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FHA Loan Requirements in 2021
FHA loan is the easiest loan to qualify for. With minimal down payment requirement of 3.5% and the down payment can be a gift from family members, it allows homebuyers to realize their dream of homeownership. However, borrowers must meet specific eligibility requirements to qualify for an FHA-insured loan. FHA loan requirements are straightforward and must be met by all applicants.
FHA loans are the best option for people who filed for bankruptcy or had a prior foreclosure. They are popular among first-time home buyers who have not saved up a large payment for the purchase of a home.
Credit Score Requirement
FHA’s general guideline regarding a borrower’s credit score is a 580 mid-FICO score to qualify for a mortgage loan. This guideline varies from one lender to another. Some big commercial banks require a minimum of 620, others all the way to 640 before they can extend an FHA loan. The FHA guideline of 580 is a requirement for the loan to be eligible for an FHA insurance. Since FHA only insures the loan against future default by the borrower and doesn’t originate the loan themselves, they cannot force a mortgage lender to extend an FHA loan to borrowers that fall below their set criteria. This is what’s referred to as an “overlay” by lenders.
Borrowers with a FICO score below 580 may still qualify for an FHA loan provided they come up with a minimum of 10% down payment. There are certain restrictions that will apply to these borrowers but it is still more lenient as compared to conventional loans and other types of mortgage programs
Income Requirement (Debt-to-Income Ratio)
FHA doesn’t have a set minimum income requirement to qualify for an FHA-insured loan. They do, however, require the buyer to make sure they can afford the mortgage for which they are applying for. This includes documenting a steady income for at least two years.
A borrower’s debt-to-income ratio is calculated based on their income versus their monthly debts. To calculate your DTI ratio, add up all your monthly bills and divide it by your gross monthly income (wages before taxes). The result is the percentage of your debt-to-income. The lower the percentage, the less risky a borrower is and vice-versa. The standard DTI ratio of an FHA loan is 31/43. The first ratio is the proposed monthly housing expense should not exceed 31% of the borrower’s gross monthly income. The second ratio of 43% is all the monthly debts plus the proposed housing expense should not exceed 43% of the gross monthly income.
We can extend FHA loans to borrowers with a DTI ratio as high as 55% with an Automated Underwriting System (AUS) approval. In certain circumstances, we can offer an FHA loan with a DTI as high as 57% with compensating factors.
A self-employed borrower must be in business for at least two (2) years. Their last 2 years’ personal and business tax returns will be required to calculate the monthly income. Also, a year-to-date Profit & Loss (P&L) Statement is required for all self-employed borrowers. If a borrower is in Sales or 30% of his income comes from straight commission, the same rule will apply.
Student Loans and FHA Loan
There is an important update on how mortgage lenders must calculate students loans for FHA loans that recently took in effect. It affects how borrowers may qualify for an FHA loan, mostly affecting the borrower’s debt-to-income ratio in a negative way.
Mortgage lenders must calculate the borrower’s student loan payment as follows:
- The greater of 1 percent of the outstanding balance on the loan, or the monthly payment reported on the credit report;
- The actual documented payment as long as the payment will fully amortize the loan over its term.
To put it into perspective, say a borrower has $80,000 in student loans on an income-based repayment (IBR) and the credit report is showing a monthly payment of $140. Under the new rule, the lender must use 1% of the balance ($80k) which is $800 instead of the $140 which shows on the credit report.
A deferred student loan doesn’t exempt any borrower either. If there is no payment showing on the credit report, the 1% rule will apply. This will push the borrower’s debt-to-income (DTI) ratio higher than the regular payment, hence, making the loan out-of-reach for most borrowers with a student loan.
For all case numbers assigned on or after August 16, 2021 and effective immediately, the new rule for outstanding student loans will be as follows:
- use the payment amount reported on the credit report or the actual documented payment, or
- use 0.5 percent of the outstanding balance if the monthly payment is showing zero (0) on the credit report.
