Homebuyers have a number of financing options, but the low down payment and relatively easy qualification make loans underwritten by the Federal Housing Administration, or FHA, a popular choice. Even though FHA loans are somewhat more attainable than their conventional counterparts, borrowers must meet certain criteria to qualify for FHA financing.
The FHA has a number of income requirements for borrowers. As a basic requirement, according to the FHA Home Loans website, borrowers should demonstrate at least two years of steady employment. Lenders typically prefer that the applicant have been with the same employer for at least two years, but many will consider applicants who have changed jobs after otherwise consistent employment. In addition to steady employment, borrowers must also demonstrate that their income has remained the same or increased over the past two years.
Even though FHA credit requirements are somewhat more lax than those of conventional lenders, applicants must demonstrate creditworthiness in order to qualify for an FHA loan. According to the FHA, most borrowers must have a minimum credit score of 620. In addition, borrowers should have no late payments within the last two years. Borrowers who filed bankruptcy more than two years before the application or who experienced a foreclosure at least three years before applying may also quality, but the applicant must have maintained a perfect payment record since the bankruptcy discharge or foreclosure.
The FHA requires borrowers to meet two ratio tests in order to qualify for a loan. The lower of these ratios, known as the front-end ratio, compares the borrower’s income to the proposed mortgage payment. According to the FHA, the borrower’s combined mortgage principal, interest, taxes and insurance must amount to no more than 29 percent of the borrower’s gross income as of September 2012. To meet back-end ratio requirements, the borrower’s total debt payments must amount to no more than 41 percent of income. Debt payments include auto loans, student loans, credit and charge cards, federal tax repayment installments, personal loans, alimony and child support. Non-debt related monthly expenses, like utility bills and insurance premiums, are not included in either ratio.
Borrowers applying for an FHA loan must make a down payment of at least three percent as of September 2012. In addition to these requirements, the FHA has a number of other requirements related to savings balances, income documentation and personal identification. The FHA may also have additional requirements for the type of property financed, the value of the property and the funding sources from which a borrower draws the down payment money. In addition to requirements that the Federal Housing Administration enforces, FHA lenders typically have additional (and more restrictive) requirements of their own.
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