Government Refinance and Home Purchase Assistance

Information and Updates on Government Mortgage Programs

(Contact us in the sidebar for help with your specific situation. Also, see the basic steps to obtaining an FHA loan here, info on the fees associated with an government backed loan here, and info on credit score requirements for a traditional FHA loan here.)

FHA and Conventional Loan Qualifications

The basic qualifications for FHA (and conventional) loans can be generalized by using “the three C’s”: Capacity, Collateral, Character

Capacity: This means you make enough money to pay for the new loan without difficulty.

In order to qualify for an FHA or conventional loan the combined gross monthly income of borrowers historically was supposed be at least double the minimum monthly payments on debts. There is leeway with this but these ratios are a useful a rule of thumb. In other words, if the minimum payments on all debts is $2000 per month the borrower(s) should be able to document a stable, verifiable pre-tax monthly income of $4000+ in order to qualify for a traditional FHA or conventional mortgage. However, these debt to income requirement are not in force at all for FHA-to-FHA streamline refinances and the ratios can be significantly stretched for HARP 2.0 refinances.

The basic idea behind debt-to-income ratio requirements is that that one should be living within one’s means in order to qualify for a home loan. If your mortgage or other financial obligations are too high to be supported by your income you normally will not qualify for a traditional loan and will likely need to look at scaling back expenses before qualifying. However, with the FHA streamline program there are no debt-to-income requirements. The logic is that if a borrower can stay on time with their higher FHA payments they can stay on time with lower payments too. The HARP 2.0 program employs similar logic but still requires debt-to-income ratios to be considered.

Collateral: This means you need to have equity in your home to get a traditional loan.

While conventional mortgages still require borrowers to have equity to refinance, borrowers with FHA loans, VA loans, or with conventional loans backed by Fannie or Freddie can refinance no matter how underwater/ upside down they are on the home if they meet the other requirements of the FHA streamline, VA streamline, or HARP 2.0 programs.

Also, the more liquid assets (meaning savings or other money in the bank or retirement plans) you have the better the chances you have qualifying for a loan. All lenders like to see financial reserves set aside to offset the risks of loss of income etc.

Character: This is the credit score requirement for most loans.

Your credit history comes into play with any home loan application. Lenders normally insist that borrowers show that they are responsible and that they diligently seek to meet their financial obligations. Credit scores are all the more important in the midst of the current lending crisis.

The FHA program does not currently technically have a minimum FICO score requirement. However, most banks are requiring at least a 600 FICO score for an FHA loan.

There are no official credit score minimums for HARP 2.0 loans.

Some of the things that lower credit scores (recent bankruptcies, foreclosures, collections, judgments, missed payments) can keep borrowers from qualifying for loans. If your credit is severely damaged you may need to spend time cleaning it up before qualifying for an FHA loan (and we can offer advice or referrals on that front if needed). The good news is that FHA does utilize a “common sense” approach to underwriting loans so if there are compensating factors and extenuating circumstances that can explain glitches on credit reports those factors will be taken into account and can often help get a loan approved.

Please contact us by filling in the Contact Us form in the sidebar with questions.

Comments Off Posted on 30 Apr