The Department of Housing and Urban Development (HUD) has made more changes to the FHA loan program in the last two years than the previous ten years combined. For the most part, these changes are a direct result of the housing and mortgage crisis that began in 2008. Long story short: the FHA’s capital reserves were wiped out by massive insurance payouts resulting from bad loans. Today, the agency is struggling to restore its reserves while preventing further losses.
What does all of this have to do with FHA eligibility? Everything. Borrowers who may have been eligible for FHA loans in the past might not be qualified under current guidelines.
As a result of all of the changes, we felt it was time to publish a revised list of basic FHA eligibility guidelines. The information below is based on HUD Handbook 4155.1, Chapter 4, Section A. If you would like to learn more about anything covered below, please refer to this handbook. It is available on the HUD website and can be found with a quick Google search.
Who Is Eligible for an FHA Loan?
Let me start by saying these loans are not limited to first-time home buyers. This is a common misconception. Any borrower who meets the FHA’s basic eligibility requirements can apply for a government-insured loan. This is true even for borrowers who have owned multiple homes in the past.
- There is currently no maximum age limit for borrowers. The minimum age limit for FHA financing will depend on the state in which you reside. According to the Department of Housing and Urban Development, the minimum age for an FHA-insured mortgage loan is “the age for which a mortgage note can be legally enforced in the state … where the property is located.” In most states, this minimum age is 18. Refer to your state’s specific mortgage requirements for more information.
- To be eligible for an FHA loan, borrowers must have a credit score of at least 500. This is the minimum score required by HUD for program eligibility. To qualify for the 3.5% down-payment option, you must have a score of 580 or higher.
- Most lenders impose their own credit guidelines on top of those issued by HUD. This is known as an overlay. So ultimately, the minimum credit-score cutoff is up to the lender. Learn more here.
- Borrowers and co-borrowers are both required to sign all mortgage-related documents leading up to, and during, the settlement process. Co-borrowers must also meet minimum FHA eligibility requirements. Both the borrower and the co-borrower are responsible for repaying the mortgage debt.
- Cosigners, on the other hand, are not responsible for repaying the debt. Note the distinction here between a co-borrower and a cosigner. The cosigner must sign all of the documents just like a co-borrower would. But the cosigner is not legally responsible for repaying the debt.
- If you have defaulted on any type of government-insured mortgage in the past, or have been delinquent on an FHA-insured loan, you must wait three years before obtaining another FHA loan. You will not meet minimum FHA eligibility requirements until three years have passed from the delinquency or default.
- Borrowers do not need to be U.S. citizens to be eligible for an FHA loan. But the mortgage lender must be able to determine the applicant’s residency status. They do this by obtaining and verifying certain documents relating to residency.
- Lenders are required to calculate the borrowers debt-to-income (DTI) ratio. As the name indicates, this is a comparison between the amount of money you earn and the amount you pay each month on recurring debts.
- When calculating the DTI ratio, lenders must include the borrower’s monthly housing expense (mortgage payments, property taxes, homeowners insurance, etc.), as well as all “additional recurring charges extending 10 months or more.” This includes such things as credit cards and other revolving accounts, installment loans, child support, alimony, etc.
- Chapter 4, Section F of the aforementioned HUD handbook states that “the relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effect of income.” With that being said, a borrower in this category could still be eligible for FHA if the mortgage underwriter identifies “significant compensating factors.” One example of a compensating factor would be that the borrower has a long history of making payments on time, and/or has significant savings in the bank.
- FHA eligibility guidelines also state that the total debt-to-income ratio (including mortgage payments and all other forms of recurring debt) should not exceed 43% of gross effective income. But here again, exceptions can be made if the underwriter can find compensating factors.
- In 2013, most mortgage lenders are limiting the total or “back-end” debt-to-income ratio to 45% for FHA loans. Some lenders may allow borrowers to have higher ratios, while others set the bar even lower than 45%. It varies from one lender to the next. But the current standard seems to be 45%.
- In order to be used for mortgage qualification, the borrower’s income must be fully verified by the lender. Income cannot be used if it comes from a source that “cannot be verified, is not stable, or will not continue.”
- Currently, FHA does not impose a minimum length of time for employment. But lenders are still required to verify the borrower’s employment for the last two years. Borrowers must explain any gaps in employment that are longer than one month. To learn more about income-related eligibility requirements, refer to HUD Handbook 4155.1, Chapter 4, Section D.
While it’s not an eligibility requirement, I should at least mention a new rule regarding credit scores and debt ratios. Some borrowers with scores below 620 will have to undergo additional scrutiny during the application and approval process. Specifically, borrowers with credit scores below 620 and total debt-to-income ratios above 43% must undergo manual underwriting. These borrowers could still be eligible for an FHA loan. But the underwriter must find some kind of compensating factors to offset the unfavorable credit/debt situation. Learn more here.
This is a very basic overview of FHA’s minimum eligibility requirements, as of April 2013. If you are considering using this mortgage program, I highly recommend reading Chapter 4 of HUD Handbook 4155.1. This chapter is entitled “Borrower Eligibility and Credit Analysis.” The name says it all. This is the “bible” used by mortgage underwriters when reviewing applicants. Granted, the lender can impose its own guidelines on top of the FHA’s. But it all starts with the minimum eligibility requirements outlined in this handbook.
Disclaimer: This article provides an overview of minimum eligibility requirements for the Federal Housing Administration’s loan program. It answers the question: Who is eligible for an FHA mortgage? This information has been adapted from loan guidelines published by the Department of Housing and Urban Development. We would like to stress that this is a basic overview of program eligibility. There are literally hundreds of pages of HUD documentation on this subject. HUD frequently changes the minimum guidelines for the FHA program. As a result, there is a chance that some of the information above may become outdated over time. We encourage you to visit the official HUD website for more information.