Of all the ways to complete a home purchase, using FHA financing is often the most popular. These loans have convenient terms that make them available to numerous borrowers, and with affordable rates, many people can get a great deal on their financing. From first-time buyers to experienced homeowners, these loans can be the right choice for you.
While convenient, FHA financing is not a sure thing. There are specific requirements that you’ll need to meet in order to qualify. Fortunately, if you meet these requirements, you’ll have a top-quality loan on your home.
Using these tips, you can increase your chances of qualifying for FHA financing. Some are simple, fast, and easy, while others take time and effort; all of them, however, will increase your chances of earning an affordable, convenient loan.
Is it Really “FHA Financing?”
The terms “FHA financing” and “FHA loan” are a little deceiving. The FHA is not actually making the loan, but instead providing financial insurance to lenders. Lenders want to have this insurance, which protects them in the event that the borrower can’t make the payments. And to get this FHA insurance, lenders need to make sure each “FHA loan” meets the agency’s requirements.
So an FHA loan, or FHA financing, is not a loan from the FHA, but merely a loan that is insured by the FHA.
Increase Your Chances of FHA Financing with these Essential Tips
The FHA has clear, specific guidelines for loans that they will support. If you want to increase your chances of FHA financing, these simple tips can help…
1. Save for a Downpayment
There are many factors that go into your loan approval, but one of the most important is your down payment. With FHA financing, you will need at least a 3.5% downpayment, assuming your credit score is at least 580. While 3.5% is a relatively small requirement, it can equal thousands of dollars; for a $300,000, for example, a 3.5% downpayment is $10,500.
This is the first and most basic requirement: if you’re going to use FHA financing, you must have at least a 3.5% downpayment.
2. Maintain a Credit Score of 500 or Better
While other loans can provide wiggle room on credit scores, FHA financing is very clear: you need at least a 500 credit score to qualify. If your credit score is between 500 and 580, you will be able to secure an FHA loan with a 10% downpayment. Of course, 10% can be a significant amount of money; on a $300,000 purchase, we’re looking at $30,000.
Fortunately, if you have a credit score over 580, you can secure FHA financing with only a 3.5% downpayment. This means on a $300,000 purchase, you would only need about $10,500. This is a more achievable downpayment, so most borrowers will want to improve their credit scores in order to qualify.
3. Avoid Bankruptcy and Other Financial Issues
Of course, no one wants to go through a bankruptcy, so this is an obvious statement. If you are planning on using FHA financing for your purchase, you will have to have a clean record, with no foreclosures or bankruptcies in the past two years.
While there are mortgage options, bankruptcy can be a devastating experience, so avoid it at all costs and you’ll be far more likely to get the FHA loan you need.
4. Have a Low Debt-to-Income Ratio
Your debt-to-income-ratio, or “DTI,” is an important part of your loan application. For obvious reasons, lenders want to see that you earn enough to cover all of your monthly debt payments; generally speaking, the lower your DTI, the greater your chances of loan approval.
DTI is calculated monthly, comparing your total monthly debts against your monthly income. For example, if you have debt payments totaling $3,000, and a monthly income of $6,000, your DTI is 50%. ($3,000 is 50% of $6,000.)
Lenders will look at your overall debt ratio, and they will use this number to approve (or reject) your application. Lowering your DTI by eliminating some of your debts is often wise, not only for your loan application but also for your personal finances.
For FHA loans, you will need a ratio of 43% or lower. If your monthly debt expenses are no more than 43% of your total monthly income, you should be eligible for FHA financing.
5. Use Gift Funds and Document them Thoroughly
As we discussed above, if you need FHA financing for your purchase you will need to bring at least a small downpayment, and saving for this downpayment is often difficult considering the cost of living, such as rent, groceries, travel, and other expenses.
Because it’s so difficult to save, many people use cash gifts from friends or relatives to fund their downpayment. With FHA financing, this is perfectly acceptable, but you need to thoroughly document that gift through a “gift letter.”
6. Stick With Your Job and Career if Possible
Steady employment is important for loan financing. Statistically speaking, the longer you are with a certain job, the less your chances of default on a loan. For this reason, lenders like to see that you have been with a certain company (or have been self employed) for at least two years.
If you will be looking for a home loan (even if that loan is not supported by the FHA), you should avoid changing careers if at all possible. Obviously life can change quickly, and sometimes making a shift is important, but staying with a certain job for an extended period will increase your chances of loan approval.
If possible, stay with your current job until after you have purchased a home.
Your Source for FHA Financing, Jumbo Loans, and More!
The team at San Diego Purchase Loans is here to help you get the right financing for your specific needs. We are proud to serve San Diego and the surrounding area with FHA loans, jumbo loans, investment-property loans, and more, so contact our expert staff today!