Before talking about who can get an FHA loan, it is important to clarify what one is because a lot of people aren’t quite sure. (Doing so will also help make clear who qualifies). FHA loans are mortgages backed by the Federal Housing Administration and issued by FHA-approved mortgage lenders that can be used to purchase or refinance new or existing 1-4 unit homes. The federal government backs, or insures, these loans in order to lower the down payment requirements, interest rates, and fees that would otherwise serve as built-in risk protection for lenders. In other words, it’s a way for the federal government to encourage lending to first-time home buyers who might have affordability concerns.
Now that you have a general sense of what FHA loans are and who they’re for, there are certain qualification criteria about which you should be aware.
• Borrowers with credit scores equal to or greater than 580 are eligible for maximum financing and therefore may be able to place down payments as low as 3.5%
• Borrowers with credit scores between 500 and 579 are eligible for a maximum of 90% financing, which means they will have to place a down payment of at least 10%
• Borrowers with credit scores below 500 are not eligible for FHA loans
• Borrowers must have income stability (reasonably expect current income to continue through at least first three years of loan)
• Home payments (i.e. mortgage payments, homeowner’s insurance and property taxes) cannot account for more than 29% of a potential borrower’s income
• Total monthly payments – on all loans and obligations– cannot comprise more than 41% of their income
Contrary to popular belief, there is no maximum income for FHA loan eligibility. However, if you make too much, you might be unable to get down payment assistance or supplemental financing.
Finally, all potential applicants will, of course, have to find FHA-approved banks and compare the terms they can offer. In addition, keep in mind that the amount of financing you get depends on your entire consumer profile (i.e. credit score, payment history, income/assets, debts/liabilities), the state of the economy, lender policies, and local FHA loan limits.