If the 20% down payment and sky-high credit requirements for a conventional mortgage are what’s keeping you from becoming a homeowner, you have another option.
Once upon a time, the steep down payment and credit requirement for mortgage loans stood in the way the average Americans dream of owning their own home – but not anymore. Thanks to the guarantee that the Federal Housing Administration (FHA) offers to mortgage lenders through the FHA loan, the home buying process has become so much easier for first-time applicants and working-class residents.
If low credit standards and 15% down payment sound good to you, qualify for FHA loan. Check out the qualification requirements below to know if you’re eligible.
1. Income and employment
You need verifiable income and long-term employment to be eligible for the FHA loan. This is to show that you are capable of meeting the upfront and monthly payments of the mortgage.
FHA-approved lenders prefer applicants who have been with the same company or employer. Furthermore, they will require you to present a copy of your W2’s and tax returns for the past two years.
2. Debt-to-income ratio
Another way for lenders to ensure that borrowers meet their mortgage responsibilities is by setting a DTI ratio limit.
Ideally, your accumulated debt-to-income ratio must be less than 35% of your gross income –this includes your mortgage and other debts. However, lenders may still qualify you even if you’ve exceeded the limit a little bit.
If your current DTI ratio is more than 45%, you might want to put off getting a loan until you’ve paid off some of your existing debts.
3. Credit score and down payment
Your credit score has a direct impact on how much down payment you need to pay.
FHA loans appeal to the average, working-class American because of the low down payment rate. The thing is, you’re qualified to pay only 3.5% down if you have a credit score of 580 or more. You may still avail of the FHA loan with a 500 – 579 FICO score, but be prepared to pay around 10% upfront.
4. Closing costs and Insurance
Remember that there are other fees to take care of upon closing the loan aside from the down payment.
The closing costs will amount to 3% of your loan amount, on average. This includes the upfront insurance payment and all the processing and issuance fees for the loan.
One more important thing to note is that insurance for FHA loans, also called mortgage insurance premium (MIP), is paid for the life of the loan. This is perhaps the biggest drawback to FHA loans.
While the MIP set-up may dissuade some people, many borrowers who have had problems qualifying for conventional mortgage found FHA loan to be a great alternative. With all that said, the only way to know whether or not the FHA loan is right for you is by consulting and prequalifying with an FHA-authorized lender in your area.