What is an FHA Loan?

Mortgage lending has been a quickly transforming environment within the last several years.  Additional regulations and guidelines have resulted in hundreds of thousands of families that were able to buy or refinance a property just a couple years ago being unable to get approved for a mortgage loan.  A growing number of home buyers are using government-insured FHA home loans because of the favorable terms that they offer, compared to other loan types.  In fact, there were over 3,000,000 mortgage applications for FHA loans during the 2009 FY in the United States, up from 1,800,000 during 2008.

What is the Federal Housing Administration?

The FHA (quick for Federal Housing Administration) has been in existence since 1934 when it was founded in the course of the Great Depression.  Since its inception over 75 years ago, over 37 million mortgages have been insured by the FHA in the United States.  The FHA is the largest government insurer of home loans in the world today.

FHA Loans have become so popular in today’s lending climate because they can be much more accomodating than other mortgages, but they do contain specific credit, income and property criteria for a mortgage to get approved.  A number of the more crucial  requirements are listed beneath.

FHA Loan Income Requirements

The income verification and earnings capacity evaluation of the borrowers is an essential component of the FHA mortgage approval process because it shows the individuals capacity to repay the home loan.  FHA loans utilize two separate DTI Ratios (Debt-To-Income Ratios) to determine a borrowers income eligibility.

The initial ratio to be applied is the housing cost ratio (Top Ratio).  To meet the Top Ratio requirements, the new month to month housing expenses can not exceed 31 percent of the borrowers total income.  Housing expenses include principal and interest mortgage payment, taxes and insurance.

Once it is determined that the housing ratio meets criteria for approval, the total expense ratio (Bottom Ratio) is applied.  To meet Bottom Ratio criteria, the individuals complete monthly expenditures, including the new housing payment, can not exceed 43% of their total monthly income.  Other expenses that are factored into the total expense ratio include credit card payments, car payments, student loans, and any other monthly payments that are to be paid.  A borrowers credit report may be used to verify monthly expenses.

FHA Loan Credit Requirements

To meet FHA loan credit criteria, the borrowers almost certainly be required to have a FICO credit score of 620 or above.  The credit score used for FHA loan qualification is determined by obtaining the borrower’s scores from each of the three major credit bureaus, then eliminating the highest and lowest scores.  This score is referred to as the “middle score” or “mid score”.  Although the FHA has set its minimum credit score requirement at a 580 for many of its programs, individual lending institutions are free to add additional requirements and raise the minimum score as they see fit.

It can be acceptable for the borrower to posses a bankruptcy in their past and still qualify, but you will find that additional guidelines will apply.  If an individual possesses a Chapter 13 bankruptcy in their past, they must provide proof that all court ordered payments have been made on time for at least one year before application.  If an individual has a Chapter 7 bankruptcy in their past, they must wait at least two years from the discharge date before application.

FHA Loan Property Requirements

A home must have an FHA appraisal performed by a certified appraiser to be an acceptable property for an FHA loan.  To satisfy the FHA appraisal requirements, the home must be in reasonably good condition.  Certain disqualifying appraisal conditions may include but are not limited to structural problems, leaking roofs or missing exterior paint or siding.  The property appraised value is extremely significant in the FHA loan process and the home must appraise for at least the purchase price.  If the loan application is for an FHA refinance loan, the desired mortgage amount may not exceed 97.75 percent of the current appraised value.

The highest FHA mortgage amount changes from county to county and metropolitan areas throughout the United States.  The smallest maximum FHA loan amount in any county is $271,050, but can reach as large as $729,750 in particular high-cost locations.