Asset Reserve Requirement
FHA insured loans do require a savings requirement or what is referred to as “Reserves”. The total monthly reserve requirement is dictated by the borrower’s middle FICO score. A Reserve is the total amount of savings the borrower have in liquid assets after the down payment is used towards the purchase of the home. One month reserve equals one total monthly mortgage payment. If the borrower’s proposed monthly mortgage payment, the principal, interest, taxes, and insurance (PITI) are $1,000, one month in reserve is $1,000 just the same. The general rule of 3 months in reserve is a good rule of thumb but not required in all cases. The three (3) months or more in reserve rule will only apply if the borrower is purchasing a 3 – 4 unit property or have a middle FICO score of less than 620.
Down Payment Requirement
All FHA loans require a down payment. The minimum down payment requirement for an FHA loan is 3.5 percent of the sales price. This applies to borrowers with a middle-FICO score of 580 and above. Those with a credit score under 580 and under, all the way down to 500, may still qualify for an FHA loan but must come up with a minimum of 10 percent down.
Down payment can come from the borrower’s 401(k) account. If the home buyer borrows against their 401(k), it will not count as the borrower’s monthly payment obligations for underwriting purposes.
A borrower can also use “gift funds” as a source of down payment. The borrower’s immediate family can gift the down payment; their employer, labor union, a charitable organization or any close family friend with a clearly defined and documented interest in the borrower may also contribute towards the gift fund for the borrower.
An FHA requirement regarding large non-payroll deposit is something that is quite often overlooked. Every borrower is required to provide a credible explanation and documentation of the source of funds where the large non-payroll deposit came from. Typically, when money is moved or transferred from one account to another, e.g. Savings to Checking, this is easily documented. However, there are circumstances wherein the borrower gets money from other people or another source. This is where the documentation is not evident.
An appraisal is an expert assessment of an independent third party (the Appraiser) to determine the value of the property. As a general rule, the appraised value of a property must justify the sales price of the house.
During the process, the appraiser will look at comparable sales (comps) in the area within the last six months. He will visit, measure and evaluate the “subject property” inside and out. The appraiser will then provide an expert opinion regarding the value of the property and include any repairs that are required to meet the said value.
How does an appraisal of an FHA loan differ from a conventional loan?
A conventional loan appraisal is mostly concerned with the current market value of the property. The appraiser is only concerned with the condition of the property as it relates to the value relative to the sales price. That is primarily the objective of a conventional loan appraisal.
An FHA loan appraisal has another objective besides the value relative to the sales price. The Housing and Urban Development (HUD) requires the appraiser to inspect certain elements to make sure the property meets HUD’s minimum standards for health and safety. The property must be safe, sound, and secure. Are more comprehensive checklist can be found here. As a reminder, HUD doesn’t require a regular home inspection report. They highly recommend any home buyer to get the property thoroughly inspected by a certified home inspector. However, it is ultimately up to the borrower to have an inspection done for their peace of mind. They need to make sure the property is not going to be a money pit in the future.
In today’s world of lending, it is highly recommended that all borrowers be prepared for documentation. Have all sources of funds documented accordingly. Not only will this ensure that the loan file moves smoothly in processing, but this also eases the burden on behalf of the borrower, if everything is documented up front.
For additional information on savings or sourcing, please contact our FHA Home Loan Specialists at 346-297-0516.
An FHA Loan Specialist Available to Help You
Our FHA Loan Specialists are always available to help you and answer any questions. You may contact a dedicated FHA Loan Specialist through our website or by calling us directly. You may also chat with us to get a quick answer to your questions.
We make the FHA Loan Process Quick & Easy
Lenders often times will steer their clients away from an FHA loan due to their inexperience with the program. FHA Loans are a great source of funding for our clients. We share our knowledge and experience with FHA loans, making it easier for borrowers.
FHA Approved Lenders
The Federal Housing Administration requires lenders offering FHA loans to go through an extensive approval process. We are FHA-approved and designated as a “Full Eagle” FHA mortgage lender offering FHA-insured home loans in Texas.
FHA Loans Help Make Home Ownership Possible For a Wider Range of People.
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RMLO, NMLS # 286371
19500 State Hwy 249, Ste 210
Houston, TX 77070