Whether you are a first-time homebuyer or facing problems qualifying for conventional home loans due to bankruptcies or poor credit history, you can qualify for FHA (the Federal Housing Administration) loans. These loans are the type of mortgage you can qualify for based on your credit scores or financial profile and allow you to finance your home purchase.

Keep reading to find out how FHA-insured loans can help you finance your primary residence.

How to Qualify for FHA Loans- Rules for 2022

Down Payment Percentage and Credit Scores

 The rules and regulations for FHA loans change each year. Applicants for FHA loans are required to have a minimum credit score of 580 to obtain a low down payment. The down payment percentage is 3.5, but if your credit score is less than the current rate, you will receive a 10 percent down payment.

Debt-to-Income Ratio

DTI or debt-to-income ratio is a percentage that helps lenders estimate the amount of the monthly income for the debt payments you will be paying for the loans, such as student loans or car loans. The formula for calculating DTI is;

Total debt/ total monthly income x 100 = Debt-to-income

FHA loans allow for 50 percent DTI.

Loan Limits

An FHA loan has varying loan limits, depending on your location. The loan limit for FHA is significantly lower everywhere. The amount you're allowed to borrow depends on your income, debt, and affordability. The loan limit for an FHA loan in 2022 is;

  • For low-cost areas - $420,680.

  • For high-cost areas - $970,800

But remember that limits change every year. Also, evaluate the area to determine if the houses' prices align with their actual worth of land and building when you purchase a home.

Primary Residence Requirement

FHA loans are limited to primary residence and come with some explicit standards for the property's condition. For instance, your property must have;

  • Site drainage

  • Comfortable heating and cooling system

  • Watertight roof

You must move into your home within 60 days of your loan closing.

Bank History

Besides credit scores, residential requirements, and loan limits, the FHA also assesses your prior payment history, bankruptcies, debts, and foreclosures. The purpose is to get information on the reasons that kept you (as a borrower) from paying your outstanding bills and debts.

Note that you can't apply for FHA-insured loans if you have a history of bankruptcy or unpaid debts. You must wait until you straight your record with at least one year of on-time payment before applying for FHA loans.

However, if you face foreclosure, you can apply for an FHA-insured loan after three years of foreclosure. The banks and lenders evaluate the circumstances and scenario behind the foreclosure. Similarly, in the case of civil judgment or decision against you for any unpaid federal debt, you need the FHA-approved lender to demonstrate that you have resolved all the issues.

Income and Job History

Your employment history should have at least two years of tenure with the same employer. The lender will also consider the verifiability of your income through tax returns, bank statements, and pay stubs.

 

Down Payment Assistance Programs

Down payment assistance programs help you qualify for FHA-insured loans. The programs offer grants without any repayment requirement. The loan amount is forgiven under specific circumstances. Though FHA has strict rules for the credible source of down payment, the programs qualify for the loan as they come from public entities or charitable organizations.

 

Lender Overlay

 You need to watch out for the lender’s overlay and FHA requirements. As FHA only insures the loan and isn’t the lender itself,   it may have high credit score requirements or a low debt-to-income ratio. If you’re refused a loan because of the lender’s overlay, try applying to other FHA-approved lenders. 

 

Closing Costs

Remember that FHA doesn’t have relative costs, including attorney's fees, property survey fees, origination fees, property taxes, title recording costs, etc. You must have sufficient funds to cover the costs or figure out ways FHA accepts to pay these expenses. You can ask the builder or lender to cover this cost for additional interest over the loan.

 

Current Interest Rate for FHA Loans

The current interest rate for FHA loans is below 3 percent. The rate may vary from lender to lender.

Pros of FHA Loans

·       Lower down payment requirement

·       Perfect for moderate or low-income borrowers

·       Lower credit score requirement

·       No PMI required

·       Ideal for first-time homebuyers

Cons of FHA Loans

·       It can't be used for investment property

·       Have stringent property standards 

·       Requires mortgage insurance for a more extended period

All in all, FHA loans make an excellent option if you're a first-time borrower and have a low credit rate. It has easy qualifying standards, a good percentage of interest rate, and lower requirements for down payments.