. Lastly, you must prove you’re not on the government’s list of those with criminal judgments or delinquent debts.

Beyond these proofs of identity and FHA eligibility, the agency will also qualify you according to your debt-to-income ratio. The FHA normally only allows a 43% debt-to-income ratio, ensuring that home buyers will actually have the funds available to pay their mortgage without driving themselves further into debt. While they now take this on a case-by-case basis, that’s a reasonable starting point to determine if it’s even worth comparing an FHA loan to conventional ones in your case.

Having little to no credit may also be a sticking point that would make you ineligible for FHA loan. However, the FHA understands many first-time home buyers as well as moderate-to-low income households simply may not have established credit histories. In this situation, some mortgage lenders are able to substitute non-traditional credit sources for financial history purposes.

Are you considering an FHA loan? Be sure to have your lender determine qualifications for FHA loan to first know if you are eligible and then provide a comparison between it and conventional loans.