How to qualify for a FHA Home Loan
Credit Requirements- As in all home loans, your credit demonstrates the ability and likely-ness of repaying a loan.
Your credit scores are determined by your past history of paying your debts on time as well as how you use the credit granted to you.
Revolving credit is credit cards and lines of credit that do not have a fixed repayment schedule. The credit reporting agencies will give you a score in part based on how you use revolving credit.
Someone who has a credit limit on a credit card of $500 and has a loan balance of $475 will be given a lower credit score than someone who has a limit of $500 but only has a balance on the credit card of $100 for example.
Fha loans typically require a credit score of 640. Some lenders will accept a lower credit score but will have a loan level price adjustment based on the higher risk of the loan. The interest rate is adjusted higher for the higher risk of the loan.
Debt to Income Ratios
Debt to income ratios are a calculation of how much of your money is needed for your monthly obligations reporting on your credit report in relation to your gross monthly income.
When determining debt to income ratios for a home loan, there are 2 ratios used to qualify the borrower.
The “front end ratio” is a ratio of the principle and interest as well as taxes and insurance on the new home loan in relation to the borrowers gross monthly income. The “PITI” as it’s referred to is divided by the borrowers gross monthly income to determine the ratio.
The “back end ratio” is is the PITI combined with all other monthly payments reporting on the credit report as well as any child support or alimony owed monthly divided by the borrowers gross monthly income.
The typical ratios used in qualifying the borrowers for a FHA mortgage are 33% for the front end ratios. and 41% for for the back end ratios.
A computerized automated underwriting system is used to approve a borrower based on the information from the application. It will consider the debt to income ratios, assets in bank or retirement accounts,
and the credit of the borrower. It’s not uncommon for a borrower to be approved for a mortgage with higher than 33/41% ratios if the strength of the file is good.
If the computer thinks it’s a good risk based on the information input it will issue an approval. After an appraisal is completed to determine the properties value the file will then go to the underwriting department to be reviewed by an underwriter. The underwriter will review the file to make sure the proper documents are it the file and the borrower meets all of the necessary guidelines for approval.
Job Time Requirements
FHA requires the borrower to have at least 2 years on the job or at least with in the same industry to qualify.
A self employed borrower also has to have a two year history of being self employed to qualify.
The income used to qualify the a self employed borrower is averaged over the two year period based on the income reported on the borrowers tax returns.
A commission based borrowers income is averaged over the last two years and year to date income reported on their pay stubs. If for example it is June 1st 2015, the underwriter will take the income reported on the tax returns over the last two years as well as the income from the borrowers pay stub.
The calculation would look like this… 2014 adjusted gross income + 2013 adjusted gross income+ year to date income/ 29 months.
For FHA 203k information go here.
To see if you qualify for a home loan Apply Here or call me, Greg Kitchen at 586-997-3533. I will analyze your situation and recommend the lowest cost options for your situation.
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Cranbrook Loans has a long history of originating home loans in Michigan. For over 20 years we have provided Michigan residents with mortgage financing to help fulfill the american dream of home ownership.
FHA Mortgages are one of the easiest ways to qualify for a mortgage especially for a first time home buyer. This site will guide you through what it takes to qualify for a mortgage, from credit, income,and mortgage insurance. We are here to answer your questions and to help you close your loan in as little as 3 weeks.
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