Buying a home is the American dream; it gives people the feeling of ownership and pride. But before purchasing a home you will need to make sure you get all of your ducks in a row, as they say, otherwise you will not be able to pass the FHA underwriting guidelines necessary for loan approval. These guidelines are important because they safeguard the investment federally approved lenders as well as the investment of the homeowner. Without them, you may end up with a loan that you won’t be able to maintain, which means eventual foreclosure for you and a financial loss for the lender; neither of you benefit in this scenario. So before you approach a lender, you’ll want to understand what these guidelines are.
Requirements for a Conventional Loan
The guidelines for a conventional loan are not specific, set in stone rules that are used across the board. In fact, it is not uncommon for them to vary depending on the lender you go with. However, though the details may vary, the items that are reviewed do not. Typically, on a conventional loan the underwriter will look at your income, your credit history, any debt you may have, the debt-to-income ratio, and your savings.
Your income is the first and most important item reviewed in the loan process. A conventional lending institution will look at your current income, the length of time you’ve been with your employer, the type of work you do, and even the possibility for advancement at your job. Once your income has been verified, your credit history will be reviewed. This is important because from it the lender will determine whether you can be relied upon to make payments. Factors that come into play are your credit score, a foreclosure or bankruptcy, payment histories, outstanding debt, debts that may be in collection, and so on. If you have any of these issues and can resolve them before approaching one of the approved lenders, do so. It will help your case.
Debt and debt to income ratio are important because they determine whether or not you will be capable of making the mortgage payment with your current income. If your debt-to-income is too high, which means you have a high percentage of your monthly income being paid to debts, you won’t be able to qualify. If you can reduce this, you’ll be better off.
Savings are taken into account with a traditional lender for a few reasons. One, if you have savings you’ll be able to make the payment if your income drops. Two, if you put your savings into a home it becomes an investment for you and you’ll fight harder to keep it if you fall on hard times. And three, you will have to be able to make the down payment, which can be up to 20% with a conventional lender.
Underwriting Guidelines for a Federally Insured Loan
The requirements mentioned above are those for a conventional lender. For an FHA loan, the guidelines are a bit different. When a conventional lender looks at your income, he’s looking to make sure you’ll be able to make the payment. Federally insured lenders look at your income as well. Before you can be approved for a loan you will need to show that you have a stable work history, meaning you’ve been employed with the same employer for at least two years. If you have had that stable employment, you will need to wait before approval.
In addition to your work history, federally approved loan lenders will look at your credit history. Unlike conventional lenders, however, FHA underwriting guidelines do not require you to have a high credit score or a flawless financial history. You can qualify for a federal loan with a credit score that dips into the five hundreds, sometimes lower. You may also be able to qualify if you have had a bankruptcy or a foreclosure on your record as well, depending on the amount of time that has passed since it was completed. In these cases you will have to prove that you have taken the steps to improve your credit.
Debt-to-income ratios according to FHA underwriting guidelines cannot be higher than 41% of your monthly income when your mortgage is added to your debts. In addition, the mortgage alone cannot be higher than 29%. If you have debt that is driving your ratio up, you will need to pay it down or pay it off before you can qualify. Savings are helpful with a federal loan but not required. You won’t have to use them to pay your down payment unless you want to because the down can often be paid through other sources.
The Federal Housing Administration is there to help you get into a home even though you might have an imperfect financial history. The guidelines they have established are in place to make sure you can make your payments, but they are lenient enough that qualifying through one of their loan lenders is much easier than going through a conventional lending institution.