The Federal Housing Administration, commonly known as the FHA loan program, insures mortgages on single family homes including manufactured homes against losses due to homeowner’s inability to pay the mortgage loan back. Since its inception in 1934, FHA insured more than 34 million properties in the entire United States. The FHA loan requirements are applicable to both purchase and refinance transactions. There are different types of FHA loans:
- 203b Home Mortgage Loan – the most commonly used to purchase a home. Almost anybody buying a house with an FHA loan uses the FHA 203(b) as long as they meet the FHA loan requirements both the borrower and the property.
- 203h Mortgage for Disaster Victims – used by victims of a major disaster who have lost their homes and are in the process of rebuilding or buying another home;
- 203k Rehabilitation Mortgage – Loan where a home buyer can finance up to $35,000 into their mortgage to repair, improve or upgrade their home;
- HECM – home equity conversion mortgage also known as “Reverse Mortgage”, where Seniors who are 62 years or older and have equity in their home can withdraw funds in their home and use it to supplement their income. Additional information can be found on our Reverse Mortgage page.
- EEM – Energy Efficient Mortgage loan program allows buyers to save money on utility bills by adding energy efficient features on new or existing homes. This loan can also be used with the 203k rehabilitation program.
Different FHA loan programs have their own loan guidelines and requirements, respectively. The 203b, being the most commonly known and used loan program to buy a home is the one generally thought of by a prospective home buyer when they are in the process of buying a home.
203b Loan Eligibility and Requirement
The borrower must meet FHA credit qualifications
– Although FHA allows a borrower with a middle credit score of 580 to purchase a home, it is actually the lender who dictates the minimum credit criteria they require to extend a loan. Most big lenders require a minimum of 640 middle credit score. Some private lenders will grant a loan to borrowers with credit scores as low as 620. Rarely would a lender approve a borrower with a score below 620 middle FICO score. We are one of the Texas mortgage brokers that extend loans to borrowers with credit scores as low as 500 middle FICO. Certain restrictions will apply, contact us for details.
The borrower must have 3.5% down payment –
The minimum down payment requirement for FHA 203b loan is 3.5% and the maximum loan-to-value (LTV) is 96.5%. The total down payment of 3.5% of the purchase price can also be a “gift” given to the borrower by an immediate family member. Gift differs from a loan in a certain aspect that a gift does not have to be paid back by the home buyer, whereas a loan has to be paid back in the future. There are certain restrictions when it comes to gift funds. A ten percent (10%) down payment is required for borrowers with FICO scores below 580 and all the way down to 500. For more information, please contact our FHA Loan Specialists.
The borrower must be able to document their income –
Self-employed borrowers, 1099 home buyers, and other commissioned employees will need the average of their last two (2) years tax returns to calculate their monthly income. Home buyers who are salaried and get an actual W2 are simple and easy. Since their income can be calculated based on one of the following: (a) hourly rate, (b) monthly wage, or (c) box #1 on W2. Any bonus, in order to be counted, must have been received in the last two (2) years and will continue for the next 3. Overtime is looked upon the same manner. A borrower must have been consistently working overtime for the past 2 years and the probability of continuity for the next 3 years should apply.
The borrower must have sufficient assets and reserves –
Prospective home buyers must have enough reserve in their bank account after down payment is taken out. Depending on the borrower’s scenario and credit situation, typical rule on reserves is about 3 – 6 months of the proposed housing monthly payment.
- Driver’s License or a valid picture id;
- Social Security Card or passport;
- Last 30 days paycheck stubs;
- Last 2 years W2s or 1099 from Employer;
- Last 2 years signed Tax Returns;
- All pages of previous 2 months bank statements;
- Most recent retirement account statement (401k, IRA, etc.);
- Copy of the benefits letter (Social Security or retirement);
- Copy of Final Divorce Decree (if applicable);
- Copy of Final Bankruptcy discharge papers (if applicable);
- Name, address and phone number of current landlord (if renting);
- Letter of Explanation for any known credit problems;
- Source of any non-payroll deposits over $500;
- Gift Letter (if applicable);
The items above are a general list of what every lender needs from the borrower. Additional documentation might be required depending on the borrower’s circumstances and must not be construed as a final loan checklist. It is very important that borrowers must have the above documentation beforehand. Not only does it set the platform for the loan, it also gives the lender the ability to structure of the loan appropriately.
Texas is known as a “Community State”, thus, both parties have to sign the deed although the loan is only applied for by one or either party. A non-purchasing spouse’s (NPS) credit, though not used in qualifying for the loan, will be required. The NPS debts have to be included in the borrower’s total debts as part of calculating eligibility. NPS Credit is also required to make sure that the non-purchasing spouse has no outstanding debt that will affect the title of the property.
For additional information about FHA loan requirements and eligibility guidelines, contact our FHA Loan Specialist at (832) 562-8319.