Thereâ€™s an abundance of misinformation online today, with regard to FHA loan guidelines. Youâ€™ll find conflicting information about down payments, credit scores, debt ratios, and every other aspect of the lending process. This leaves home buyers scratching their heads (and sending us a steady stream of emails). Hereâ€™s what you need to know about FHA guidelines in 2012:
1. Down Payment Guidelines
When using an FHA mortgage loan to buy a house, you will have to make a down payment of at least 3.5%. There is a lot of Internet â€œchatterâ€ right now about HUDâ€™s plans to raise the minimum down payment to 5%, in order to replenish its reserve fund. But so far, this is only speculation. There have been no official announcements on this subject. And even if they do decide to make such a change, it probably would not take effect in 2012.
Nearly all of the lenders we spoke to felt confident the 3.5% down-payment requirement would stay in effect for the rest of this year.
If your credit score falls below 580, you might have to make a down payment of 10%. HUDâ€™s official policy states that â€œborrowers with less than a 580 FICO score will be required to put down at least 10%.â€ But, as you will soon see, this requirement is something of a moot point. Mortgage lenders impose their own (often stricter) requirements on top of the minimum guidelines established by the FHA.
2. Credit Score Guidelines
Of all the FHA loan guidelines mentioned in this article, the down-payment requirement is the one most firmly set in stone. Credit scores are a different story. Here, much depends on the particular lender you use.
Some of the lenders we spoke to set the bar at a 620 FICO credit score, for all of their mortgage products. Some had a lower minimum for FHA loans, as compared to conventional loans. Others were willing to go as low as 580, as long as the borrower has stable employment and income. Quicken Loans, for example, says that borrowers â€œmay now qualify for an FHA loan with a credit score of 580 and above.â€ So the standard will vary based on the lender you use.
We also spoke to a representative from Wells Fargo (the nationâ€™s largest mortgage lender). In 2011, the New York Times reported that Wells Fargo was offering FHA loans to borrowers with scores as low as 500. This would have marked a significant divergence from the 600-and-up crowd. So we asked them about this. Here is what a representative told us about their FHA loan guidelines:
Other large lenders had similar standards. Chad Baker, a loan officer with Prime Lending, told us that his company â€œwill provide FHA financing down to a credit score of 600,â€ adding that â€œthere are mortgage banks that are providing FHA financing below a FICO score of 600.â€ So a score of 600 or higher was the closest we could come to a general consensus. But again, it all depends on (A) which bank you use and (B) how well you measure up in other areas.
3. Debt-to-Income Guidelines
This is one of the hazier guidelines for the FHA program. There seems to be a lot of leeway, with regard to the maximum allowable debt ratio. We will get to that in a moment. But first, a quick definition is in order.
The debt-to-income (DTI) ratio shows how much of your monthly income is going toward your debts. For example, a DTI of 30% would suggest that you are using 30% of your income to pay your debts. As far as FHA loan guidelines are concerned, there are two DTI ratios. The front-end ratio only includes your housing-related debts, such as your mortgage payment. The back-end ratio combines your housing debt with all of your other debts â€” credit cards, car loans, etc.
Lenders tell us that the combined number (the so-called back ratio) is most important, when it comes to being approved for an FHA loan. This is the one that takes into account your housing costs as well as your other debts. Some said 43% was the maximum allowable back-end ratio. Others said theyâ€™ve seen borrowers get approved through automated underwriting systems with combined DTI ratios close to 50 percent.
Of all the FHA loan guidelines covered in this article, this is the hardest to pin down. My advice is for borrowers to keep their back-end ratios below 43%. If you do that, you shouldnâ€™t have any trouble qualifying for an FHA loan (as long as you meet all of the other guidelines mentioned above).