(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. These credit score requirements will not apply to H4H loans.)
FHA Loan Qualifications
The basic qualifications for FHA 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 loan the combined gross monthly income of borrowers should normally be at least three times greater than the projected monthly mortgage payment (including taxes and insurance). There is leeway with this but these ratios are a useful a rule of thumb. In other words, if the projected total mortgage payment is $1200 per month the borrower(s) should be able to document a stable, verifiable pre-tax monthly income of $3600+ in order to qualify. In addition, if other monthly installment payments (auto loans, credit cards, student loans, etc) are high it could keep a potential borrower from qualifying based on the Capacity requirements. Contact us if you have questions about that.
The basic idea is that that one must 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 will not qualify for a government backed loan and will likely need to look at scaling back expenses before qualifying.
Collateral: This means you need to have equity in your home to get a traditional FHA loan.
Through the traditional FHA program one can refinance up to 97% of the current appraised value of a home.
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 traditional FHA loans.
Your credit history comes into play with any home loan application. Lenders 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 580 FICO score for a traditional FHA loan. Also, 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 a traditional FHA loan (and we can offer advice or referrals on that front if needed). Nevertheless, 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.
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