FHA Loan Requirements

FHA loan requirements were set forth in a positive fashion to help borrowers get a grasp on reality.  Many homes have been foreclosed upon, but much of this has to do with an economy that is sinking and sinking quickly.  So, to be sure that you understand what those positive changes are, here is a little bit of information.

FHA requirements give homeowners the ability to come to the table with 3.5% down and up to 6% in seller concessions.  With conventional loans the requirement is anywhere from 5% to 30%, depending on the value of the home, and the borrower’s income.  With FHA requirements anyone can use that down payment calculation, it is not only going to pertain to moderate income families. 

FHA requirements also give some leniency in past derogatory credit.  They only require that with the past derogatory credit comes a reasonable explanation for it.  When they say reasonable, they just want to see that maybe a long period of illness or a long period of unemployment played a part in all of this. 

Secondly, FHA requirements place a hierarchy on credit.  The underwriters will typically review your credit in terms of previous housing expenses first, then installment debt such as car loans and student loans, then revolving debts.

In general, there are exceptions to certain things as with anything in life, but the key here is to remember that this is all relevant to you buying a home, so they are looking at what is important.  So, FHA requirements state that your past 12 months history of rent or mortgage is very important in how you have paid your items in the hierarchy of credit.   So, the rent history is critical if you are planning to buy a home, and if you are refinancing then it would be your current mortgage payment.  Late payments in the past 24 months will definitely require a letter of explanation from the borrower.

FHA requirements also state that any new credit obtained must be evaluated very carefully.  FHA just wants to ensure that any new credit you have obtained was not obtained in order to assist you in the process of putting down money on your new home.

FHA requirements do not state that all collections must be paid off in order to qualify for an FHA loan.  While it is best to not have these on your credit, certainly there are some exceptions as mentioned previously.  Small medical collections are reasonable for many, and that seems to be the trend.  However, large judgments or liens are not acceptable. 

As always, the thing to keep in mind here is that with anything in life there are exceptions to the rule, but you can get a great loan with FHA.  FHA offers you and your family the chance to get a great home, with a lower down payment and up to 6% seller concessions and they won’t hold it against you if you didn’t pay your electric bill five years ago!