FHA Loan Guidelines: Clearing Up the Confusion

There’s a great deal of misinformation online today in regards to FHA loan guidelines. You’ll find conflicting information about down payments, credit scores, debt ratios, and every other aspect of the FHA’s lending process. This leaves home buyers wondering what’s true and what’s not. So here’s what you need to know about current FHA guidelines:

Down payment guidelines

When using an FHA mortgage loan to buy a house, you need to make a down payment of at least 3.5 percent. Most lenders feel confident that the 3.5 percent down-payment requirement will stay in effect for the rest of this year.

If your credit score is below 580, you might have to make a down payment of 10 percent. HUD states that borrowers with less than a 580 FICO score are required to put down at least 10 percent. But this requirement is something of a moot point. Mortgage lenders impose their own requirements, which are often stricter, on top of the minimum guidelines established by the FHA.

Credit score guidelines

Of all the FHA loan guidelines, the down-payment requirement is the one most firmly set in stone. However, credit scores vary depending on the particular lender you use.

Some lenders set the bar at a 620 FICO score for all of their mortgage products. Others are willing to go as low as 580 as long as the borrower has stable employment and income. Quicken Loans, for instance, states that borrowers may qualify for an FHA loan with a credit score of 580 and above.

Chad Baker, a loan officer with Prime Lending, states that his company “will provide FHA financing down to a credit score of 600.” He states further “there are mortgage banks that are providing FHA financing below a FICO score of 600.” So a credit score of 600 or higher is about the closest there is to a general consensus among lending institutions. Again, it all depends on which bank you use and how well you measure up in other areas.

Debt-to-income guidelines

This is one of the hazier guidelines of the FHA program. There seems to be a lot of leeway regarding the maximum allowable debt ratio, which is addressed further down. But first, here’s a quick definition of debt ratio:

The debt-to-income (DTI) ratio shows how much of your monthly income is going toward your debts. For instance, a DTI of 30 percent would suggest that you are using 30 percent of your income to pay your debts. In terms of the FHA, though, they calculate two DTI ratios. The first is the front-end ratio which includes only housing-related debts, such as your mortgage payment. The second is the back-end ratio which combines your housing debt along with your other debts, credit cards, car loans, etc….

For lenders, the combined number, the so-called back ratio, is the most important one in getting approved for an FHA loan. Some lenders say that 43 percent is the maximum allowable back-end ratio. Others say they’ve seen borrowers get approved through automated underwriting systems with combined DTI ratios close to 50 percent.

Of all the FHA loan guidelines, this one is the hardest to pin down. However, if you can keep your back-end ratio below 43 percent, you shouldn’t have any trouble qualifying for an FHA loan, as long as you meet all of the other guidelines mentioned above.

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