An FHA loan is a commonly-sought mortgage program by potential borrowers who would like to get a home loan but have problems either with their credit score or getting enough money to pay the conventional down payment requirement.
An FHA loan is one of the housing programs established by the government to aid a significant chunk of the borrower market who cannot get a conventional mortgage. Because many lenders shy away from the risk of these types of borrowers, the FHA stepped in to cover for their needs, although modifications in their standards may soon take effect.
To be eligible for an FHA loan, the borrower must be able to satisfy the following requirements:
- A credit score of 580 or above. If you are applying with a spouse, the lower score will be considered. If your credit score is within the range of 500 to 579, you may still qualify for an FHA loan, given that your LTV ratio is at 90 percent of less and you will have to pay a down payment of at least 10 percent of the purchase price.
- A 3.5 percent down payment requirement
- A DTI ratio of 43 to 45 percent at maximum
- A clear CAIVRS report
- The property must meet the standards set by the FHA
With less stringent requirements than those set by conventional lenders, it is easy to think that your loan approval will go unhindered. But never be overconfident. Know these most common roadblocks to an FHA loan approval to be adequately prepared for your FHA loan application.
Property needs repairs
Note that the FHA has set standards for the property to be insured. An inspection is to be made on the property before it can be given a green light for purchase. If a problem is identified, that might cause a delay in the process. Another problem is in fixing the issues with the property’s condition. You, as a buyer, cannot fix a property you do not own.
To get around this dilemma, you can negotiate with the seller to do the needed repairs before the sale can proceed. But if they refuse, experts recommend using the FHA 203K Streamline Program, which allows you to borrow $35,000 to facilitate non-structural repairs before you can move in.
If the identified problems are bigger in scale such as leaks or problems with plumbing, you may want to reconsider the purchase and think about whether it does not compromise yours and your family’s safety.
Too many debts
Or too high. Whichever is the case, a high DTI ratio can hinder your potential for an approval. Your DTI ratio computes how much you earn versus how much you owe with your creditor/s. A high DTI ratio is bad news for your originators.
In such case, you may ask your lender to use the TOTAL automated underwriting system by the FHA which lets you get an almost instant yes-or-no decision from the FHA by feeding it the needed information. This is useful only if you have problems with high DTI – the system usually tolerates high DTI ratios. However, it will not help you with issues in your credit reports. You can make up for this by giving the lenders at least two compensating factors. This may take the form of having enough reserves to cover three to six months worth of mortgage payments, putting it a bigger down payment, etc.
The home’s appraisal value tells you how much the house is worth in the market. Sometimes, it may be higher, or lower than you expect. Now, this is not the appraiser’s fault – for those who are too fast to place the blame on them. Certain factors affect a home’s value.
Should this be your case, you can use the appraisal numbers to renegotiate with the seller. You can input a bigger down payment to make up for the difference between the sale price and the appraisal value. If you give a lower offer compared to the negotiated sale price and the seller refuses, you may have to consider walking out of the deal if the difference is too great for it to be sensible.