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What does it take to qualify for an FHA loan?

by admin
August 13th, 2013

After the housing bubble burst, conventional lenders stopped offering low- and zero-down-payment financing and upped their requirements for credit scores. Borrowers today are scrutinized more carefully, regardless of whether they choose an FHA-insured loan or conventional financing. As the FHA itself began to have reduced reserves, the agency revised FHA guidelines for lenders. FHA lenders can also establish their own loan requirements, such as a higher credit score or a lower debt-to-income ratio.

FHA mortgage requirements

FHA mortgage requirements are based on the borrower’s credit profile and the appraised value of the home. To qualify for an FHA loan, a lender will review:

Credit score: While the FHA itself says that borrowers must have a credit score of 580 or above in order to buy a home with 3.5 percent down or to refinance with as little as 3 percent in home equity, most lenders require even FHA borrowers to have a credit score of 620 or 640. In May 2013, the Ellie Mae Origination Insight Report showed that the average credit score for an approved FHA refinance was 704, while the average score for an approved FHA purchase loan was 697.

Loan-to-value: FHA loans require 3.5 percent as a down payment or 3 percent to refinance, but Ellie Mae says that the average loan-to-value for an FHA refinance in May 2013 was 87 percent.

Debt-to-income ratio: FHA underwriting guidelines allow for a debt-to-income ratio up to 43 percent, but lenders may have a lower threshold for that ratio. Ellie Mae’s research shows that the average debt-to-income ratio for FHA refinances in May 2013 was 39 percent, while the average ratio for purchase loans was 40 percent.

FHA mortgage insurance

While FHA lenders and FHA itself have tightened guidelines for borrowers, the FHA has also increased the amount of mortgage insurance borrowers must pay and extended the length of time the insurance premiums are required. In some cases, borrowers will have to pay mortgage insurance for the entire term of their loan.

Borrowers should compare FHA and conventional financing options before choosing the right loan program for their financial needs.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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