FHA Home Loan Guidelines on Purchase and Refinance
This blog will cover FHA home loan guidelines on purchase and refinance transactions. We will discuss whether you qualify for FHA loan and meet FHA home loan guidelines. Homebuyers presently renting a home or apartment and thought to apply and qualify for a home loan and see if you meet the qualification requirements, read further.
Qualifying for FHA Loans is much laxer due to its lenient guidelines than conventional loans. This is because conventional loans require a high credit score (620 FICO versus FHA’s 580 FICO). Conventional loans have much more stringent credit requirements regarding outstanding collection accounts and debt-to-income ratio requirements.
Borrowers who can not get qualified for conventional mortgages due to credit challenges often apply for FHA 203(b) loans. Mandatory waiting periods after bankruptcy and foreclosure are much less with FHA Loans than with conventional financing.
FHA Home Loan Guidelines Down Payment Requirements
While renting an apartment or home, homebuyers should plan and start saving for a down payment for a home purchase. All home purchase loans, except VA and USDA, require down payments.
Homebuyers should also consider how much home they are looking to purchase. They should know how much home they can afford. Under FHA Home Loan Guidelines, homebuyers can qualify for a home purchase loan with 3.5% percent of the home’s purchase price as a down payment with a 580 FICO or higher credit score.
FHA Home Loan Guidelines Under 580 Credit Scores
Borrowers’ credit scores falling between 500 and 579 credit scores, buyers will need a minimum of a 10% percent down payment on their home purchase.
Buyers, especially first-time home buyers, might want to consider repairing and re-establishing credit and see if they can maximize their scores to qualify for the 3.5% down payment FHA Loan. A 3.5% down payment is required if borrowers have 580 scores.
How To Use Secured Credit Cards To Increase Credit Scores For Mortgage
Secured credit cards are the best way of re-establishing one’s credit. Secured credit cards are like traditional unsecured credit cards. Consumer needs to put in an upfront deposit with the secured credit card company.
The secured credit card company will issue a credit limit equivalent to the amount of the consumer’s deposit.
FHA Home Loan Guidelines on Credit Scores
Buyers should plan ahead and review their credit scores before they apply. Experian, Equifax, and TransUnion, the world’s largest credit reporting agencies, will provide a free annual copy of their credit report as mandated by law. However, these three credit bureaus will not give credit scores. They will only provide credit reports.
To get credit scores, consumers will have to pay a fee. A few credible websites sell credit scores for as little as $1.00. Homebuyers with lower credit scores must meet minimum credit score and debt-to-income ratio requirements to qualify for FHA Loans. Also, when reviewing credit scores, ensure there are no errors on the credit report.
Getting Pre-Approved For Home Purchase
Not all lenders offer FHA 203b Loans. All lenders have different credit and debt-to-income ratio requirements. Many of them have mortgage lender overlays. Lender overlays are additional lending guidelines on top of the minimum agency lending guidelines set by HUD, the parent of FHA loans. For example, here is a case scenario. The minimum credit score to qualify for FHA loans is 500 FICO.
HUD will insure FHA loans with 500 FICO. Most banks and mortgage companies have minimum credit score requirements of 640 FICO. This is called an overlay on credit scores. Same with debt-to-income ratios.
HUD Debt-To-Income Ratio Guidelines
HUD allows a maximum debt-to-income ratio of up to 46.9% front end and 56.9% back end to get an approve/eligible per automated underwriting system.
Due to lender overlays, many lenders have overlays on debt-to-income ratio caps at 45% and 50% DTI. Gustan Cho Associates has no lender overlays on FHA home loan guidelines.
Choosing a Lender With No Overlays on FHA Home Loan Guidelines
The Department of Housing and Urban Development (HUD) maintains an online lender website lookup tool for all FHA-approved lenders nationally. Although many lenders offer lenient credit requirements, some lenders have more strict eligibility requirements, which are overlays. Lender overlays are higher standards set by lenders than HUD.
Borrowers looking for a direct lender with no overlays, contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are direct lenders with no investor overlays and only follow federal minimum HUD Guidelines.
FHA Loan Limits and How It Can Affect Home Purchase
When shopping for lenders, ask the mortgage loan originator about the FHA loan limits in your area. This is because they vary from state to state and county to county. The standard FHA Loan Limit in most parts of the country is $420,800. This holds true unless the property is located in a high-cost area. Buyers can also find FHA loan limits on areas they plan to shop for a home by using HUD’s online lookup tool.
Maximum Median Priced County and High-Balance Loan Limit
California has one of the highest home prices in the nation. For example, San Francisco has a higher loan limit than most countries due to high median home prices.
Maximum FHA loan amount of up to $970,800 in San Francisco and its surrounding areas due to the high cost of housing. Other areas in California have FHA loan limits of up to $970,800. Many other parts of the country are classified as high-cost areas. FHA Loan Limits are much higher than the standard FHA Loan Limit of $420,680.
Interview Loan Officers About Their Overlays
The two types of costs required when buying a home are the down payment for the home purchase and closing costs. Closing costs are the following:
- loan origination fees
- credit-reporting fees
- appraisal fees
- mortgage insurance costs
- pre-paid (escrows)
- homeowners insurance
- title charges
- recording fees
- any other third-party charges
Remember that the Federal Housing Administration will require borrowers to buy mortgage insurance to protect their interests. FHA MIP is for the protection of lenders in the event borrowers default on FHA loans.
FHA Mortgage Insurance Premium
Borrowers pay for the FHA mortgage insurance premium for the benefit of lenders. Also added is a one-time upfront mortgage insurance premium, a one-time fee of 1.75% of the mortgage loan amount. This is added to the mortgage loan at closing.
Borrowers must also pay the annual mortgage insurance premium for the life of the FHA Loan in monthly installments, which lenders charges in addition to mortgage payments.
What Documents Are Required To Start a Mortgage Loan Application
When submitting a mortgage loan application, ensure to provide employer information and addresses where borrowers have lived during the previous two years with no gaps. Borrowers will also have to provide the mortgage processor with a copy of the following:
- their social security card
- two years W-2 forms
- 60 days bank statements
- copies of complete federal income tax returns for the last two years
FHA Home Appraisal
All lenders will require a home appraisal. The mortgage loan officer will work with home buyers to pay for a home appraisal using an appraisal management company, AMC. HUD requires that the subject property meet certain minimum standards for FHA mortgage loan approval.
The home appraiser will check the property’s health and safety hazards per FHA home loan guidelines. Lenders may require repair of the defects and items that do not meet HUD housing inspection standards before approving FHA loans. The property must appraise at the purchase price or higher.
This blog on FHA home loan guidelines was updated on November 24th, 2022.
