How to Qualify for an FHA Mortgage

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My sister recently purchased a home. She was able to get a low mortgage rate and a great deal on the home such that her mortgage payment is less than the rent she was paying. And the home loan was an FHA mortgage. So I thought it would be a good time to cover FHA mortgages.

The FHA (Federal Housing Administration) provides mortgage insurance for buyers without huge sums to use for initial down payments. FHA insured mortgages can be financed with as little as 3.5% down.  While the FHA allows home-buyers to purchase homes with little money down, the loans aren’t given out to just anybody. If you happen to be in the market for a home and are looking to qualify for an FHA loan, you’ll need to have the following:

  • A steady employment history. This means having been with the same employer for at least two years. Staying with the same employer shows stability, which is exactly why it’s a criterion for FHA backed loans.
  • Your income over the last two years must have stayed the same or improved. Because the maximum amount of an FHA backed loans is based on your income, you must document that your wages are steady or rising.
  • FHA loans recommend a good credit score of 620 or better, which generally means that your credit for the past two years must have less than two thirty day late payments and a solid credit history.
  • If you have an unfortunate bankruptcy on your record, it must be two years old, and you must have good credit for the last two years.
  • If you’ve had a foreclosure in the past, it must be at least three years old, and your credit for the past three years must be solid.
  • The mortgage payment that you qualify for must be approximately 30 percent or less of your total monthly gross income. For example, if you earn $50,000 per year ($4,166 per month), your mortgage payment could be at most approximately $1,250.
  • State tax liens must be paid by the time you apply for a loan. If you have a federal lien, you must be able to show that you’ll be able to pay the tax lien payment and the mortgage payment.

If you meet these criteria, chances are you’ll be able to qualify for an FHA backed loan. The next step is finding a lender to work with in your area. In fact, you’ll want to check rates and fees from multiple lenders to find the best deal.

Once you have lenders in mind, you’ll want to gather documents regarding your income, employment, savings, and credit. Here’s a list of the documents you’ll need to complete the loan process:

  • Complete tax returns from the last two years
  • W-2 and 1099 forms from the last two years
  • Pay stubs covering at least the most recent month
  • Self-employed borrowers will want three years of tax returns and a profit and loss statement covering the year to date
  • Bank statements covering the most recent three months
  • The newest statement available from any investments: mutual funds, 401(k), retirement accounts, money market accounts, etc.
  • Recent bill statements indicating account numbers
  • Name, address, and contact information for your current landlord
  • If you have no credit, you’ll need recent utility bills
  • If you’ve had a bankruptcy, you’ll need a copy of the complete discharge paperwork
  • Copies of drivers license and social security card
  • If you’re divorced, you’ll need copies of divorce papers and papers related to alimony

Quite a list, isn’t it? It gets better–you may have to provide additional documents on a case by case basis. Luckily, your lender will be available to answer any questions about the documentation process.

So, if you’re looking to qualify for an FHA insured loan, here’s what you’ll need to do:

  • Save at least 3.5% of the purchase price of the home you’re interested in buying. (Remember: your mortgage payment must be approximately 30% of your monthly gross income.)
  • Keep steady employment. If you’re considering leaving your current job or switching careers, doing so could mean waiting until you’ve held your new job for two years.
  • Keep on top of your bills. More than two thirty-day late payments in the past two years will probably spell doom for your FHA application.
  • Pay down any state tax liens.
  • If you’ve had a bankruptcy or foreclosure, you’ll just have to wait out the required two or three years. Make sure you keep your credit solid in the meantime!

After that, it’s all a matter of finding a lender in your area, finding an appropriate home, and applying for a loan. Check the Housing and Urban Development site for a lender in your area.

Published or Updated: March 22, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Pamela says:

    We’re going to be seeing a lot about FHA loans because of our financing drying up. This is a useful review of its requirements.

    But, FHA loans have just gotten more expensive after HUD raised the mortgage insurance premium borrowers have to pay (yep, there’s a cost for putting down such a low down payment).

    I’d encourage buyers to also check out programs offered by their state’s Housing Finance Agency. NY State, for example, has a mortgage which has similar terms to FHA but with lower monthly costs and lower interest rates. I’m sure many states have similar programs that lots of people are missing out on.

  2. Annie Mack says:

    We just refinanced our home with an FHA mortgage last November. Even with the PMI, we are paying $800 less than on our conventional mortgage! The paperwork was a nightmare and it took almost six weeks, but we are saving so much money that it was all worth it. Eventually the PMI will drop off ad our savings will increase even more. I don’t regret this refi one bit.

  3. Paul says:

    It is embarrassing to admit, but I worked in the mortgage industry for 8 years before I really understood the virtues of the FHA loan. Don’t let the guidelines above scare you away. The FHA program guidelines are there because they increase the odds of Successful Home Ownership. PART of the reason you can get incredible deals on foreclosed homes today is because the mortgage and investment industry lost their minds for a while and let their greed develop and sell some crazy loan programs with easier guidelines. Granted, FHA is not the right program for everyone today, but unless you are wealthy and put 20% down from your own funds, please make sure you at least seriously consider it with a loan professional that really understands FHA financing.

    If you are reading this blog you probably already know IT IS A FANTASTIC TIME TO BUY – FOR SOME PEOPLE. Whether you already meet the guidelines above or have some work to do first, the safest and smartest thing you can do is FIRST go see a HUD approved non-profit housing counselor to help you develop a step by step plan to get there. These people don’t have to sell you anything to earn a paycheck! If you are mortgage ready, fantastic. They can help you source fantastic mortgage programs that have your best interest at heart ( like the NY State program Pamela referred to above) because their mission is always tied to stable communities which we can now, more than ever, clearly see requires successful home ownership.

    While I suggest you start the process sooner than later I also want to caution you to avoid the temptation to rush the entire process just to take advantage of today’s home prices. Unfortunately, there are going to be people willing to try anything to get you approved right away. That is in part because the people you need to work with to get a mortgage usually need you to BUY a house or else they don’t earn any pay for working with you.

    If you are not mortgage ready, don’t give up. Instead, develop and follow a plan to meet the guidelines. Your time will come, and guess what? When it does, you will find a great realtor, a great loan officer and a great home. The reward for taking the time and doing the things needed to become eligible and qualified for a good mortgage is that when “the right one” truly comes along, you will be able to buy with confidence.

    Sorry this was so long. (Yes, it is my first blog comment anywhere so I admit I tried to squeeze everything I think I know into what may also be my last blog comment)

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