Borrowers who cannot qualify for a conventional mortgage are often able to obtain an FHA loan. However, to secure this type of loan, you must still meet certain requirements.
What Is an FHA Loan?
FHA loans are mortgage loans that are backed by the Federal Housing Administration. It is designed to help borrowers who are unable to meet the requirements for a conventional mortgage or other types of financing. These loans can be used to purchase single-family and multi-family homes.
What Are the Requirements for an FHA Loan?
When you apply for an FHA loan, the underwriter will consider many of the same characteristics considered when you apply for a convention loan, including:
- Your credit rating
- Your income
- Your outstanding debts
- Your down payment
- The value of the home you intend to purchase
In order to qualify for an FHA loan, you must have at least a minimum credit score. However, the minimum credit score for FHA loans is much lower than the minimum imposed on conventional mortgage applicants. This allows more borrowers to qualify for financing.
Before approving your application, the underwriter will compare your revolving debts to your gross income to calculate your debt-to-income ratio. Your debt-to-income ratio must be below a certain threshold to qualify. However, this threshold is higher than the threshold typically imposed for conventional loans.
The underwriter will also want to see proof of your income, as well as evidence that your income is reliable and likely to continue. In addition, the underwriter will review an appraisal of the property to ensure that your loan amount is appropriate.
In general, FHA loans allow a much lower down payment than a conventional mortgage. Many borrowers will be able to obtain an FHA mortgage with only a 3.5 percent down payment. However, if your credit score is below a certain threshold, you may need a larger down payment.
Things to Consider
Although an FHA loan has less stringent qualification requirements than a conventional mortgage, there are also drawbacks. For example, you will be required to pay an upfront mortgage insurance premium and a monthly mortgage premium.
Like other mortgages, FHA loans offer a variety of loan terms, including 10, 15, 20 and 30 years. Both fixed rate and variable rate options are available as well.
To determine whether an FHA mortgage is right for your needs, consider speaking with a home finance professional.