Requirements for FHA Loans

Requirements for FHA Loans

If you’re looking to buy a home but have less than perfect credit or lack the cash for a down payment, an FHA loan might be a perfect choice for you. Backed by the Federal Housing Administration, an FHA loan is a type of mortgage loan that allows for purchases with low down payments and closing costs.

At City Creek Mortgage, we’re proud to provide FHA loans in both fixed rate and adjustable rate formats. These loans are among the easiest loans to qualify for, but they do have a few important requirements that buyers and the new home must pass. Let’s look at these.

Basics

Some basics on the FHA loan:

  • Buyers can purchase a home with a down payment as low as 3.5 percent of the home’s value.
  • Pre-payment penalties do not apply.
  • Interest rates are around 4 percent on average.
  • Buyers need a FICO credit score of 580 or better to qualify.

 

Requirements

Some important credit and financial requirements for FHA loans include:

  • You’ll have to provide a Social Security number or proof of lawful residency, along with steady income over the last two years.
  • Your front-end ratio (cost of the mortgage payment plus mortgage insurance, taxes and other fees) should be less than 31 percent of your gross income, but it can be up to 40 percent in some cases.
  • Your back-end ratio (mortgage costs in addition to spending on other debt from credit cards, student loans, etc.) cannot exceed 43 percent in most cases, or 50 percent in others.
  • If your FICO score is between 500 and 580, you can still get an FHA loan if you make a 10 percent down payment or larger.

In addition, the FHA imposes limits on the kinds of houses that you can get on an FHA loan:

  • The borrower must live in the property as their primary residence.
  • There may be limits on loan value, depending on your area – usually 115 percent of the county’s medium home price.
  • The property must be appraised by an approved appraiser in most cases.

 

Mortgage Insurance

In most cases when a borrower can’t put 20 percent down on the house, a conventional loan will require private mortgage insurance that will drive up the monthly payments. With FHA loans, mortgage insurance will come in two forms:

  • Upfront mortgage insurance may be paid as a lump sum or rolled into monthly costs, but will be 1.75 percent of the loan value.
  • Annual insurance premiums will be added to monthly payments. These will vary, and can range between 0.45 percent to 1.05 percent of the loan value.

For more on FHA loan requirements, or to find out about any of our other mortgage loan services, speak to the pros at City Creek Mortgage today.