February 26, 2024
Are you new to FHA loans? Do you feel the list of requirements is a bit overwhelming?
You are not alone. Many first-time home buyers experience these feelings as they get to know the home loan landscape. The good news is that your confusion will end the more you learn about how home loans work.
Here is some clarity on some common FHA loan basics that some newcomers find confusing in the early days of mortgage planning.
FHA Loan Approval Basics
Looking at finance blogs, you will find a variety of FHA home loan requirement lists. Here is an example of one, published by NerdWallet.
- FHA minimum credit score: 500
- FHA minimum down payment: 3.5%
- FHA debt-to-income ratio: 50% or less
- FHA loan income requirements
There are important nuances to understand about the list above. before you proceed.
Let’s review each section of this list. To start, it is true that the FHA loan minimum credit score is indeed 500. But there is a caveat there.
Those applying with FICO scores between the 500 minimum and 579 are required to make a 10% down payment.
10% is higher than the on-paper FHA minimum down payment of 3.5%, offered to those with FICO scores of 580 or higher.
A 500 minimum score” for FHA loan approval does not mean that FHA loan applicants could qualify for the FHA’s lowest down payment (3.5%) but seeing that word “minimum” may convince new borrowers that 3.5% down is possible with a FICO score below 580. This is not true.
The FHA loan minimum FICO score does not reflect lender standards. Those standards may be higher than these minimums. It’s not that finance blogs are trying to fool anyone, but incomplete information leads to confusion. And when you are new to the home loan world, there is already plenty of that at first.
FHA Debt Ratios
The FHA loan debt ratio of 50% or less in the list we printed above? That’s typically caveated (like it is at the Nerdwallet official site), and it is important to note that as with other aspects of FHA loans mentioned above, FHA loan rules may allow a different debt ratio than the lender. Your experience may vary.
In HUD 4000.1, the FHA Single Family Lender’s Handbook, the rules stipulate 45% as the maximum percentage of debt you pay each month that may be approved.
FHA Income Requirements Aren’t What Some Think They Are
Some borrowers get to the part about FHA loan income requirements and wonder if there is a minimum dollar amount each year or each month required in order to land an FHA mortgage.
But you should know FHA loans are NOT approved or denied based on the dollar amount of a borrower’s annual income. At least not all by itself. It’s more about how much of your monthly income is already spoken for with debts and other financial obligations.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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