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Everything you need to know about qualifying for an FHA Loan Feature Image
Posted on 09/09/2020 5 minute read

Everything you need to know about qualifying for an FHA Loan

After this short read, you should have a better sense of how to go about qualifying for an FHA loan and whether this mortgage option is one you should consider.

Have you been presented with an FHA by your Loan Officer? Or, maybe you’re just starting to think about buying a home, and you keep hearing that an FHA loan is the best mortgage option.

If you’re like most people, terms like FHA loan and other mortgage buzzwords are confusing. 

Well, in this article, we’re going to make FHA loans easy to understand. More importantly, we’re going to walk you through the qualifying process. 

Basic FHA Qualifying Guidelines for Borrowers

Let’s start with the basics. The following are the most basic considerations that will determine if you qualify for an FHA loan. 

  • Your debt-to-income ratio, which is based on your Automated Underwriting Findings
  • A required down payment ranging between 3.5% to 10%, based on credit
  • The home you are buying must be your primary residence and meet FHA’s minimum property requirements

Remember that these qualifying standards may vary from time-to-time depending on FHA guidelines and individual borrower credit profiles. 

The mortgage market is fluid and sometimes volatile; that’s why it is essential to select a trusted professional loan officer early in your home buying process. That professional will be your best resource in exploring all possible mortgage options and getting the best mortgage for your situation.

Now that you have a quick list of some basic qualifying factors. Let’s dig a little deeper to understand this unique type of mortgage loan.

What is the FHA, and why do they do loans?

To answer that simple question, we’ll take it “straight from the horse’s mouth,” as they say. Here’s how the Federal Housing Administration describes themselves and what they do.

“The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single-family homes, multifamily properties, residential care facilities, and hospitals. It is one of the largest insurers of mortgages in the world, insuring more than 46 million mortgages since its inception in 1934.”

Since 1934, FHA has been a driving force in helping American’s realize the dream of owning a home. Their flexible credit requirements for borrowers and mortgage insurance protection for lenders often makes this an attractive mortgage option for home buyers.

What credit score do I need to qualify for an FHA Loan?

FHA loans can offer more flexible credit options for homebuyers. However, as with any lending program, better credit scores typically lead to more options, which may make your mortgage more affordable.

How much down payment do I need?

One of those additional factors, dependent on your credit score, is the amount of down payment you need.

A down payment of 3.5% of your home’s purchase price is standard for FHA.

What Debt-to-Income ratios do I need to qualify?

Debt-to-income ratio, the amount of your monthly debt and expenses divided by your monthly income, is another crucial qualifying factor. But, with qualifying DTI threshold of 50% or lower, this is another area where an FHA loan can provide an attractive option for a new homebuyer.

What is Mortgage Insurance Premium (MIP)?

Mortgage insurance is another important feature of an FHA loan to understand. Although mortgage insurance is common on most mortgages with less than a 20% down payment, FHA mortgage insurance is slightly different.

FHA loans require two types of mortgage insurance premiums:

  • Upfront mortgage insurance premium: This premium is paid “up front” when you get your loan and is often rolled into the financed loan amount, and is 1.75 percent of the loan amount. 
  • Annual mortgage insurance premium: This premium is paid as a part of your monthly mortgage payment. Your premium will be 0.45 percent to 1.05 percent, depending on your loan term (30 years vs. 15 years) and the initial loan-to-value ratio (the amount of your loan divided by the value of your home).

In contrast to a conventional loan, FHA mortgage insurance premiums cannot be canceled in most cases. However, you can get rid of FHA mortgage insurance by refinancing into a conventional loan in the future, and when you sell your home.

This FHA “life of the loan” mortgage insurance premium allows lenders to often offer an FHA mortgage option to a broader range of credit profiles. 

Next Steps to Getting an FHA Loan?

As we often repeat, your loan officer is your best resource and guide in finding the best mortgage options when you’re ready to buy a home. 

If you have more questions about an FHA loan or just general questions about buying a home, our professional loan officers are available when you are. 

Find a loan officer from our growing team of professionals or get started by requesting a current rate quote

Homefinity is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.

Photo by Kelly Sikkema on Unsplash

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