What many people do not understand is that FHA is not a lender themselves. FHA is an insurer of loans to lenders to ensure them against loss. As such, FHA Loan Guidelines are established by HUD, but lenders can have their own ‘overlays’ or stricter than FHA Loan Qualifications than FHA sets forth.

FHA Loan Qualifications – Credit

A potential borrower must possess a credit history that demonstrates a responsible use of credit, by the payment of one’s obligations on time. Generally speaking, lenders look at the last 24 months of payment history, but can look further back if warranted.

For the most part, lenders will require a clean payment history with no late payments. A payment to a creditor is considered late, when it is received by the creditor more than 30 days past the due date. This allows for delays in mail and minor oversights.

Although FHA loan guidelines technically do not require credit scores, most lenders have implemented a credit score minimum. The typical industry standard is a minimum of 620 credit score, however a few lenders will go down to a 560 score. Now there are very strict guidelines associated with these lower scores, as well as a premium to the interest rates and fees.

FHA Loan Guidelines – Income

Verifiable income is required in order to qualify for a FHA loan. The amount of income is relative to the loan amount being sought as well as the borrower’s debts. Debt to income ratio, or DTI as the industry refers to it, is a factor of one’s monthly debt payments in relation to his or her monthly income.

For example, if a borrower has a monthly income of $2000 and his or her monthly debt payments, including the payment on the proposed loan totals $600, his or her debt to income ratio would be 30%.

There are two different debt to income ratios to be aware of – housing expense and total debt service. FHA loan qualifications call for 31/43 ratios, or a 31% housing expense and 43% total debt service. Essentially, the proposed payment on a borrower’s new loan cannot exceed 31% of their gross monthly income, including property taxes and various insurances.

Total debt service, or the total monthly debt payments a borrower has, including the new loan payment, cannot exceed 43% of the borrower’s gross income.

As in other FHA loan qualifications there are exceptions to these ratios on a case by case basis, especially when a borrower has good compensating factors.

FHA Loan Qualifications – Assets

Assets, or sometimes called Cash Reserves, are liquid assets that a borrower has access to in the event of financial challenges. A borrower with 12 months’ worth of payments in reserve is in a much stronger position financially than someone who has no backup in the event of financial difficulties such as loss of job, or injury.

For 1-2 unit properties, there is no specified minimum cash reserve. On 3-4 unit properties, a minimum balance equivalent to 3 months of mortgage payments is required.

Assets must be verifiable and able to be accessed without difficulty. Examples of assets can be checking or savings accounts, retirement accounts provided they can be withdrawn from, CDs, money market accounts, etc.

Cash on hand, or “mattress money” is not an acceptable asset, regardless of the amount, as its ownership is not verifiable. A lender wants to know that the asset is the borrowers, and cash cannot be documented.

The only exception to the ownership rule is in the case of the down payment, which can come as a gift from a related party. The related party must verify the ownership of the funds and that they have not been borrowed. They will also need to attest that the funds are a true gift, and that no repayment is required. A borrower’s down payment cannot be borrowed. Here is a list of acceptable donors:

• A Relative of the borrower
• The borrower’s employer or labor union
• Charitable organizations
• Government agencies
• A close friend with a clearly defined interest in the borrower

FHA Loan Guidelines – Property

There are many FHA Loan Qualifications that pertain to a property and whether or not it will qualify for FHA financing. It would be best to consult a mortgage adviser regarding a particular property that you are interested in, but we’ll cover some of the major things to consider. Most single family homes will qualify. The home must be free of major defect and livable. Although FHA has programs that allow for repairs, the main FHA loan does not. Any repairs necessary must be completed prior to closing.

Condominiums or attached dwellings must be on HUD’s approval list. That list can be found here – FHA Loan Guidelines for Condos.

It is highly recommend to seek the assistance of a qualified mortgage professional. We have a list of FHA approved lenders on our home page and their corresponding rates. If you are considering a FHA loan, it would be ideal to seek out FHA loan qualifications sooner than later, even if you don’t intend on purchasing or refinancing today. It is much better to research lenders and programs well in advance of needing it. In most cases, an offer to purchase a home cannot be submitted until you have been pre-qualified for a loan anyway, so it pays to research early. The above is not meant to be an exhaustive list of all FHA Loan Qualifications. It is merely intended to assist you in understanding the general nature of FHA Loan Guidelines.

Since its inception in 1934, FHA has been an integral part of lending. So what is FHA?

What Is FHA – The History

The Federal Housing Administration was founded in 1934 when congress created it in response to the Great Depression. Its focus was to carry portions of the National Housing Act. It later became part of HUD during the Department of Housing and Urban Development Act. FHA was created to stimulate home ownership. In the 1940s, only 2 out of every five households owned their home.

The FHA helped ignite the production of thousands of apartments and affordable housing for seniors. In the 1970s, the FHA helped save thousands of apartments from foreclosure as rising energy costs threatened their financial survival.

Until FHA existed, most loans were terms ranging from 3-5 years with balloon payments in the end. As a result, many people could not afford the substantial down payment and it barred them from owning a home.

What is FHA – Important Points

What is FHA? FHA’s primary focus is to help people become homeowners. By focusing on helping first time home buyers, FHA is able to bridge the gap between shortcomings of applicants and a lender’s requirements. Now, as long as an applicant expresses an ability to pay the loan payments and a stable income and payment history, they may qualify for a home loan even though lenders traditionally have more stringent guidelines. By guaranteeing the loans for the lender, the lender is motivated to lend to applicants that normally wouldn’t meet their standards.

FHA is the only government agency that operates completely from its own self-funded revenue. It doesn’t take a penny from tax payers to support its budget. Its income is derived from mortgage insurance premiums that it charges borrowers for insuring their loans to lenders. This becomes a win-win, as applicants are able to obtain home financing that they otherwise might not be able to obtain and lenders are protected against losses in the event of default on the loans.

One of FHA’s most popular programs is its REO or Real Estate Owned programs, where is offers for sale properties that have been previously foreclosed on. One of the hottest parts of this program is that qualified buyers can purchase these homes with a down payment as little as $100! This program substantially assists lower income families that struggle to save up the current down payment minimum of 3.5%. This program can reduce to cost of acquiring a home by thousands of dollars!

FHA provides a huge stimulation to the economy thru community development, job creation and better citizens. When people have a vested interest in their home and community, their neighborhoods tend to be safer as well. Now you know about the Federal Housing Administration, and no longer need to ask What is FHA?