We could run through a list of FHA rules here and that would be beneficial if you’re having trouble sleeping at night, but instead of a tired list of FHA loan requirements, how about we go through a list of lending “Myths” and show you how an FHA can help overcome these false ideas.
Top FHA Loan Requirements vs Myths
MYTH: You Have to Have a Large Down Payment Before You Can Buy a House.
FHA helps people buy homes with little or no money down. The minimum down payment for an FHA loan is currently 3.5%. So if FHA requires 3.5% down, why did I just say that you can buy a home with little or no money down? It’s because there are many creative ways to come up with the down payment for an FHA loan, including:
- Gift Money: You can have a relative, and sometimes even a close friend, gift you the money needed for a down payment. The gift can cover ALL the required down payment too – there are no restrictions on how much can be gifted and how much is your own money. (And do your loan officer a favor and ASK before the gift is made because there are rules to follow!)
- Down Payment Assistance Programs: Many cities, counties, state agencies, and other non-profit entities have programs available for low-to-moderate income families, and FHA allows these programs to cover all your down payment and closing costs. Ask your loan officer for some ideas. Certain types of jobs – like school employees, fire fighters, or police officers – may qualify for special programs. There are programs for families affected with disabilities or veterans or Native Americans in many parts of the country.
- Loans or Advances from your Employer: Has to be documented and any loan agreement must be documented and the repayment figured in to the debt ratio.
- Loans from Relatives or Friends: Can’t get a gift? You can use a loan agreement. Ask for details!
- Sweat Equity: This is not common, but in some cases you can even “work” for your down payment.
(READ: FHA Qualifications: What Are the Requirements to Qualify for an FHA Loan?)
MYTH: You Have to Have a Pile of “Reserves” in Your Bank Account After Closing.
Although it may strengthen your file a bit if you have extra money left over after closing, on FHA loans this is a minor consideration in most cases. As long as you have enough money to close, you’re usually going to be just fine.
MYTH: You Have to Have a 2-Year Job History.
A 2 year job history can certainly help with your approval, but there is no set requirement for this on FHA loans. The rule with FHA is that the underwriter must have some reason to believe that your income is “likely to continue”. That’s it. What does that mean? It means, work with someone who understands FHA loans and not with someone who tells you that since you don’t have a 2 year job history that you don’t qualify.
Did you go to school to train for your job? Maybe you have a nursing degree and just started working as a nurse? Bam! One paycheck is probably enough to get this file approved. Maybe you went to a 9 month truck driving school and have been driving trucks now for 6 months. Bam! That’s an easy story to tell and shows your income is likely to continue. Maybe you had a big gap of unemployment but your company just called you back? Bam! A letter of verification from your employer and you’re probably good to go. Even having several jobs over the past 2 years can be tied together and get you your approval. And if you do have a recently-shaky work history, but you have a degree or certificate related to your line of work – even if it’s from a few years back – provide it with your application. It can help show stability!
MYTH: Bad Credit Will Keep Me From Getting a Loan for Years!
Not true at all. Yes, you need to meet minimum standards and FHA just implemented some new rules about how much unpaid bad credit you can have on your report, but for the most part, FHA is designed to help you get back in the game much sooner than other programs. Even after a bankruptcy or short sale, there are ways to get qualified much sooner than you think. And raising your credit score? Pretty easy if someone shows you how.
Having bad credit is embarrassing, so people with damaged credit tend to wait to talk to a lender “until their credit is better”. This is akin to waiting until you feel better before you go to the doctor. A good lender will WANT to help you fix your credit. We can’t do a loan for you until your credit passes the guidelines – and WE know what those guidelines are. Why wouldn’t you want to let us help you? Don’t be afraid – we don’t bite. And if you call someone who won’t help you – did you really want someone like that doing your loan in the first place? What a great way to find a good lender to use.
MYTH: You Have to Have a High Credit Score to Get an FHA Loan.
FHA allows credit scores as low as 500. Per FHA guidelines, a credit score between 500-579 requires a down payment of 10%. A 580 score is required for the standard 3.5% down. So can you get a 3.5% down FHA loan with a 580 credit score these days? Not likely. You see, FHA’s minimum standards allow these scores but the reality is that the individual lenders are held responsible for the quality and performance of their loans. If a lender does too many bad loans, they can lose their ability to generate ANY FHA loans, or they can lose their special designations (like “Full Eagle”) which come with special perks related to pricing and underwriting speed.
So lenders put “overlays” on the minimum standards, meaning in most cases you still need credit scores in the low 600’s to qualify. This is still far better than what is required for conventional financing programs – and getting to a 620 or 640 score isn’t all that hard. Too many people bought homes during the sub-prime years when they really weren’t ready to do that. Do you really want to try to buy a home before you’ve cleaned up your credit act a little?
MYTH: Co-Signers Aren’t Allowed on Home Loans.
Non-Occupant Co-Borrowers are most certainly allowed on FHA loans. If you are short on income, having a co-borrower added to your loan can help get you over the top. But unlike car loans, a co-borrower will not help overcome your bad credit issues. Any borrower on the loan MUST meet the minimum credit standards – you can’t co-sign that away.
Those are some of the major myths that keep many people from talking to a lender. The next section has links to actual FHA guidelines. Get your pillow ready. But now you can search these links looking for the myths above, and see if I’m right with my answers. Just keep in mind: There are minimum standards set by FHA, and then there are actual Lender Guidelines (overlays) that lenders put in place. So just because FHA allows it, that doesn’t mean you can do it!