An FHA loan is insured by the Federal Housing Administration, a federal agency that is a part of the U.S. Department of Housing and Urban Development (HUD). The FHA does not loan funds to borrowers, rather, it provides lenders with security by offering mortgage insurance in case the borrower does not pay his or her financial obligations. Applicable to all buyers, FHA loan programs are made to help credit-worthy low-income and moderate-income families who do not have the qualifications for conventional loans.

The rates on FHA loans are generally market rates, while down payment requirements are lower than that of a conventional loan. The home loan programs that the Federal Housing Administration provides are exceedingly useful to consumers with less starting income available.

What is required for FHA loans?

It can be difficult to navigate finding the best FHA loan for your family. However, knowing some of the basic requirements does make the process easier.

Property standards

It isn’t enough to just like the property for you to qualify for an FHA loan. The property also has to meet minimum guidelines. These guidelines ensure the value and the potential collateral of the property to ensure the process doesn’t end in debt. The house or property needs to have enough value that, in case of foreclosure or debt, the property has enough collateral to cover the amount owed. Because of this, appraisals are more important than ever to the home buyingprocess.

Knowing what is on the checklist for meeting the necessary guidelines is also helpful to prevent buying a money pit. A home in good condition, needing minimal repairs to complete the checklist is always going to be a better option for any low-income family. A home inspection is vital before purchasing any home. This will help to guarantee you are picking a secure property that has no health hazards like water leaks, lead paint, asbestos or structural damage.

This will help to determine the minimum property value as the home stands without any work done, to help determine if it is worth the investment.

Buyer requirements

While there are certain standards in place for properties to be backed by FHA loans and mortgages, there are also requirements for prospective buyers. First, you must be an adult citizen of the United States (18 years of age or older). Along with citizenship, you must also be able to provide your own, valid social security number.

You also have to have some credit history. To qualify for FHA backed mortgages, you need a minimum of two credit accounts. Most credit accounts take about six months to be considered ‘established,’ so it’s better to have a more documented credit history than not. These two (minimum) credit accounts also need to be in good standing. That means there cannot be judgments against the accounts, and the accounts should have a history of on-time payments (no delinquencies).

This is required to show not only that you have made attempts to have a good credit score, but also that you do your best to pay your obligations.

Your income and past or current debt will also be considered. You should have at least two years of employment, without large gaps. The employment history also needs to be current, meaning you can’t list employment history from a decade ago if your current work history has large gaps.

Often, buyers applying for FHA backed mortgages also need to provide past tax returns, paycheck stubs, or W2 forms to show that they have income coming in and can meet afford what they are currently signing up for. Buyers may also be requested to provide a combination of these documents or to list their sources of income if not from employment, such as estates, trusts, alimony or government assistance. A list of all assets you own, such as vehicles, land or anything else will be needed to establish your full financial situation.

What income or credit score is needed for FHA loans and mortgages?

You can receive an FHA backed mortgage, even if you have some debt. However, there is a limit to the amount of debt you can have while still being approved. The higher your income, the more debt is considered acceptable, relative to your salary. In essence, your debt cannot exceed more than half of your annual income. You may see this referred to as a debt to income ratio of 50%.

Your down payment is determined heavily by your current credit score. The general ‘limit’ for FHA approval is a credit score of 580. However, some buyers can be approved with credit scores ranging from 500 to 579. The largest difference is in the amount of your down payment. For instance, if your credit score is under 580, you’ll be expected to pay a down payment of 10%. If your credit score is 580 or above, it only requires a 3.5% down payment.

You can find out more about FHA mortgages online and how to take the next step to get approved for a home in your area. Whether through the website, over the phone, or in person, your information is protected by a privacy policy, meaning everything will stay confidential.