Who is Eligible For FHA

An FHA loan is generally easier to qualify for than a conventional loan. For this reason, FHA loans are extremely popular with first-time homebuyers and those with lower credit scores. If you are interested in qualifying for a loan, it is helpful to know the FHA loan eligibility standards. Many factors are taken into consideration when determining the eligibility of a loan applicant.

Basic Eligibility Requirements

The Federal Housing Administration is responsible for setting FHA loan requirements. You must meet the following basic eligibility requirements to qualify for a loan:

  • Credit score of at least 500: You must have a FICO score of at least 500 to qualify for an FHA loan. If you have a score of less than 580, you will need to make a larger down payment of 10%. If you have a score of 580 or above, you will only be required to put down 3.5%.

  • Down payment: The FHA requires a down payment of 3.5% or 10% depending on your credit score.

  • Debt-to-income ratio below 50%: You may be able to qualify with a DTI ratio of 50, but most lenders expect your DTI to be 45% or less.

  • Property requirements: The home you purchase must be safe, secure, and sound. An appraiser from the FHA will examine your home.

  • Primary residence: You must intend to use the home you purchase with the loan as your primary residence. The loan does not cover vacation homes or investment properties.

  • Bankruptcy and foreclosure: You may not have declared bankruptcy within the last two years or had a property foreclosed on in the last three years.

The FHA’s loan requirements are significantly looser than those of traditional mortgage loans, so they are relatively easy to qualify for if you have a low credit score or a considerable amount of debt.

Additional Eligibility Requirements

All FHA lenders are not the same. Mortgage rates and eligibility requirements can vary from lender to lender. The FHA does put forth minimum eligibility requirements for all insured loans, but lenders are allowed to set their own rules. These rules are referred to as “overlays.”

For example, a lender may require a credit score of at least 580 instead of the minimum 500. One lender may require you to verify your income using paystubs, whereas another lender may require tax returns for verification. Since requirements vary, if you are not approved by one lender, it is always wise to try applying with another.

FHA Loans for First-Time Homebuyers

Many people think FHA loans are only for first-time homebuyers. In reality, both first-time and repeat homebuyers may be eligible for a loan. FHA loans are typically marketed toward first-time homebuyers because of their low down payment standards. However, not all repeat buyers have a significant sum of money saved up for a down payment or a good credit score. The loan program is open to these individuals as well. As long as a buyer meets the eligibility requirements and intends to use their home as a primary residence if approved, they can obtain an FHA loan.

Geographic and Income Limits

Did you know that FHA loans don’t have geographic or income limits? Other government loan programs, such as those offered by the VA and USDA, are only for certain groups of homebuyers. For example, the VA loan program is only for homebuyers who have served in the military, and the USDA program is only for homebuyers who are willing to reside in certain rural areas.

On the other hand, anyone may qualify for an FHA loan, regardless of income level or ZIP code. You can also make a down payment using money from an employer, family member, assistance program, or charitable organization.

Debt-to-Income Ratio

Your debt-to-income ratio will be taken into consideration when determining your eligibility. This is the percentage of your monthly income that is used to pay debts. For example, if your monthly income is $4,000, and you spend $2,000 paying your debts (including housing expenses), your DTI is 50%. The FHA uses two DTIs when determining eligibility:

  • Front-End DTI: This type of DTI only includes housing-related costs such as principal and interest payments on a mortgage, property insurance, homeowner’s dues, and taxes.

  • Back-End DTI: This DTI includes all your monthly debt payments, including credit cards, student loans, child support, alimony, housing costs, and any other significant debts.

The allowable DTI often varies from lender to lender. For example, some lenders may require a DTI of 30% or less, while others may be willing to offer a loan to someone with a DTI of 45% to 50%. You may be able to qualify for a loan with a higher DTI if you:

  • Have a large amount of savings in reserve.

  • Have no discretionary debt, such as that from auto loans or credit cards

  • Earn income beyond the standard income taken into account when calculating DTI, such as bonus pay, overtime, or part-time work.

In other words, the lender may require you to compensate for the fact that you have a higher DTI.

Down Payment Requirements

You will need a credit score of at least 500 (580 in some cases) to be eligible for an FHA loan. Your credit score will decide whether you need to put either 3.5% or 10% down on a property. The best way to find out how much you will need is to check your credit score before applying for a loan. You must have a down payment to qualify for an FHA loan, but fortunately, if you do not have a down payment saved up, you may qualify for a down payment assistance program in your state, county, or city.

It is important to note, however, that you may not use certain sources of income to make a down payment. The FHA does not want you to go further into debt, so you cannot make a down payment using a credit card or payday loan.

Find Out if You Are Eligible for an FHA Loan

If you would like to find out if you are eligible for an FHA loan, FHA Insider can provide you with the necessary information. We strive to provide the most accurate and up-to-date information regarding FHA loans possible. Visit our website today to get started.