Am I qualified for an FHA loan?

FHA loan programs, such as the FHA 203(b) Basic Home Mortgage Loan, are extremely helpful to first time home buyers. You might ask yourself: "Do I qualify for an FHA mortgage?" Well, the answer is not that complicated.

The FHA-approved lender is basically going to look at 3 main things:

1. Your income
2. Your current debts and liabilities
3. Your credit history

Additionally, you need a valid Social Security Number (SSN). Note that if you work for the World Bank or a foreign embassy, then you might not be required to have an SSN, but you'll need to provide evidence of your status. To qualify for FHA, you also need to be old enough to sign a mortgage note. This depends on the state you live in. In most states, you need to be at least 18 years old to sign a mortgage note. There is no "maximum" age to qualify for FHA (i.e., you're never too old to qualify for an FHA loan!).

Your income

When FHA insures a mortgage, they just want to make sure the borrower has the ability to repay the loan. If you applied for an FHA loan today, your income needs to stay at least at the same level you're currently at for the next 3 years. For example, if you're making a nice $45,000 per year salary, then the lender that is processing your mortgage application has to do some research to verify that it won't likely drop below $45K during the next 3 years. If you have an erratic income that fluctuates year to year, then it could make it harder to approve you for an FHA loan.

Can I include disability income, alimony, or pension benefits on my FHA loan application?

Yes! In addition to regular salaries and wages, you can include income from other non-employment sources, such as disability benefits, alimony, and pension benefits. Keep in mind that they need to be verified by the lender, so be prepared to provide documentation. Also, as mentioned earlier, they want to see that this income will continue for at least 3 years. So if you have alimony on a child that is going to turn 18 in less than 3 years, then that alimony income most likely won't be counted.

Your current debts and liabilities

Your FHA approved lender is going to take a really detailed look at your current debts: things like credit cards, car loans, student loans, and other lines of credit that you have to make regular payments on. For FHA to insure your mortgage, they're going to look at your debt-to-income ratio. I.e., how much debt you have compared to how much income you make.

Your debt-to-income ratios (DTI)

To qualify for an FHA insured loan, such as the FHA 203(b) Basic Home Mortgage Loan , there are two debt to income ratios that are important:

• The front-end DTI: Your front end debt to income ratio is basically the mortgage payment divided by your monthly income. FHA says that it needs to be 31% or lower. For example, if you make $3000 per month, then your mortgage payment can't be more than $930 (31% of $3000 is $930).
• The back-end DTI: Your back-end debt to income ratio is defined as all of your monthly credit payments divided by your monthly income. FHA requires that this can't be higher than 43%. For example, if you make $3000 per month, then all of your minimum credit card payments, car payments, other loan payments, plus your mortgage payment cannot be more than $1290 (43% of $3000 is $1290)

Basically, if your debt to income (DTI) ratio is too high, then FHA believes that it is more likely you can't afford to repay the loan. So, FHA won't take the risk to insure it.

Your credit history

The last piece that determines if you are eligible for an FHA 203(b) or other FHA loan is your credit history and credit score. The good news is that FHA doesn't require a perfect credit score to qualify. That said, if your credit score is below 500, you'll need to work on bringing it up before applying for an FHA loan. If your credit score is above 500, then you are in the game!

FHA requirements say that a lender can approve someone with a credit score as low as 500 in order for FHA to insure the mortgage. Keep in mind, however, that lenders are not forced to accept borrowers with 500 credit scores. The regulation just says that FHA will insure borrowers that have a 500 credit score. In reality, many lenders will require a higher credit score - closer to 600 before they'll approve you.

If your credit score is 580 or higher, then with an FHA loan, you only need to put down as little as 3.5%. If your credit score is between 500 and 579, then you can still qualify but you'll need to have a 10% down payment.

Additional factors: Must be primary residence. Property must meet HUD's minimum property standards

Must be an owner-occupied primary residence

The FHA 203(b) loan program is limited to owner-occupied primary residences. This means the home that you are planning to buy has to be your primary residence. In general, it can't be an investment property or second home. However, borrowers may be permitted to use the FHA 203(b) for a second home once, so long as they have only one secondary residence at any time. A secondary residence is only permitted if the Homeownership Center assisting the borrower determines that there is no affordable rental housing available that meets the needs of the family within a reasonable commuting distance of work; and if the maximum loan amount is 85% of the home's value.

The house must meet HUD's property standards

The property you are buying must meet HUD's minimum property standards, such as durability and safety and soundness. HUD's bulding standards are typically higher than local county building codes, so buying a fixer-upper might not be approved as easily. Sellers are expected to correct any safety issues in the home as a condition of accepting the loan and the repairs need to be finished before closing. If the seller refuses, the buyer may create an escrow account for repairs and finance it into the loan through FHA's Limited Section 203(k) program.