An FHA Loan is a mortgage that is backed by the Federal Housing Administration rather than a mortgage lender. The option acts as a gateway to home ownership for people with lower incomes and credit scores, and/or minimal down payments.
Unlike conventional loans that require a 20 percent down payment or additional private mortgage insurance, borrowers choosing an FHA loan are eligible for a loan with as little as 3.5 percent down with a mortgage insurance premium. These loans are most common with first-time homebuyers.
To be eligible for this type of mortgage, borrowers must meet the following requirements:
Borrowers must have a minimum credit score of 500 to be approved, with a 10 percent down payment, or a credit score of 580 or above to be approved with a 3.5 percent down payment.
FHA loan approval requires a steady employment history (or two years of work experience with the same employer), and the income must be verifiable through paycheck stubs, bank statements, or your federal tax return.
An FHA mortgage can only be used for a primary residence (as opposed to an income property or vacation home), and an FHA-approved appraiser has to appraise the property to ensure it meets the Housing and Urban Development’s guidelines for FHA properties.
Your monthly debt payments, (not including a mortgage) should not go over 31 percent of your pre-tax income. For example, if your gross monthly income is $5,000 a month, your debt from car payments, credit card payments, and student loans should not exceed $1,550 a month. With a mortgage, your debt-to-income ratio should not exceed 43 percent a month, meaning that all your debt, including your house payment, should be less than $2,150 if your pre-tax income is $5,000 per month.
Borrowers can not be approved for an FHA loan within two years of declaring a bankruptcy or three years of a foreclosure. However, most lenders will factor in extenuating circumstances.