FHA loan qualifications

The FHA loan is one of the easiest ways to finance a new home. The FHA loan program was created under Franklin Roosevelt’s New Deal program to help the housing industry and make it possible for home bCheck listuyers of modest means to purchase homes. The following information is provided to illustrate the minimal qualifications for an FHA loan. If you meet the following guidelines, you may qualify for an FHA mortgage loan.

FHA AGE REQUIREMENT

The FHA loan program does not have a minimum age requirement; however, the borrower must be old enough to meet the age requirement that a mortgage note can be legally enforced in the state, or other jurisdiction, where the home is located. There is no maximum age requirement.

SOCIAL SECURITY NUMBER REQUIREMENT

All applicants are required to have a valid social security number.

FHA LOAN CITIZENSHIP REQUIREMENT

In addition to US citizens, lawful permanent resident aliens, and non-permanent resident aliens are eligible for an FHA loan. Permanent resident aliens are required to provide evidence of their permanent residency, and state their residency status on the mortgage application. Non-permanent resident aliens must state that the home will be the principal residence, have a valid social security number, and are eligible to work in the United States, confirmed by the Employment Authorization Document (EAD) issued by the USCIS. Non-U.S. citizens without lawful residency in the U.S. are not eligible for FHA mortgages.

United States (U .S.) citizenship is not required for eligibility. The lender must determine the residency status of the borrower based on information provided on the application and other applicable documentation. In no case is a Social Security card sufficient to prove immigration or work status.

A borrower with lawful permanent resident alien status may be eligible provided the borrower satisfies the same requirements, terms and conditions as those for U.S. citizens. The file must include evidence of the permanent residency and indicate that the borrower is a lawful permanent resident alien on the Uniform Residential Loan Application (URLA). The U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security provides evidence of lawful, permanent residency status.

A borrower who is a non-permanent resident alien may be eligible provided:
• the property will be the borrower’s principal residence;
• the borrower has a valid Social Security Number (SSN), except for those employed by the World Bank, a foreign embassy, or equivalent employer identified by HUD;
• the borrower is eligible to work in the U.S., as evidenced by the Employment Authorization Document issued by the USCIS; and
• the borrower satisfies the same requirements, terms and conditions as those for U.S. citizens.

The Employment Authorization Document is required to substantiate work status. If the Employment Authorization Document will expire within one year and a prior history of residency status renewals exists, the lender may assume that continuation will be granted. If there are no prior renewals, the lender must determine the likelihood of renewal based on information from the USCIS.

A borrower residing in the U.S. by virtue of refugee or asylee status granted by the USCIS is automatically eligible to work in this country. The Employment Authorization Document is not required, but documentation substantiating the refugee or asylee status must be obtained. Non-U.S. citizens without lawful residency in the U.S. are not eligible. SOURCE: US Department of Housing and Urban Development

Credit score for an FHA loan

The FHA guidelines permits a credit score as low as 500 for home buyers. However, credit scores between 500 and 579 require a down payment of at least 10%. A credit score of 580 or higher are eligible for the FHA minimum down payment of 3.5% (i.e. 3.5% X $100,000 = $3,500). Lenders are permitted by the Federal Housing Administration to exceed the minimum credit scores for loan approval.

The borrower is not eligible for FHA-insured financing if the Minimum Decision Credit Score (MDCS) is less than 500. If the MDCS is between 500 and 579 the borrower is limited to a maximum loan-to-value (LTV) of 90%. If the MDCS is at or above 580 the borrower is eligible for maximum financing.

But what if there are two applicants for the FHA loan, which credit score is used?


The MDCS refers to
• the credit score reported on the borrower’s credit report when all reported scores are the same.
• the lowest score where two differing scores are reported 
• the middle score where three differing scores are reported   An MDCS is determined for each borrower. Where the mortgage involves multiple borrowers, the lender must determine the MDCS for each borrower, and then select the lowest MDCS for all borrowers.  Where the mortgage involves multiple borrowers and one or more of the borrowers do not have a credit score (non-traditional or insufficient credit), the lender must select the lowest MDCS of the borrower(s) with credit score(s).   The lender must review the credit report to determine the borrower's MDCS, except for mortgages to be insured under Sections 247, 248, Streamline Refinances, and Assumptions.  SOURCE: FHA Knowledgebase



FHA LOAN EMPLOYMENT REQUIREMENTS

The lender needs to verify the applicant's most recent two years of employment and income. W-2's are typically used to verify employment. The FHA requires a paystub referencing the year to date earnings; or in the alternative, the lender can contact the employer directly by phone or mail. The FHA guidelines do not specifically address whether the applicant is required to be employed for the previous two years prior to application.

Applicants may qualify if gaps in employment greater than six months or longer (an extended absence), if the applicant has been employed in the same job for a minimum of six months at the time of application; and has a two year work history prior to the absence from employment.

Most FHA lenders want an FHA mortgage payment to be no more than 31% of the applicant's monthly income. The mortgage payment consists of principal & interest, 1/12 of the annual real estate taxes & homeowner's insurance and monthly mortgage insurance premium.

Can I use my part time income to qualify?

According to the FHA, part time income may be used providing . . .

The Mortgagee may use employment income from part time employment as Effective Income if the Borrower has worked a part - time job uninterrupted for the past two years and the current position is reasonably likely to continue.

Calculation of Effective Income The Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use a 12 - month average of hours at the current pay rate. SOURCE: Handbook 4000.1 - page 200


FHA DOWN PAYMENT

The minimum down payment on an FHA loan is currently 3.5%.

FHA delinquent federal debt

Borrower(s) are ineligible for an FHA-insured mortgage until the borrower/applicant resolves the delinquent federal debt with the creditor agency.

If the creditor agency confirms that the debt is valid and in delinquent status as defined by the Debt Collection Improvement Act , then the Borrower is ineligible for an FHA - insured Mortgage until the Borrower resolves the debt with the creditor agency SOURCE: Handbook 4000.1 - page 155

How much can I borrow with an FHA loan?

The FHA will allow up to 40% of the borrower(s) monthly gross income for a mortgage payment and with monthly debt, 50%. Although, most home buyers will be limited to a payment close to 31% and with monthly debt (including the proposed mortgage payment) to 43%.
Read more about FHA debt to income ratio