FHA Criteria for 2012 – Borrowers Can Expect More of the Same

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Editor’s note: This page has been updated for 2014. Read the updated version here.

What does it take to qualify for an FHA loan in 2012? This is a hot topic among home buyers lately. It’s also one of the most common questions we receive from our readers. We surveyed more than two-dozen lenders on this subject. This is what they had to say.

FHA Loan Guidelines

Based on recent emails we have received, there seems to be a lot of confusion regarding current FHA criteria. Many home buyers have expressed concerns about the imminent demise of the program. Others have heard rumors that a mandatory 10% down-payment requirement is coming down the pike. Both of these are false. In an effort to prevent any additional rumors from surfacing, we have compiled a list of FHA loan criteria.

Definition: An FHA loan is a government-backed mortgage. It is insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). These loans are offered by government-approved lenders within the primary mortgage market. In the event of default, the lender will be insured against losses. This program has broad appeal among home buyers, mainly due to the lower down-payment requirement and easier qualification process.

A Survey of 27 Lenders

We keep in touch with a group of mortgage lenders across the United States. We frequently query them about current lending trends, market news, and other topics that might interest our readers. For this story, we contacted all of the lenders that are government-approved to make FHA loans. We also solicited input from some of the largest banks in the country, including Wells Fargo. In all, we received input from more than 27 lenders for this story. Here is what they told us about FHA criteria in 2012.

The FHA’s Cash-Reserve Problems

The FHA is required by Congress to maintain cash reserves equal to 2% of the loans they insure. Historically, they never had a problem meeting this requirement. But the organization’s reserve fund plummeted during the housing crisis, largely due to insurance claims resulting from homeowners defaulting on their loans. In November of 2011, an independent audit found that the reserve fund had fallen to 0.24%. This comes at a time when the Obama administration is looking for ways to scale-down the government’s role in the housing market.

The FHA’s future is uncertain. There is talk of a taxpayer bailout over the new few years, to bolster the organizations depleted reserves (the money it uses to insure home loans). According to Joseph Gyourko, a real estate professor at The Wharton School: “It’s highly likely that the FHA will need a taxpayer bailout over the next three to five years.”

The lenders we spoke to had mixed views on this subject. Some expressed concerns that the FHA was “on its way out.” Others felt that the government would keep the program going for at least a few more years, if not longer. But most agreed that the situation would not affect FHA borrower criteria in 2012. “Whatever happens down the road, it’s pretty much a non-issue for the rest of 2012,” said one broker.

Minimum Borrower Criteria for 2012

There’s an abundance of misinformation online today, with regard to FHA loan guidelines. You’ll find conflicting information about down payments, credit scores, debt ratios, and every other aspect of the lending process. This leaves home buyers scratching their heads (and sending us a steady stream of emails). Here’s what you need to know about FHA guidelines in 2012:

1. Down Payment Guidelines

When using an FHA mortgage loan to buy a house, you will have to make a down payment of at least 3.5%. There is a lot of Internet “chatter” right now about HUD’s plans to raise the minimum down payment to 5%, in order to replenish its reserve fund. But so far, this is only speculation. There have been no official announcements on this subject. And even if they do decide to make such a change, it probably would not take effect in 2012.

Nearly all of the lenders we spoke to felt confident the 3.5% down-payment requirement would stay in effect for the rest of this year.

If your credit score falls below 580, you might have to make a down payment of 10%. HUD’s official policy states that “borrowers with less than a 580 FICO score will be required to put down at least 10%.” But, as you will soon see, this requirement is something of a moot point. Mortgage lenders impose their own (often stricter) requirements on top of the minimum guidelines established by the FHA.

[Related story: Why you don’t need a 20% down payment]

2. Credit Score Guidelines

Of all the criteria mentioned in this article, the down-payment requirement is the one that is most firmly set in stone. Credit scores are a different story. Here, much depends on the particular lender you use.

Some of the lenders we spoke to set the bar at a 620 FICO credit score, for all of their mortgage products. Some had a lower minimum for FHA loans, as compared to conventional loans. Others were willing to go as low as 580, as long as the borrower has stable employment and income. Quicken Loans, for example, says that borrowers “may now qualify for an FHA loan with a credit score of 580 and above.” So the standard will vary based on the lender you use.

We also spoke to a representative from Wells Fargo (the nation’s largest mortgage lender). In 2011, the New York Times reported that Wells Fargo was offering FHA loans to borrowers with scores as low as 500. This would have marked a significant divergence from the 600-and-up crowd. So we asked them about this. Here is what a representative told us:

Wells Fargo Quote
Other large lenders had similar standards. Chad Baker, a loan officer with Prime Lending, told us that his company “will provide FHA financing down to a credit score of 600,” adding that “there are mortgage banks that are providing FHA financing below a FICO score of 600.” So a score of 600 or higher was the closest we could come to a general consensus. But again, it all depends on (A) which bank you use and (B) how well you measure up in other areas.

3. Debt-to-Income Guidelines

There seems to be a lot of leeway, with regard to the maximum allowable debt ratio. We will get to that in a moment. But first, a quick definition is in order.

The debt-to-income (DTI) ratio shows how much of your monthly income is going toward your debts. For example, a DTI of 30% would suggest that you are using 30% of your income to pay your debts. As far as FHA criteria are concerned, there are two DTI ratios. The front-end ratio only includes your housing-related debts, such as your mortgage payment. The back-end ratio combines your housing debt with all of your other debts — credit cards, car loans, etc.

Lenders tell us that the combined number (the so-called back ratio) is most important, when it comes to being approved for an FHA loan. This is the one that takes into account your housing costs as well as your other debts. Some said 43% was the maximum allowable back-end ratio. Others said they’ve seen borrowers get approved through automated underwriting systems with combined DTI ratios close to 50 percent.

My advice is for borrowers to keep their back-end ratios below 43%. If you do that, you shouldn’t have any trouble qualifying for an FHA loan (as long as you meet all of the other guidelines mentioned above).

New: The Weekly Composite of Mortgage Rates

We recently launched a new feature of the website that’s relevant to this story. It’s a weekly composite of FHA mortgage rates. It shows the current rates being offered by lenders across the country.

We obtain this information through a survey of 25 FHA-approved lenders located throughout the United States (including some of the larger national banks). The composite is updated every Thursday at noon (CST). This is just one of several new features we will be rolling out in 2012.