If you’re looking to buy a new home and are considering a federally backed mortgage to finance it, make sure you do your homework before applying.
An FHA loan is insured by the Federal Housing Administration. It is a great way for potential homeowners with lower credit scores and a smaller down payment to get into their dream home.
But homeowners have to meet certain FHA loan requirements before an FHA-approved lender approves the mortgage. Here is a checklist of what is needed that will make the process of financing a home easier and hassle-free.
What is an FHA Loan?
Before diving into loan requirements, borrowers need to understand the specifics around what is an FHA loan.
An FHA loan is a home mortgage guaranteed by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development. When borrowers default on the loan, the FHA steps in to help the lender.
Basic FHA Loan Requirements
Borrowers need to meet certain basic FHA home loan requirements. The federal government updates these guidelines each year.
These guidelines specify how much homeowners can borrow and on what types of property. The loan requirements also list a minimum down payment, credit score, and a maximum debt-to-income ratio.
Borrowing Limits
All FHA home loans have a maximum borrowing limit. These limits are set based on which county the home is located in and what type of property you are purchasing.
For example, in 2021 the FHA increased the maximum loan limit for single-family homes in high-cost living areas of the country from $765,600 to $822,375.
Use this easy tool to look up the FHA mortgage limits in your area.
Required Down Payments
FHA home loans need homeowners to put down a percentage of the mortgage and that down payment amount is determined by your credit score.
Under the 2021 guidelines, a credit score above 580 requires a 3.5 percent down payment. The down payment amount jumps to 10 percent if the credit score is between 500 and 579.
To estimate your required down payment, try using an online FHA loan calculator.
Debt-to-Income Ratio Requirements
While there are no specific fha-loan-income-requirements, lenders do want to ensure you have a steady income and aren’t overloaded on other loans. That’s where the debt-to-income ratio comes in.
To calculate your debt-to-income (DTI) ratio, take the total amount of your monthly debts (student loans, credit cards, car loans) and divide it by your monthly gross income (before taxes).
The FHA requires the DTI ratio to be 43 percent or less, but that percentage can change based on your credit score.
Go Ahead and Apply for an FHA Loan
Now that you’ve learned the basics about FHA loan requirements, it’s time to apply for FHA loan approval.
The process is not complicated. By meeting these simple requirements about credit scores, down payments, and debt-to-income ratios, you will soon be on your way to owning your own home.
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