Who is Eligible for an FHA Loan?

 in Blog
bathroom in modern resort house

If you are in the market for your first home, an FHA loan may be on your radar. It is an excellent option if you don’t want to put a massive down payment on your mortgage. 

Who is eligible for an FHA loan?

The FHA loan is a type of mortgage that is insured by the Federal Housing Administration. This type of loan allows the borrower to finance their home with a minimum down payment of 3.5%. An FHA home loan is especially popular among those who are looking to purchase their first home. In order for a person to be eligible for an FHA loan, the borrower has to meet specific lending guidelines. These requirements are as follows:

  • The borrower must have a FICO score of between 500 and 579 (105 down), or
  • A FICO score of 580 or higher (and 3.5% down)
  • Employment history for the past two years (must be verifiable)
  • Debt-to-income ratio (including the mortgage) of less than 43% of the person’s gross monthly income
  • No bankruptcies over the period of the last two years
  • No foreclosures for the past three years
  • The property needs to be used as the primary residence of the homebuyer

Do FHA loans have income limits?

woman in white long sleeve shirt sitting on brown wooden chair

There are no income requirements or limitations for getting an FHA loan. When it comes to the minimum amount that is required, the regulations of the FHA loan are more focused on the person’s ability to afford the loan, and the person’s debt-to-income ratio, their job, and income verification, repayment history on financial obligations, the dollar amount of applicant’s gross income. 

This means that the FHA loan rules dictate that it is not impossible to earn “too much” in order to get an FHA loan. These loans are for any qualified borrower and not just those applicants who are not able to afford conventional home loans. Since there is no income ceiling, the borrower does not have to worry about the income limitations of an FHA loan. 

Related: How to Buy a House

What disqualifies a house from an FHA Loan?

While it is easy for applicants to qualify for an FHA loan, there are some issues that may be flagged during the initial FHA approval. For instance, a home that is too expensive will not qualify for an FHA loan. This is because the annual limitations that are established by HUD vary by area and the number of units. The FHA is only able to insure up to that limit. In other words, an expensive home with a 3.5% standard down payment could require a loan amount that exceeds the limit. 

Also, the following are some of the issues that may be flagged during the FHA approval that can disqualify the home for an FHA loan:

  • Houses built before 1978 with peeling paint. 
  • Houses with bedrooms without windows or a secondary egress point.
  • Safety-related concerns.
  • Issues with the property’s electrical system.
  • Installed electrical or plumbing systems.
  • A leaking, damaged or rotting roof.
  • Water that’s standing in the basement or anywhere else in the house.

It is important to note that these are not the only issues that may be flagged during the FHA approval of the property, but rather, some of the most common issues that are normally flagged during the FHA approval.. 

Note: FHA loans are not for vacation properties or investment homes. Another issue that may be flagged is if it’s a condo, and as a result, is not on the “approved” list. 

What is the downside of an FHA loan?

people gathered inside house sitting on sofa

While there are many benefits to getting an FHA loan, there are also some downsides. Some of which may make it a bad option for some people, which is why it is important for you to know what you’re getting into. 

Mortgage Insurance Premiums 

The first downside of FHA loans for many borrowers is the high MIP. Borrowers have to make an upfront payment of 1.75% of the loan amount along with the annual premium, which amounts to .85% of the loan. 

Limitations 

Another disadvantage of getting an FHA loan is the limitation of how much an applicant is able to borrow. These limitations are increasing in all areas of the FHA loan, which does not offer the freedom that borrowers expect when getting an FHA home loan. That being said, the number of limitations is still lower as compared to conventional home loans. 

Varied FHA Loan 

The limit of the FHA loan varies depending on the location of the property, as well as the city and state, which can result in lower or higher rates for the FHA home loan. 

Minimum Property Standards 

Another downside of getting an FHA home loan are the minimum property standards. This may keep a borrower from being able to purchase the home that they want. The minimum property standards that are enacted by the FHA home loan is meant to provide protection to the borrower from purchasing any property that is in disrepair and could be dangerous to live in. On the other hand, these limitations tend to be burdensome to some borrowers, especially if they are looking to get a loan to purchase a home that does not meet the FHA’s minimum property standards. This also means that buyers cannot take a small FHA loan to buy a fixer-upper and carry out repairs later.

How long do you have to be at your job to qualify for an FHA loan?

One of the questions that borrowers ask when it comes to an FHA home loan is, “How long do I have to be at a job to qualify for the FHA loan?” According to the FHA guidelines, all borrowers need to show a work history of at least two years. This can be in any given field or industry but needs to be two years immediately prior to filing your application for the FHA loan. It is also possible for a borrower to qualify if they have worked in a field for less than two years, as long as they show any development in that specific field. 

Related: Is Buying a house for suckers?

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