July 26, 2023
The FHA loan is one of the most popular loan programs for a reason: it offers a number of advantages with a low cost of entry, making it ideal for many different types of homebuyers.
6 Reasons You May Be Rejected for an FHA Loan
The FHA loan is one of the most popular loan programs for a reason: it offers a number of advantages with a low cost of entry, making it ideal for many different types of homebuyers.
An FHA loan can be an excellent financing option for a wide variety of homebuyers. Backed by the Federal Housing Administration, the FHA loan makes homeownership more available to people of all income levels all across the country. While many people think of it as primarily geared toward first-time homebuyers, in reality, its flexibility and low down payment make it an attractive choice for many different financial situations. What could cause you to be denied for an FHA loan and what do you do in this situation? How can you ensure that when you’re ready to apply for an FHA loan, you give yourself the best possible chance at approval?
The FHA loan requirements are among the most generous in the mortgage industry. The program is designed to help lower or middle-income borrowers qualify for a home loan. Each year, the FHA sets out financial and market requirements to guide lenders through the FHA underwriting and approval process. Failure to meet any of these six requirements could result in being denied for an FHA loan. Here are the most current year’s loan requirements:
The minimum FICO credit score for the lowest down payment scenario is 580 while some lenders allow credit scores as low as 570 with a higher down payment.
A minimum down payment for borrowers with a credit score of 580 or above is 3.5 percent of the home’s purchase price. Some lenders will allow borrowers with a credit score of 570 to 579 to qualify with a down payment of 10 percent.
While most lenders look for a debt-to-income ratio of 43 percent to 45 percent, you may qualify for an FHA loan with a DTI as high as 50 percent.
You cannot qualify for an FHA loan if you are purchasing a home to use primarily as an investment property or as a secondary residence or vacation home. You must occupy the property as your primary residence throughout the life of the loan or until you refinance into a conventional loan. (Read on for a house hacking tip that will allow you to enjoy the best of both the FHA’s favorable terms and investment property potential.)
The FHA sets loan limits based on average home prices in a particular geographic area. The limit for most areas for 2022 is $420,680. However, this number can be considerably higher in more expensive markets, topping out at $970,800 for the highest-priced U.S. metropolitan markets, as well as Alaska and Hawaii.
An FHA appraiser will ensure that the home is worth the price you’re paying and that it is in safe and secure condition.
FHA minimum property requirements are designed to promote the safety, security, and soundness of the property being purchased. While some superficial and cosmetic repairs may be expected as part of the purchase of a new home, major repairs that keep the home from being safe must be completed in order to close on the home with an FHA loan. These include repairs related to:
If you are looking to purchase a home that has been disqualified based on the property condition, you may want to ask the owners if they would be willing to make repairs and improvements so that it can conform to FHA property requirements. If the home is priced below its current market value, you may be able to add the cost of repairs to the purchase price. This may provide compensation for sellers who would otherwise be reluctant to cover the cost of repairs.
Another possible option is an FHA 203K loan. This loan combines the purchase price of the home and the projected repair costs into one mortgage product, allowing you to buy a fixer-upper and make the repairs yourself. This helps to make homeownership more affordable and possible for lower-income buyers while also helping to rehab existing properties that are in disrepair, making them viable parts of the community.
Failure to meet any of the requirements can keep you from qualifying for an FHA loan. It’s important to review all of the requirements and make sure that you fulfill them before attempting to apply for an FHA loan. The good news? Even if you don’t meet them immediately, you still have a number of strong options to explore.
In the event that you do not qualify for an FHA loan, you may qualify for another type of loan. If the low down payment is what attracted you to the FHA loan, consider a USDA loan with its zero down payment if you are purchasing a home in a rural area or a VA loan if you are a veteran or an active duty member in the armed forces. Alternatively, some conventional loans have low down payment options, as well.
If you are interested in an FHA loan but do not meet the credit score or debt-to-income ratio requirements, take a few months to work on rebuilding your financial situation. Paying down debt is good for both your DTI and your FICO score and will help make your monthly mortgage payment more comfortable.
If you would like to purchase an investment property with an FHA loan, consider house hacking where you buy a multi-unit property and reside in one unit while renting out the others. Since you would be occupying it as your primary residence, you would qualify for the FHA loan and can quickly build your equity in the property through rental payments from your tenants.
