How To Qualify For Your FHA Mortgage
FHA qualifyingÂ guidelines are more flexible than those of most conventional (non-government) lenders. However, not just anyone can qualify.Â You must have a sufficient and stable income, and show that you can responsibly manage debt.
Hereâ€™s what youâ€™re dealing with:
You donâ€™t have to be a U.S. citizen, but you do need to show that youâ€™re in the country legally, and that the U.S.Â Citizenship and Immigration Services (USCIS) is likely to approve your continued residency.
Youâ€™ll need 3.5 percent of the property purchase price (10 percent if your credit score is below 580). You can save it, get it asÂ a gift, or even borrow itÂ from an approved source.
You can get an FHA mortgage without a credit score. But if you have one, it must be at least 500 for a loan with 10 percent down, and 580 with 3.5 percent down.
However, only 1.55 percent of FHA loan approvals went to those with FICOs between 500 and 549, according to a recent Ellie Mae report. You can have a low score, but your credit history should not look like a rap sheet.
You have to be able to prove your income. Income should be stable, meaning you receive it regularly and reliably. It should also be likely to continue for at least three years. (Mortgage lenders generally assume that your employment income will continue unless there is reason to believe that it won’t.)
Your newÂ mortgage payment, including principal, interest, property taxes and homeowners insurance, should not exceed approximately one-third of your gross (before-tax) income. All of your monthly bills, including house payment, credit cards, student loans, auto loans, etc., should not exceed 43 percent of your income.
Lenders will let you go as high as 50 percent of your income in certain cases — for instance, your credit is excellent, you have lots of savings, or you purchase an Energy Star home.
For more information, check out the MortgageÂ Affordability Calculator before applying for your mortgage.
When underwritingÂ for any government-backed mortgage like FHA, the lender must check a database of people who have defaulted on government debt, such as taxes or student loans. This database is called the Credit Alert Interactive Voice Response System (pronounced â€œcaversâ€�).
In most cases, the check is just a formality. If your name turns up on that list, however, you wonâ€™t be eligible for any government-backed mortgage until you resolve the matter.
Qualifying for FHA financing is not cut-and-dried. Underwriters look at the total picture, and may be more or less lenient, depending on the overall strength of your application. In addition, not all lenders apply FHA guidelines the same way.
Beating Overlays For FHA
Many lenders impose tougher guidelines (called overlays) than FHA requires. For example, a lender might set a minimum FICO of 620 instead of 580.
If youâ€™re concerned about being approved, ask about overlays when you interview prospective lenders.
Your FHA Mortgage Application
Once you find a mortgage lender with a good FHA rate, it’sÂ time to apply for your mortgage. Hereâ€™s a list of documents that youâ€™ll probably need when you apply for your loan:
For salaried employees, that means your last two pay stubs and W-2s covering your most recent two years of employment.
For self-employed borrowers, that means two years of tax returns and year-to-date financial statements. If you earn income from commissions, bonuses, or a second job, youâ€™ll need to have received it for two years before it can be used to qualify for an FHA mortgage.
Other income documentation
You canÂ use Social Security, disability, pensions, unemployment, ADC payments, interest or dividends to qualify for your mortgage. Youâ€™ll need to prove that you get it regularly and that it will continue for at least three years.
What about unemployment compensation? There is one situation in which you can use unemployment compensation to qualify for mortgage financing.Â Seasonal employees with a 2-year history of working and then collecting unemployment can count the unemployment compensation as income.
Aside from your down payment and closing costs, the FHA sets noÂ minimum amount for assets. However, lenders like you better if you have savings to pay several months of mortgage payments if your income temporarily stops.
To document your checking account funds, furnish your most recent two monthsâ€™ statements, all pages. Donâ€™t bounce any checks in the months before you apply for a home loan â€“ it doesnâ€™t look good.
For your savings accounts, investments, and retirement accounts, provide your most recent quarterly statement or your last two monthly statements. If you have joint accounts with someone who is not applying for the loan with you, getÂ a letter verifying that you have access to 100 percent of the money in the accounts.
If someone givesÂ you part or all of the down payment, you have to prove that it’s a gift, and that it comes from an acceptable source. FHA wants to be sure that you did not borrow theÂ money or get a gift from someone who would benefit from the sale, like the seller, real estate agent or your loan officer.
Youâ€™ll have to provide a gift letter and copies of statements proving that the money came from the giver.
If you pay or receive child support or alimony, you need to supply a copy of your divorce decree. You don’t haveÂ to disclose your support payments. But if you want to use them to qualify for your mortgage, you must prove the amount and duration.
You’ll also have to show that you receive it regularly and on-time. Canceled checks or records of your deposits can take care of this requirement.
Â Avoid These MistakesWhen Applying For An FHA Home Loan
When your loan is in process, avoid these errors:
- Do not make big-ticket purchases on credit.
- Do not apply for new credit cards or take on other consumer debt.
- And please, do notÂ quit your job unless you are switching to a better-paying one in the same field.
Your credit and employment will almost certainly be re-checked before your home loan funds. Anything that indicates that your debt-to-income ratioÂ has changed, or that your credit scoreÂ has dropped could get your loan approvalÂ revoked.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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