The FHA loan is one of the easiest ways to finance a new home. TheFHA loan program was created under Franklin Roosevelt’s New Deal program to help the housing industry and make it possible for home buyers of modest means to purchase homes.
The following information is provided to illustrate the minimal qualifications for an FHA loan. If you meet the following guidelines, you may qualify for an FHA mortgage loan.
1. FHA age requirement
The FHA loan program does not have a minimum age requirement; however, the borrower must be old enough to meet the age requirement that a mortgage note can be legally enforced in the state, or other jurisdiction, where the home is located. There is no maximum age requirement.
2. Social security number requirement
All applicants are required to have a valid social security number.
3. FHA loan citizenship requirement
FHA loans are available to US residents, legal permanent resident aliens, and non-permanent resident immigrants.
Permanent resident aliens must show proof of permanent residence and indicate their residency status on the mortgage application. Non-permanent resident immigrants must declare that their house will be their primary residence, have a valid social security number, and be authorized to work in the United States, as shown by the Employment Authorization Document (EAD) issued by the USCIS.
Non-U.S. nationals who do not have legal residence in the United States are ineligible for FHA mortgages.
Citizenship in the United States (U.S.) is not required.
Based on the information provided on the application and other necessary papers, the lender must determine the borrower's residency status.
A Social Security card is never sufficient to prove immigration or work status.
Borrowers with legal permanent resident alien status may be eligible provided they satisfy the same requirements, conditions, and circumstances as citizens of the United States.
The file must include evidence of permanent residency, and the borrower must indicate on the Uniform Residential Loan Application that he or she is a lawful permanent resident alien (URLA).
The U.S. Citizenship and Immigration Services (USCIS) of the Department of Homeland Security provides evidence of lawful, permanent resident status.
A borrower who is a non-permanent resident immigrant may be eligible if the following conditions are met:
• the property will be the borrower's main residence; and • the borrower has a valid Social Security Number, unless employed by the World Bank, a foreign embassy, or a similar employer recognized by HUD (SSN).
• the borrower is legally permitted to work in the United States, as shown by a USCIS Employment Authorization Document; and
It is a terrific way to start the day if the borrower fulfills the same requirements, conditions, and circumstances as US residents.
To establish job status, the Employment Authorization Document is required.
If the Employment Authorization Document is scheduled to expire within a year and there is a track record of renewals, the lender may assume that continuation will be granted.
If there have been no prior renewals, the lender must evaluate the likelihood of renewal using data received from the USCIS.
Borrowers who are granted refugee or asylum status by the USCIS are instantly permitted to work in the US.
The Employment Authorization Document is not required, but evidence of refugee or asylum status must be obtained.
Non-US citizens who do not have legal residency in the US are disqualified.
SOURCE:US Department of Housing and Urban Development
4. Credit score for an FHA loan
The FHA guidelines permit acredit score as low as 500 for home buyers. However, credit scores between 500 and 579 require a down payment of at least 10%. A credit score of 580 or higher are eligible for the FHA minimum down payment of 3.5% (i.e. 3.5% X $100,000 = $3,500). Lenders are permitted by the Federal Housing Administration to exceed the minimum credit scores for loan approval.
If the borrower's Minimum Decision Credit Score (MDCS) is less than 500, he or she is ineligible for FHA-insured lending.
If the MDCS is between 500 and 579, the borrower's loan-to-valu (LTV) is restricted to 90 percent. If the borrower's MDCS is at or above 580, he or she is qualified for maximum financing.
But what if there are two applicants for the FHA loan, which credit score is used?
The MDCS stands for
• when all reported scores are the same, the credit score recorded on the borrower's credit report
• the lowest score when two scores are recorded
• the middle score in cases when three different scores are provided
Each borrower is assigned an MDCS.
When a mortgage has several borrowers, the lender must compute the MDCS for each borrower and then select the lowest MDCS for all borrowers.
When there are several borrowers on a mortgage and one or more do not have a credit score (non-traditional or insufficient credit), the lender must select the borrower(s) with the lowest MDCS (s).
Except for mortgages insured under Sections 247, 248, Streamline Refinances, and Assumptions, the lender must investigate the borrower's credit history to determine the MDCS.
FHA delinquent federal debt
Borrower(s) are ineligible for an FHA-insured mortgage until the borrower/applicant resolves the delinquent federal debt with the creditor agency.
If the creditor agency verifies that the debt is legitimate and in overdue status as defined by the Debt Collection Improvement Act, the borrower will be ineligible for an FHA-insured mortgage until the debt is resolved with the creditor agency.
SOURCE:Handbook 4000.1 - page 155
5. FHA loan-employment requirements
The lender needs to verify the applicant's most recent two years of employment and income. W-2's are typically used to verify employment. The FHA requires a paystub referencing the year to date earnings; or in the alternative, the lender can contact the employer directly by phone or mail. The FHA guidelines do not specifically address whether the applicant is required to be employed for the previous two years prior to application.
Applicants may qualify if gaps in employment greater than six months or longer (an extended absence), if the applicant has been employed in the same job for a minimum of six months at the time of application; and has a two-year work history prior to the absence from employment.
Most FHA lenders want an FHA mortgage payment to be no more than 31% of the applicant's monthly income. The mortgage payment consists of principal & interest, 1/12 of the annual real estate taxes & homeowner's insurance, and monthly mortgage insurance premium.
6. FHA down payment
The minimum down payment on an FHA loan is currently 3.5% with a credit score of 580 or greater. Thee FHA will accept a credit score of 500, however, credit scores of 500 - 579 require a 10% down payment.
7. FHA borrowing limits
The FHA will allow up to 40% of the borrower(s) monthly gross income for a mortgage payment and with monthly debt, 50%. Although, most home buyers will be limited to a payment close to 31% and with monthly debt (including the proposed mortgage payment) to 43%.
Read more about FHA debt to income ratio
Frequently Asked Questions About FHA Loan Qualification
Can I use my part-time income to qualify?
According to the FHA, part-time income may be used providing . . .
If the borrower has worked a part-time job continuously for the previous two years and the present position is fairly expected to continue, the mortgagee may consider it as effective income.
Effective Income Calculation
The mortgagee's income must be averaged over the preceding two years.
If the mortgagee can demonstrate a rise in pay rate, he or she may utilize a 12-month average of hours at the existing pay rate.
SOURCE:Handbook 4000.1 - page 200
Q. Are FHA closing costs more than conventional?
A. The closing costs are similar between an FHA loan and a conventional loan. The FHA mortgages do require a funding fee that can be financed with the loan amount or paid in cash at settlement. The funding fee is technically not a closing cost.
Q. Can a seller refuse FHA loan?
A. There is no state or federal law that requires home sellers to accept FHA financing.
Q. Can an FHA loan be denied?
A. Applicants can be denied for any number of reasons, such as:
- unacceptable credit history
- credit score
- insufficient income
- length of employment
Q. Can I borrow more than the asking price?
A. The FHA 203(K) loan allows for purchase and home improvements all rolled up in one loan.
Q Is it hard to qualify for an FHA loan?
A. The FHA is the easiest home loan to qualify for
Q. What are the advantages of an FHA loan?
A. The down payment is only 3.5% (with a credit score greater than 579). The seller is allowed to pay up to 6% of the sales price toward the borrower's closing costs. The cash requirement can be gifted from an eligible donor.
Q. What would disqualify you from getting an FHA loan?
A. The previous question lists several reasons for the denial, but the leading loan stopper is a delinquent federal debt (i.e. school loan, IRS judgment, etc.)
Q. Why get an FHA loan?
A. The FHA loan has the least difficult and complicated qualification guidelines.