Purchasing a home is one of the most significant decisions in many people’s lives. For those who aren’t able to pay in cash, which is almost everyone, they must apply for a loan that often requires a 30-year financial commitment. With all this in mind, it’s important to research and get the best loan option for your situation. FHA loans are often an excellent route to take for first-time home buyers.

To start, one critical thing to understand is that the Federal Housing Administration, or the FHA, does not provide loans to individuals directly. Just as with a standard mortgage, you work with a private lender to process your application. The role of the FHA is to ensure your loan amount for the lender in the event that you default. Because of this, you will have to meet the minimum requirements of both the FHA and the lender to qualify for an FHA loan.

Here is a checklist that outlines everything you need to qualify for an FHA loan: 

Down Payment

Typically, FHA Loans ask for 3.5% of the property’s purchase price or its appraised value as a downpayment. If you don’t have the needed amount, you can accept donations from approved sources such as family or friends, according to the 2019 FHA guidelines. These gifts are not equivalent to loans as they are not expected to be paid back in any way. People involved in the sale of the home, including the seller, real estate agents, the home builder, and other invested parties, cannot contribute to your down payment as this is seen as a direct conflict of interest.

Grants are also another option for those who can’t pay the minimum down payment requirement of an FHA loan. State, county, and local housing agencies offer grants to individuals. If you search for “down payment assistance” in Google and include your city, county, and state, you will find options for your area.

Decent Credit

The Department of Housing and Urban Development, also known as HUD, oversees the FHA and sets the requirements borrowers need to meet to qualify for a loan. To get the maximum amount of 96.5% of the purchase price with a 3.5% down payment, you need to have a 580 credit score or higher. However, the lender you’re working with may require a higher score, called an overlay. In today’s real estate market, many lenders require a 600 credit score or higher to be approved for a loan.

It’s still possible to get a loan with a score between 500 and 579. You just need to put down at least 10% of the purchase price to receive a 90% loan. You will not qualify for an FHA loan if your credit score is 500 or less, and your best bet is to try and improve your score before buying a home.

Reasonable Debt

In the most basic terms, before giving you a large sum, the lender will want to make sure you’re able to pay back the money they give you. To do this, they will look at your income, or how much money you have come in each month, and compare it to your debts, how much money is going out, and then determine that this mortgage would not overburden you with excessive debt. If the borrower has a debt-to-income ratio that is greater than 43%, it’s common for lenders not to approve the loan. 

However, this isn’t always clear-cut, and there are exceptions to the rule. If you have an excellent credit score or a great track record of paying your debts on time, the lender is likelier to allow a higher debt-to-income ratio.

Reliable Income

To qualify for a mortgage, you must show consistent, reliable income. At a minimum, the lender will request a copy of your last two years of tax returns and W-2 forms to verify your income history. You should also have bank statements and recent pay stubs readily available to share should they request that information. Before approving your loan, the lender will conduct it’s due diligence and verify your employment and any alternate streams of income to ensure you have the money to pay the loan they provide.

Home Inspection and Appraisal

One of the last steps in a loan approval process is the home inspection and appraisal. This procedure ensures you aren’t overpaying for the property and that the cost aligns with the current market value of a home in your area. The house inspection ensures it meets the FHA’s safety, health, structural integrity, and other factors.

If you’re looking for more information on the mortgage process, the FHA research library is a great resource that has in-depth information, well-researched articles, and handy tutorials for learning.