For those who are planning to purchase a home and need help doing it, it’s important to be aware of FHA loan requirements. This type of loan is federally insured and protects lenders from risk, which allows them to loan the money with confidence. There are requirements for both lenders and borrowers in place. The changes in these requirements for 2019 can impact borrowers who are hoping to secure an FHA loan.
What is an FHA loan?
The Federal Housing Administration insures FHA loans. Rather than a bank or other lender providing the backing for the loan, the FHA backs the loan. This removes the risk for the lender in the event of a default, making the lender more willing to loan the money. This type of loan was created to help stimulate the housing industry by encouraging lenders to lend and buyers to buy.
Advantages of FHA Loans
There are many benefits of securing an FHA loan:
- No large down payment is necessary. The minimum down payment is only 3.5 percent of the home’s purchase price. But remember that a small down payment will mean larger or more payments later on.
- This type of loan is ideal for those who don’t have money for a large down payment or haven’t had time to establish a high credit score, such as younger borrowers and first-time home buyers.
- Those with bankruptcy or foreclosures in their past may not qualify for other, more traditional loans. FHA loans are an easier option for these individuals.
Here are the FHA loan requirements for 2019:
Credit Score of At Least 500
Your credit score is very important, even for traditional loans. To obtain an FHA loan, you will need a credit score of between 500 and 579. However, you will need to provide a down payment of 10 percent of the purchase price of the property. For the minimum down payment of 3.5 percent, you will need a credit score of at least 580.
In addition to your FICO score, credit requirements will take into account your payment history and circumstances that have prevented you from making payments. This is why obtaining a copy of your credit report is so important. Bankruptcies and foreclosures will be look at, too, though they may not necessarily count against you.
There are special credit circumstances that may be taken into account when you apply for an FHA loan. If you have no credit history, either you must establish credit another way or your lender must obtain a non-traditional merged credit report. Bankruptcies must have been two years ago or longer, and the borrower must have established good credit in the meantime or at least not have incurred any more debt. Late payments will count against you, so you should apply for an FHA loan after you have established 12 months of on-time payments.
FHA Mortgage Insurance
With a traditional mortgage loan, private mortgage insurance is required with a down payment of less than 20 percent. FHA loans require a mortgage insurance premium to be paid up front, regardless of the amount of down payment, as well as an annual mortgage insurance premium. This premium is paid every year for either 11 years or the lifetime of the loan, depending on your local program’s terms.
Debt-to-Income Ratio of Less Than 43 Percent
The debt-to-income ratio is the relationship between all of your debts and income. This ratio should not exceed 43 percent in order to qualify for an FHA loan. This ensures that you can keep up with payments in addition to your existing obligations.
The Borrower Must Live in the New Home as Their Primary Residence
The Federal Housing Administration places restrictions on how you can use your new property. The home must become your primary residence. You cannot purchase the home for a family member unless you plan to live there as well. You cannot buy it to “flip it” and resell it, and you cannot buy it for intended use as a rental property. You also cannot buy the property as a vacation or second home.
The property must also be located in a specific city, county, state, or other regional area. There may be limits on the purchase price of the property as well. A municipality’s program will have its own limits on the purchase price. There may also be income limits which vary from one region to another.
You must have steady income to prove that you can keep up with the loan payments. This goes hand-in-hand with the next requirement, proof of employment, and does not include savings.
Proof of Employment
To provide a steady income, you must have steady employment. Generally, you should have proof of employment at the same position for two consecutive years. You could also have moved up to a higher-paying position within that time, but a decrease in pay will not look good for you. Long periods of unemployment will not look good, either.
FHA loans have definite advantages, but they also have lots of requirements. They are ideal for those who don’t have an established credit history, who have bankruptcies or foreclosures in their past, or who don’t have the money for a large down payment. A credit score of 500 or higher will be required, unless you are planning to put down the minimum down payment, and a good payment history is helpful. You should obtain copies of your credit score and credit report to make sure you are aware of all your credit issues. You will need to pay for mortgage insurance and maintain a decent debt-to-income ratio of less than 43 percent. You must live in the home you are buying as your primary residence and provide proof of both steady income and steady employment. By staying on top of the FHA loan requirements, you can successfully secure the funding you need to achieve your home ownership dreams.
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