For this update, we’ll be talking about Eligibility Requirements for the FHA Loan Program. Additionally, we’ll be separating how lenders view borrowers into “categories” to give you an idea of where you may end up.
How to Apply For the FHA Loan Program: Eligibility Requirements
The FHA Loan program is a little different than other programs. For example, the USDA Loan Program has income requirements and the property must be in an eligible location as well. The FHA Loan Program does have property requirements, but only that the home being purchased be safe and sanitary, meeting HUD guidelines.
The borrower has to fulfill two criteria to qualify for an FHA Loan: be defined as a first time home buyer and have moderate income. To be defined as a “first time buyer” can be two things: having never purchased a home ever, or haven’t been the primary owner of a home in the last three years. If you are either one of these two definitions, you are a first time home buyer in the eyes of the FHA!
The FHA Loan Program will approve new construction as well as existing homes, just like other loan programs. Remember, homes cannot be purchased if they require repair or complete renovation, unless this is a 203K Loan. These homes will need to be repaired to meet guidelines before the lender can approve the loan.
The home being purchased for FHA Loans cannot be used as secondary home. It must be the borrower’s primary residence. Additionally, homes are allowed to have “income-producing” qualities, such as a back entrance to the basement which may have a kitchen and bathroom in it.
For FHA Loan Programs, the borrower meet credit and income requirements. While there are categories of borrowers that lenders will prefer, the “tier” system doesn’t have as many levels as the Conventional Loan program does.
Keep in mind that these aren’t actual categories used by lenders and should only be used to help determine where you may sit.
Let’s say in the following example, all borrowers are buying the same home listed at the exact same price.
Top Tier – The Perfect Borrower In The Eyes Of A Mortgage Lender
The highest tier are borrowers who wish to bring 3.5% down or more and have a credit score of 780 or higher. These borrowers are the ones that will have the largest benefit with a low interest rate for the life of the loan, and benefit from doing an FHA Loan the most. If you’re able to bring a 20% down payment to the table, you may actually be better off doing a Conventional Loan instead.
This means this category of borrowers will have the lowest monthly payments approved by mortgage lenders due to the lowest interest rates, no private mortgage insurance fees, and no borrower risk fees.
Lowest Tier – Lower Than Desired Credit Scores
The last tier of borrowers are those that may have a lower credit score than the other tier. If this borrower is able to bring the minimum 3.5% down payment to the table, they’ll still pay the same premium for mortgage insurance premiums as the top tier borrowers. However, this borrower will still pay more money over time due to having to pay an increased interest rate and a borrower risk fee.
For the next part, we’ll be discussing more about what it’s like to go through the FHA Loan program