FHA Loans are the best home mortgage programs for borrowers with less than perfect credit, high debt to income ratios, and lower credit scores.
- HUD, the parent of FHA, sets the minimum agency mortgage guidelines on FHA Loans
- FHA is not a lender
- FHA is a government agency that insures and partially guarantees lenders in the event borrowers default and/or foreclose on their FHA loans
- Due to the government guarantee, lenders can offer FHA loans with as little as 3.5% down payment at low interest rates
- To qualify for a 3.5% down payment FHA loan, the borrower needs a minimum of a 580 credit score
- Borrowers with under 580 credit scores and down to 500 FICO can qualify for an FHA loan
- However, if the borrower has under 580 credit scores, HUD requires borrowers to put a 10% versus a 3.5% down payment
- HUD has created very lenient lending guidelines on FHA loans to promote homeownership for first time homebuyers and homebuyers with bad credit
Not all lenders have the same lending guidelines on FHA loans.
Why Do Lenders Have Different Lending Requirements On FHA Loans
- However, lenders can have higher lending requirements that is above and beyond the minimum HUD Agency Lending Guidelines which is called lender overlays
- Lenders can have lender overlays on just about anything
- For example, to qualify for a 3.5% down payment FHA loan, the borrower needs a 580 credit score
- However, most lenders will require a 620 to 680 credit score requirement even though FHA only requires a 580 FICO
- This higher credit score requirement are called lender overlays
- Another common lender overlays on FHA loans are debt to income ratios
- The maximum front end debt to income ratio is capped at 46.9% and back end DTI is capped at 56.9% to get an approve/eligible per automated underwriting system (AUS)
- However, most lenders will cap the debt to income ratios at 43% to 50% although the borrower has gotten an AUS Approval with a higher DTI
- This is called lender overlays on debt to income ratios
- Capital Lending Network, Inc. has no lender overlays on FHA loans
- As long as you get an approve/eligible per automated underwriting system (AUS), Capital Lending Network, Inc. can approve and close on your FHA loan
This is why just because you do not qualify at one lender does not mean that you cannot qualify at another lender who has no lender overlays like Capital Lending Network, Inc.
Minimum HUD Agency Guidelines On FHA Loans
Below are the minimum HUD Agency Mortgage Guidelines on FHA Loans:
- To qualify for a 3.5% down payment FHA loan, the borrower needs at least a 580 credit score
- Borrowers with under 580 FICO down to 500 credit scores are eligible to qualify for an FHA loans with a 10% down payment and an approve/eligible per automated underwriting system
- Maximum front end debt to income ratio is capped at 46.9% down payment and back end debt to income ratio is capped at 56.9% to get an approve/eligible per AUS
- Outstanding collections and charged-off accounts do not have to be paid to qualify for an FHA loan
- There is a two year waiting period after Chapter 7 Bankruptcy discharged date to qualify for an FHA loan
- There is a three year waiting period after foreclosure, deed in lieu of foreclosure, short sale to qualify for an FHA loan
- Borrowers in Chapter 13 Bankruptcy repayment plan can qualify for an FHA loan after being in the repayment plan for at least 12 months with Trustee Approval and a manual underwrite
- There is no waiting period after Chapter 13 Bankruptcy discharged date to be eligible to qualify for an FHA loan
- If the Chapter 13 Bankruptcy discharge has not been seasoned for at least two years, the file needs to be manually underwritten
- Non-occupant co-borrowers who are related to the main borrower by law, marriage, blood are allowed
The above lending guidelines are the minimum HUD Guidelines to qualify for an FHA loan.
Types Of FHA Loan Programs
FHA Loans are for owner-occupant primary home financing only. You cannot finance a second home or an investment property with an FHA loan.
Homebuyers can purchase the following properties with an FHA loan:
- Single-family homes
- HUD-Approved Condos
- Manufactured Homes
- 2 to 4 unit multi-family homes
FHA 203k Loans benefit homebuyers who want to purchase fixer-uppers.
There are two types of FHA 203k Loans:
- FHA 203k Streamline which is limited to a maximum of $35,000 renovation budget
- Standard Full 203k Loans which has no maximum construction budget as long as the project does not exceed the maximum FHA loan limit
Borrowers need to come up with 3.5% down payment on the after repaired value as the down payment.