For first time home buyers and even repeat home buyers it is always helpful to know what items a lender needs to generate a mortgage pre-approval. The mortgage pre-approval process requires quite a bit of documentation from start to finish but this can be relatively easy if you are organized and you have maintained good financial records. While you might hear about several documents that mortgage lenders might ask you for, if you focus on the five things you need to get an FHA mortgage pre-approval, this will be the start to a smooth mortgage process and having the requested items ready will be helpful to getting pre-approved for an FHA loan.
What is an FHA loan?
An FHA loan is a mortgage loan backed by the Federal Housing Administration, a US Government agency under the jurisdiction of the Department of Housing and Urban Development. FHA loans are insured and backed by the FHA, which only means that these mortgage loans have a form of protection for your lender against loss if you default on your loan.
In order to purchase a home using an FHA loan, mortgage lenders follow the guidelines set forth by the Federal Housing Administration as well as any additional guidelines, called overlays, that may be put in place by the lender you are using. It is important for borrowers to understand that guidelines are often updated to reflect trends or new developments in the housing and financial markets. We last saw this on a large scale during the housing and financial crisis in 2008 when many banks and mortgage lenders tightened credit in response to what was happening in the markets. We also saw this on a smaller scale in the Spring of 2020 in response to the COVID Pandemic when credit was tightened also due to the uncertainty in the markets.
What are the Qualifications for an FHA Loan?
FHA loans are not only for first time home buyers but because of these loans being very credit and new borrower friendly they appeal quite a bit to new entrants to the housing market. FHA loans require only a 3.5% down payment as mentioned earlier which is a small number that is very buyer friendly. In addition, one may qualify for an FHA loan with a credit score down to 580, and FHA loans are also known to be sympathetic to prior credit events and collections accounts when compared to Conventional loans. FHA loan borrowers may also qualify to buy with a debt-to-income ratio of 50% and sometimes higher. For these reasons and more, an FHA loan is a great option for those buyers looking to purchase their first home and any one with past credit events on their credit report.
What documents are required to get an FHA Mortgage Pre-Approval?
When applying for a mortgage pre-approval borrowers should know ahead of time that underwriters look at a range of items in a borrowers loan file but they pay close attention to the following five items. Borrowers who have been planning their home purchase at least one year before they actually buy should be organized and financially prepared to address these five items.
What is the Minimum Credit Score for an FHA Loan?
Borrowers hoping to obtain an FHA loan for their home purchase should set a goal of having a credit score of 640 or higher when they are ready to buy a home. In some cases, lenders can go as low as 580 on a credit score but credit scores under 640 could be subject to higher interest rates and somewhat tighter debt and underwriting guidelines. For this reason, I advise borrowers to set a goal to have the highest credit score possible when buying a home. That minimum credit score for an FHA loan goal should be set at 640 or higher when getting ready to buy a home.
Income
Borrowers need to have sufficient income to cover both the projected mortgage payment for their new home, as well as their other monthly credit obligations, and still have a sufficient “income buffer” for everyday expenses and savings. Income for most borrowers is either hourly or salary and for hourly workers it is important for those workers declaring full time employment to actually be working 40 hours (or more) each week if you want the underwriter to give you credit for actually working full time.
Employment History
Mortgage lenders need to show a two-year employment history for each borrower with the most recent 12 months being in one industry and largely doing the same job. If you are a “job hopper” and you have had multiple jobs in a 12 month period that could pose problems under FHA mortgage guidelines. Mortgage lenders in a perfect world would ideally like to see a borrower that has been at their job or has been working in the same industry for two years or more, and the income is stable with a reasonable probability of continuing on in to the foreseeable future.
Debt to Income Ratio
For FHA loans, lenders like for the borrowers debt-to-income ratio (DTI) to be 43% or less with a borrowers long term debt trending down in relation to their income. For the year leading up to your home purchase, try to minimize taking on any large debt that might adversely affect your DTI ratio. For example, if you need to replace a car, try buying a used car with a smaller monthly payment rather than a new car that will come with a higher payment. FHA loans do allow for a higher debt to income ratio in some cases but set a goal to keep your ratio as low as possible so you have an easier time to get an approval when you go through the underwriting process.
Down Payment
Underwriters like to see borrowers who have demonstrated a level of financial responsibility leading up to their home purchase. Borrowers who have been able to save the FHA required 3.5% towards a down payment have shown that they can reign in their spending in order to put money aside for their family’s financial future.
Keep in mind that borrowers buying a home must pay for two types of costs at closing that will include both the down payment and closing costs. When buying a home you need to budget for both and when your loan gets in to Underwriting you will need to show sufficient funds to be able to cover both of these costs. On a $300,000 home purchase for example, the FHA 3.5% down payment would be $10,500 plus closing costs of about $5K to $6K for a total of about $16,500 on the high end the borrower needs to come up with to get in to that home.
Remember, there is a difference between getting pre-qualified and pre-approved. A pre-approval is stronger because your loan has gone through underwriting and been pre-underwritten by an Underwriter. You can read our article on this process HERE and I can be reached anytime to answer specific questions that you may have.
Anything potential borrowers can do to have their financial house in the best possible order when their mortgage application is submitted is making it that much easier for the underwriter to approve their application. Consult with your mortgage loan officer well ahead of applying for a mortgage so your financials are in the best shape that they can be.
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