If you are looking forward to buying a house, there are many options in terms of mortgage loans. However, the best of all is the FHA loan. This loan is provided by the Federal Housing Administration (FHA) and has emerged as the best option for aspiring homeowners.
This is due to low downpayment and affordable monthly installments during repayment. Due to these reasons, this loan offers multiple benefits to individuals and families looking to buy a home. But before you go on to apply for this loan, there are some requirements you should know of.
Read below to find 4 of these requirements in brief detail.
Minimum Credit Score
FHA loans require way less credit score as compared to conventional mortgage loans. Generally, a minimum credit score of 580 is needed to qualify for the lower down payment option (3.5%). Borrowers with scores between 500-579 may still be eligible but will likely need a higher down payment (10%).
However, individual lenders might have higher credit score requirements, so it’s advisable to check with lenders for their specific criteria. If you are buying from an online bank or credit union, you can enjoy way more benefits even with a low credit score.
Just be sure to search around and find a lender who offers the best interest rate with the minimum possible credit score. When filing for an FHA loan application, check your credit score and then proceed accordingly. According to SoFi, “Whether you have less-than-perfect credit or less cash on hand for a down payment, an FHA loan1 can help you finance the home you want.”
Debt-to-Income Ratio (DTI)
While you may have heard of the debt-to-income ratio several times, it is good to have a complete understanding of it, too. The debt-to-income ratio represents the total debt you owe compared with your income. When you apply for FHA loans, the lenders will look at your DTI and determine if you are qualified for the loan amount you are applying for.
Usually, the FHA prefers a DTI ratio of around 43% or lower. However, in certain cases, higher ratios may be acceptable if compensating factors, like a larger down payment or substantial cash reserves, are present. Like in some cases, the lenders may agree to accept a DTI of up to 50 percent.
However, this is only possible when you have good credit or a hefty amount of cash in the form of savings. In short, you should be comfortable paying off the loan.
Down Payment Requirements
FHA loans are renowned for their lower down payment requirements. A down payment as low as 3.5% of the purchase price is possible for borrowers with a credit score of 580 or higher. For individuals with credit scores between 500-579, a 10% down payment might be necessary.
It’s important to note that the down payment can come from various sources, including savings, gifts from family, or down payment assistance programs. Just be sure to try your best and minimize the closing costs, and you will be on your way to pay the minimum possible down payment for your loan.
Steady Income Requirements
Usually, there are no minimum income requirements for FHA loans. This is the reason these loans are available to aspiring homeowners at multiple income levels. However, these loans do demand consistent employment and income history to assess a borrower’s ability to repay the loan.
In common cases, a stable employment record with at least two years in the same job or field is preferred. Documented income through pay stubs, W-2 forms, and tax returns is necessary to demonstrate financial stability.
This way, you will be able to show the lender that you have a good credit history and that you can easily pay your monthly mortgage payments with your income.
