For many still, owning a home remains the dream. However, with a bad credit score or short credit history these days, it can seem to be a faraway one. But is it? Perhaps, if you’re looking at conventional loans, but what of FHA loans, which are insured by the Federal Housing Administration? These loans, which have different requirements than conventional ones, have been helping people realize their home ownership dreams since 1934.
What are the new FHA Loan Requirements? After the subprime crisis (2007-2010), mortgage standards did an about-face, from lax to strict. No longer were people able to walk into a bank and apply for a loan and get one, no matter their credit score or credit history. Mortgages became more difficult to come by and to this day, the aftermath of the crisis lingers. Getting a conventional loan can still be a challenge for those with less than excellent credit; but if this is you, don’t dismiss the idea of a mortgage so quickly. There’s always FHA loans. Backed by the U.S. government, these loans give lenders added assurance that the borrower can be trusted, that the home loan will be less of a risk. Basic guidelines for FHA loans include:
- < 580 FICO score = 3.5% down payment
- > 580 FICO score = 10% down payment
- Home appraisal by an FHA-approved appraiser
- Mortgage insurance (MPI) for all loans (no matter the down payment)
- Documentation (social security card, W-2 forms, tax returns)
Note that eligibility for an FHA loan starts with a 500 FICO score, with the caveat of a 10% down payment (the case since 2010). To qualify for the 3.5% down payment, the borrower will need to have a credit score above 580.While 580 is considered the threshold for most loans – as it’s ultimately up to the lender to approve a loan or not – you should still inquire about your options with a lower score. If you don’t get the FHA loan, you will at least know what you need to do to be considered for one in the future.
FHA Loan Changes in 2017
As established by the U.S. Department of Housing and Urban Development (HUD), 2017 saw a few new changes to FHA loans. The loan requirements are overall the same, but there are a few you should be aware of as you gather your paperwork for your mortgage case. In addition to a minimum credit score, MPI, and proof of income, you’ll also need to have two established credit accounts. For those with new credit history or who refuse to get a credit card or take out a loan, this could be a bump in your home-loan road. But for those who do have more than one credit account (present or past), this is a simple requirement to meet. Even at 3.5%, a down payment could still be a task to produce. A home that’s $235,000, for instance, will need $7,525 down, but for some of us, that’s not sitting in our savings. As a workaround, borrowers over time have gotten “gifts” from family to cover the down payment. A paper trail has typically been necessary, but in 2017, there’s no wriggle room. The cash gift must be verified in writing: that this is a gift, not a loan. Also, FHA lending limits, which is the maximum the agency will ensure, changed in 2017. While the “floor” went from $271,050 to $275,665, the “ceiling” increased to $636,150 from $625,000.
Home Ownership Through FHA
A misconception of FHA loans is that they are only for people with bad credit. This couldn’t be further from the truth, as FHA loans account for about 40% of all mortgages in the U.S. This includes borrowers with bad credit, but also many first-time home buyers who are just starting out and still establishing themselves. As the FHA says, the loans are popular because “borrowers that use them are able to take advantage of benefits and protections unavailable with most traditional mortgage loans.” Exactly, FHA loans don’t prohibit people with excellent credit scores from applying. Furthermore, there is no minimum or maximum when it comes to income.Eligibility for an FHA loan is a combination of factors, which is considered on a case-by-case basis by lenders. As for income, however, borrowers should have a DTI or debt-to-income ratio that’s less than 50%. This means that a person’s debt – including the mortgage – shouldn’t exceed half of what the household makes. This, of course, will also tie into one’s credit history, as the higher the debt (versus available credit), the lower the score. A bad credit score of 500 can already open the door to an FHA loan, but getting to 580 or above can make the path to homeownership more viable. Don’t be discouraged by bad credit or newly established credit when it comes to buying a home. You can still realize the homeownership dream. You may just need to rethink the source of your mortgage offers and turn your attention to the FHA.