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FHA loans offer several advantages, making homeownership accessible to many first-time homebuyers who cannot secure a conventional loan. FHA loans offer low down-payment options and relaxed credit requirements, but they also come with more flexible loan terms and reduced mortgage insurance premiums. Here’s everything first-time home buyers need to know about FHA loans.
What are FHA Loans?
FHA loans are backed by the Federal Housing Administration (FHA). Although the federal government does not hold the loan, they guarantee it if you default on your loan. Because of this added security, private lenders offer looser application restrictions, opening the pathway to homeownership for many non-traditional borrowers.
FHA Loan Requirements
As with any loan, FHA borrowers must meet minimum requirements to gain approval.
Credit Score
While conventional lenders typically require borrowers to have a minimum credit score of 620, the minimum credit score for an FHA loan is 500. There is a caveat here.
If your credit score is between 500-579, you must make a 10 percent down payment. However, if you have a credit score of 580+, you will only have to make a 3.5 percent down payment.
Debt-to-Income Ratio
DTI is a metric used to determine the percentage of your monthly income that goes toward paying off your debts. To calculate this number, add your recurring monthly debts and divide the total by your income before taxes and deductions. That number is your DTI.
While DTI requirements may flex when lenders consider your credit score, bank statements, and tax returns, the FHA typically requires a DTI of less than 43 percent.
Down Payments
As we pointed out above, FHA loans are appealing for their low down-payment options. Borrowers with credit scores of 580 and above only make a 3.5 percent down payment. However, if your credit score falls below 580, you will need to make a 10 percent minimum down payment.
But we also have some more good news for you: If you cannot come up with a down payment, you are permitted to use a donor’s gift money towards it, as long as the gift comes with a letter and contact information.
Appraisals
All lenders appraise the borrower’s prospective property. However, FHA loans are unique because an FHA-approved appraiser must conduct appraisals. Likewise, the property must also meet FHA requirements.
Nikkael Home Loans: Your FHA Mortgage Specialist
Want to learn more about FHA mortgages? Nikkael Home Loans has 60 years of combined experience in mortgage law, loan origination, and home protection. Plus, we’re attorney-owned and operated, so we have a higher level of ethics and accountability than you might find elsewhere. We can help you navigate through the mortgage process. Request rates today to get started!
