FHA Mortgage Prequalification 101: Requirements & Process
Most people dream of buying their own home. But with rising property values and stagnant wages, that dream is becoming more and more inaccessible to the average American.
Enter the Federal Housing Administration (FHA) loan, a government-backed mortgage specifically designed for low-income and first-time homebuyers who may not meet the salary, down payment, or credit score requirements that come with a traditional home loan.
In this quick guide, you’ll get the answer to some very important questions such as, “what is an FHA loan?” and “how do I prequalify for an FHA mortgage?”.
What Is An FHA LOAN?
The FHA loan program doesn’t actually lend money to home buyers. What it does is that it ensures your mortgage payment so that if you default on your loan, the government will pay off your mortgage. Many lenders won’t approve borrowers who have low credit scores or income, so this is a great way for people who normally wouldn’t qualify for a conventional home loan to purchase property.
Contrary to popular belief, FHA loans aren’t just for first-time homebuyers. You can use an FHA loan to buy any kind of home (whether it’s your first or not) or to even refinance your current mortgage.)
FHA Loan Requirements
Verifiable salary: Any kind of documentation that verifies your earnings such as W-2s, payslips, or tax returns. This is also used to determine the length of employment.
Minimum credit score: Unlike most lenders that require a FICO score of 600-700+, you only need a score of 500+ to qualify for an FHA loan.
Minimum down payment: Before you can apply for the loan, you need at least 3.5% in down payment (or up to 10% for those with credit scores from 500-579).
Good credit history: There shouldn’t be any foreclosures, late payments, or bankruptcy filings in the past 1-3 years (depending on the financial event). Generally, older financial issues do not impact your ability to get an FHA loan.
Debt-to-income ratio: Your debt-to-income ratio should be less than 45%. The mortgage payment must not be more than 35% of your current earnings before taxes to ensure that you can pay off your debt.
Primary residence: The home you are purchasing through the FHA program should be your primary residence.
Minimum FHA loan requirements apply to all borrowers, but certain standards may not apply in all cases. Some areas or homes may require hazard insurance, for example. Non-typical earners like freelancers or seasonal workers may also need to provide additional documentation.
Benefits Of An FHA Loan
Affordable down payment: You only need a minimum of 3.5% down payment to apply for FHA loans, and it can even be a gift or loan from someone else.
Forgiving credit score requirements: Bad credit scores are one of the top reasons that people don’t qualify for mortgages. You can qualify for an FHA loan with a credit score of just 500 and get the best rates at 580+.
Flexible loan terms: Loans are available at 15-year or 30-year payments.
Lower interest rates: You can get significantly lower interest rates compared to a conventional mortgage, especially if you have financial issues or a lower down payment.
Eligible for refinancing: FHA loans can be used to refinance an existing mortgage, which can help you get more favorable payment terms and pay off your mortgage faster.
Assumable mortgage: If you sell your home, the new owner can assume the mortgage, which can be an attractive selling point if mortgage premiums are more expensive down the line.
Wide range of lenders: Many lenders accept FHA assurance.
Prequalification Requirements For An FHA Loan
Prequalifying for a loan simply means that a lender has gone over your basic credit information and determined that you will likely get approved. It is not a guarantee that you will actually get the loan, but it does give you some peace of mind to know that you meet the basic requirements.
Getting prequalified comes with plenty of advantages. First, it’s a good way to signal to sellers that you’re a serious buyer. Second, it gives you an idea of how much you may get approved for and what your monthly premiums may look like. Third, it reveals any credit issues that you may have overlooked, which is great for first-time homebuyers who may not be fully aware of their financial situation.
Every lender has its own prequalification process and requirements. They typically look at your earnings, debt, credit, and assets to decide how much you are able to borrow. Again, this is just an estimate – your rates and terms may change once you file a more thorough, formal loan application.
Steady employment with at least two years in your current employer. Some FHA lenders may accept a shorter work history.
Consistent income over the last two years, although increasing income is much better.
A good credit report with a minimum 500 credit score
No bankruptcies in the last 2 years
No foreclosures in the last 3 years
Total home loan amount iswithin the limits in your area. FHA loans can range from $330,000 to more than $765,000 in 2020.
Mortgage payment is less than 30% of your current earnings
Home meets FHA standards for safety, security, and soundness.
You must move in within 60 days of closing the sale.
Purchased property must be your (or a family member’s) primary residence, not a second home or vacation home.
Documents You Might Need
Social security card
W-2 statements and/or tax returns for the last 2 years
Payslips for the last 2 months that show year-to-date earnings
Recent bank statements
Profit/loss statements (for those with their own businesses)
Documents for other assets (e.g. investments, existing mortgage statements, property tax bills, etc.)
Keep in mind that this is just a general checklist. Lenders may ask for other information during the prequalification process for an FHA home loan.
Tips On How To Prequalify For A Mortgage
Check your credit reports to understand your current financial situation and spot any potential errors.
Gather all of your documents in one packet (for hard copies) or drive (for soft copies) so that it’s easier to send out to potential lenders.
Improve your credit by paying off debt and paying on time.
Shop around different FHA lenders. Some will have more forgiving requirements than others.
If you get denied by a lender, ask them why your prequalification didn’t go through. Then, use that information to address credit problems and increase your chances of qualifying next time.
Look for a co-signer or co-borrower on your loan.
Build an emergency fund with at least a few months’ worth of mortgage payments.
Frequently Asked Questions About Prequalifying For An FHA Loan
What’s the difference between prequalification and preapproval?
Many FHA lenders use the terms “prequalification” and “preapproval” interchangeably, but there is a slight difference. Generally, prequalification is an early stage of the home loan process akin to getting a cost estimate – lenders give you a prequalification decision based solely on the information you give them.
The preapproval process, on the other hand, involves verifying the information you’ve provided. As a result, you get a more accurate picture of how much you may actually be able to borrow.
How long does it take to get prequalified?
It really depends on the lender, but most prequalifications take a few days if that. Some FHA home loan providers may even provide you with an assessment immediately after you send your documents.
Does getting prequalified for an FHA mortgage guarantee that you will get it?
There’s no guarantee that you will be approved for an FHA loan even if you get prequalified. It’s very likely, and it does help you move toward that goal, but there’s still a possibility that something will come up in the underwriting or appraisal process.
If I get prequalified, is there an expiration date?
Most FHA loan prequalifications are valid for 2-3 months. The lender who prequalified you will usually put the expiration date on the letter/quote they give you. If you can’t find it on the mortgage statement, make sure to ask the lending company so that you’re not working off an invalid assessment.
An FHA loan is a great way to secure a mortgage even if you wouldn’t normally qualify under a traditional home loan. Getting prequalified helps you compare lenders, understand your borrowing power, and find the best option for purchasing a new property.
Are you in the market for a new home? Wesley Mortgage, LLC can improve your chances of getting prequalified for a loan. Contact us today to learn more about what we can do for you!