How to Qualify for an FHA Home Loan
The Federal Housing Authority (FHA) loan is a popular mortgage option for first-timers. With this, you can get a Charlotte, NC home with a low down payment - even if you have a low credit score.
To qualify for an FHA loan, you need to have a steady income and a 500-580 credit score. You must meet two qualifying ratios (Payment-To-Income ratio (PTI) and Debt-To-Income ratio DTI).
You also need a mortgage insurance premium and valid documentation.
Lastly, the home involved should be your primary residence. Likewise, it should meet FHA’s minimum property standards.
Let’s discuss these requirements in detail.
What are the Qualifications for an FHA Loan?
If you’re looking to get an FHA loan for a Charlotte, NC home, here are the requirements you need to meet:
1. FICO Credit Score Ranging from 500 to 580
Your credit score is a sign of your creditworthiness. It ranges from 300 to 850.
It factors in your accounts, total debt, and repayment history, to name a few.
If your credit score is in the 500 to 579 range, it's considered a below-average rating. With this score, you might find it hard to get a conventional loan.
The good thing about the FHA loan is that it's open to candidates within the said range. However, you will need to make a down payment of 10%.
For a score above 580 - considered fair - you can get a lower down payment rate of only 3.5%.
If you don’t have a credit history to show for, the lender will ask for alternative credit lines. Examples include rent payments or phone bills.
2. Steady Income and Proof of Employment
To determine these two factors, the loan officer will ask for the following:
Two years’ worth of pay stubs
If you’re getting cash gifts for your down payment, you need to document them through a down payment gift letter. It’s a signed and verified form that an individual is giving you a certain amount.
This down payment gift - which could be 100% of the amount - can come from any of the following:
What is the Minimum Income to Qualify for an FHA Loan?
The FHA does not require its applicants to meet a specific income range.
However, you need to have at least two credit accounts, such as a credit card account or car loan.
Likewise, you need to be free of delinquent federal debt or judgments to qualify.
How Long Do You Have to Be on Your Job to Get an FHA Loan?
You need to have been employed for at least two years to meet the pay stub requirement.
If you have a gap in your employment history, you must be working in your current job for the last six months.
3. Two Qualifying Ratios
The officer will look at two types of ratios to see if you're qualified for an FHA loan.
The first one is the PTI or the total mortgage payment to effective income ratio. It measures the potential monthly payments you can make based on your income.
For example, if you have a credit score of 580, your PTI is at about 40%.
The second consideration is the DTI or debt to income ratio or the income you spend on debt payments. These debts cover rent, student loans, credit card payments, or other mortgage payments.
To qualify for an FHA loan, your DTI should be 50% or below. You should note that this rating is only applicable if you have a credit score of >580.
4. Mortgage Insurance Premium (MIP)
Also known as the MIP, it's the fee you need to pay if you default on your FHA loan.
To qualify, you will need to have an annual insurance premium ranging from 0.80% to 1.05%.
You have the option to pay an upfront MIP (equal to 1.75% of the down payment) at closing. On the other hand, you may choose to roll this amount into your FHA loan.
5. Property Requirements
Apart from proving your creditworthiness, your property should meet FHA requirements.
The most important of this is that your single-family Charlotte, NC home should be your primary residence.
If you're taking an FHA loan for a multi-unit home (up to four), you need to live in one of the units to qualify.
A manufactured home will meet the requirement as long as it’s built on a permanent foundation.
You need to move into your property within 60 days of closing. Likewise, the property title should be under your name (or that of a living trust.)
Remember: Your home shouldn't be a 'flip,' - one that was previously sold 90 days ago.
6. Valid Documentation
As with most loans, you need to present proof of identity. A government-issued ID such as a driver’s license will suffice.
You will also have to submit your social security number upon application.
What Will Disqualify You From an FHA Loan?
While the FHA loan has less stringent requirements, you may get disqualified based on:
Delinquent federal debts or tax-related judgments on mortgage obligations insured by the FHA
Chapter 7 bankruptcy within the last two years (one year if with extenuating circumstances, such as serious illness)
Chapter 13 bankruptcy within a year
Foreclosure within the last three years (one year if with extenuating events)
More than one late payment within the last 12 months
You also may get disqualified if the home doesn't meet the minimum property standards.
In other words, if it falls short of the FHA's tenets of safety, security, and soundness.
If you want to push through with this Charlotte, NC home, you need to repair such problems to take hold of the loan.
What are the FHA Loan Limits for 2021?
The maximum borrowable amount starts at $356,362 for a single unit in low-cost areas.
The limits for other types of homes are as follows:
Note: Charlotte, NC (Mecklenburg County) is considered a low-cost district.
As for high-cost areas, the current FHA loan limits are:
Duplex: $1.053 million
Triplex: $1.272 million
Four-plex: $1.581 million
Is FHA Only for First-Time Buyers?
Although first-time buyers are the usual FHA loan customers, it’s open to repeat buyers as well. As long as you meet the requirements above, you may qualify for this financing option.
Whether you're a first-time or repeat buyer, you may want to consider applying for an FHA loan. You can easily qualify for it as long as you meet the requirements stated above.
If you need more help with the application process, don’t hesitate to approach Nancy Braun. Her Showcase Realty team can advise you and assist with the purchase of your dream n Charlotte, NC home.