The Federal Housing Authority (FHA) has helped out many prospective home buyers who may have a less-than-perfect credit history. In fact, their FHA mortgages have made it possible for people to buy a house who may not otherwise be able to because of their credit.
However, the requirements that are in place for obtaining an FHA Loan have changed rather recently. In this article, we will discuss what is required to procure one of these mortgage loans.
A Low Credit Score For Home Loan
First, let's talk about credit score. Your credit score, as with most loans, plays the key role in determining whether you get approved for an FHA loan. To qualify, you are going to need at least a 500 credit score.
However, there are some caveats attached to this low credit score. Although an FHA mortgage only requires a very low credit score for a home loan, the interest rate still goes up for lower scores.
If you are interested in applying for an FHA loan, you are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent.
If your credit score is below 580, however, you aren't necessarily excluded from FHA loan eligibility. Applicants with lower credit scores will have to put down at a minimum a 10 percent down payment if they want to qualify for a loan.
Requirements for Obtaining an FHA Loan
Here are the requirements necessary to qualify for an FHA loan:
- You must have either a long employment history that shows that you are a steady employee, or you must be able to show that you worked for the same employer for the past two years if you are in your first job.
- A valid Social Security number is required.
- A borrower must be a lawful resident of the United States, and you must be of age to be able to sign a legal contract.
- The loan has to be used on a primary residence purchase. They cannot be used for any other purpose.
- The borrower must receive an appraisal from a FHA-qualified appraisal agent.
- The loan payment can only constitute a certain percentage of one's gross income (usually 31%).
- Borrowers must be at least a year removed from any major credit problems (i.e. foreclosure, bankruptcy, etc.)
Furthermore, you will usually be required to produce two lines of credit. These show that you can successfully handle the responsibilities of credit, even if you haven't done incredibly well with these two credit sources.
What Kind of Limits Are in Place?
Of course, the government isn't willing to lend unlimited amounts of money using the FHA program. They don't want FHA loans to be used to purchase large mansions and vacation houses. Rather, an FHA loan is meant to help a first-time home buyer or someone who has fallen on bad luck to get onto their feet when purchasing a home.
With that said, there are loan limits that change by location. If you would like to discover what the FHA loan limit is for your county and state, you can do so by following this link.
Furthermore, someone who gets an FHA loan is also required to purchase mortgage insurance to protect the lender in the case of default. While this isn't extremely expensive, it can push up housing payment costs.
FHA Up-Front Mortgage Insurance Premium.
All FHA originated loans will have to pay a premium of 1.75% base amount of mortgage.
Example: $200,000 mortgage will require an FHA fee of $1750.00, which can be rolled into the loan.
You also will be assigned a Mortgage Insurance Premium (MIP). The MIP rates on a 30-year mortgage less than $625,550 is %0.80.
Example: If your monthly payment is $800 (principle % Interest only) your MIP would be $64. The MIP is also tax deductible. Please note MIP requirements do change. Be sure to ask your loan officer the current MIP requirements.