Those looking to obtain a home mortgage loan may be interested in applying for an FHA loan. This type of financing tends to offer low closing costs and interest rates, as well as an affordable down payment. It’s also known to be a bit easier to qualify for than other loans due to its more flexible requirements, as the Federal Housing Administration insures the loan, which gives lenders extra confidence that they’ll get their money repaid, even if a buyer defaults.
Applicants must meet several FHA loan requirements. This includes providing documentation of a stable employment, income and credit history, and the ability to afford 3.5 percent down.
Employment History & Income
To show proof of income, home buyers must either bring their last two pay stubs, or if self-employed, their last two years of tax returns. They should also be prepared to provide the names of any employers they had in the last two years, as a stable employment history doesn’t necessarily mean being at the same job that entire time. Instead, mortgage lenders just want to make sure the applicant has been working consistently. They will likely also want to hear a reasonable explanation as to why there were any periods in which an applicant did not work.
The U.S. Department of Housing and Urban Development (HUD), which encompasses the FHA, goes into further detail, explaining: “To be eligible for a mortgage, FHA does not require a minimum length of time that a borrower must have held a position of employment. However, the lender must verify the borrower’s employment for the most recent two full years, and the borrower must” do one of two things. He or she should either “explain any gaps in employment that span one or more months” or “indicate if he/she was in school or the military during the most recent two full years, providing evidence supporting this claim." This includes college transcripts or discharge papers.
Lenders are also expected to evaluate an applicant’s income.
HUD states: “The lender must analyze the income of each borrower who will be obligated for the mortgage debt to determine whether the borrower’s income level can be reasonably expected to continue through at least the first three years of the mortgage loan.”
Credit & Down Payment
FHA loans require a lower down payment than several other loans, but borrowers are still expected to spend some money—at least 3.5 percent of a property’s purchasing price. An applicant’s credit score will likely influence the exact down payment percentage he or she will need to pay. The higher the credit score, the lower the minimum down payment tends to be.
“A period of past financial difficulty does not necessarily make the risk unacceptable... "
HUD shares how a borrower’s credit history can be very telling: “If a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan,” it states.
“A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred," HUD continues.
Other Required Documentation
There is additional paperwork home buyers need to provide a lender when applying for an FHA loan. As discussed in one of our previous posts, an applicant’s name, current address, Social Security number, bank statements and other financial information must be reviewed.
Additionally, if an applicant already owns a home, he or she should be prepared to share documentation about the property. This may include the property tax bill, the deed, a mortgage payment coupon and any rental agreements regarding tenants, if applicable. The more paperwork someone has on hand, the easier the application process will be.
Contour Mortgage offers a variety of mortgage loans to home buyers, including FHA loans. Contact us today to learn more about the aforementioned requirements, as well as the application and approval processes.