What will disqualify you from an FHA loan?
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
FHA loans can only be used to finance a primary residence and may not be used to finance a second home, vacation home or rental property. High Debt Ratios. While FHA loans can be much more forgiving compared to other types of loans one of the reasons an FHA application is declined is due to high debt-to-income ratios.
The requirements necessary to get an FHA loan typically include: A credit score of 580 or higher (less than 580, but no less than 500 would require at least a 10% down payment) No history of bankruptcy in the last two years. No history of foreclosure in the past three years.
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
What will fail an FHA appraisal? Anything that's a health or safety hazard can cause a home to fail its appraisal. Non-functional systems, a deteriorating foundation, or issues with water supply or sewage disposal can also be red flags.
Although the FHA appraisal guidelines have developed a reputation for being unnecessarily strict, the standards have been relaxed. Today, most FHA appraisal requirements are easy to meet or relate to major hazards most home buyers and homeowners shouldn't ignore under any circ*mstances.
While conventional mortgages usually require a credit score of 620 or more, FHA loans are open to borrowers with credit scores as low as 500. You don't need a big down payment. If your credit score is 580 or more, you could qualify to put down just 3.5%. Interest rates are competitive.
Conventional Loans: In 2022, conventional loans had a denial rate of 7.6%, significantly lower than the FHA's 14.4%. Conventional loans, not backed by the government, typically have stricter credit and income requirements.
FHA loans are usually easier to qualify for, requiring a minimum credit score of 580 to be eligible to make a 3.5% down payment. If your credit score is 500 to 579, you may qualify for an FHA loan with a 10% down payment.
Is an FHA loan only for first-time buyers?
2. Who can apply for an FHA loan? Both first-time homebuyers and existing homeowners can apply for an FHA loan. There are no income limits, but you must have a good credit score and demonstrate financial stability.
Debt Ratios For Residential Lending
Lenders use a ratio called "debt to income" to determine the most you can pay monthly after your other monthly debts are paid. For the most part, underwriting for conventional loans needs a qualifying ratio of 33/45. FHA loans are less strict, requiring a 31/43 ratio.
If you have high debt or a spotty employment history, then adding a cosigner could help you qualify for an FHA loan. With a cosigner, the FHA will look at the entire financial picture of all borrowers and cosigners — "averaging" out the figures to determine eligibility.
Both the buyer and seller are responsible for covering different closings costs associated with the transaction. Some fees may be negotiated between the parties, while other fees (particularly lender fees and government fees) are not negotiable.
Can a seller legally refuse an FHA loan? The answer is yes. While there is nothing inherently wrong with FHA home loans, a seller has the right to refuse your offer if they don't like your financing, and this includes an FHA loan.
There's certainly nothing wrong with most FHA offers. If the price is right and the buyer has a solid fully underwritten pre-approval, you should have little concern that the deal will fall through.
FHA appraisers consider value, but they must also confirm that the home conforms to its minimum property requirements, which include safety and other issues — for example, the absence of lead paint and properly functioning appliances.
Exposed concrete, concrete flooring or concrete floor that is acid stained or painted is no longer acceptable flooring. It is considered to be exposed foundation to FHA and must be covered with a finished, marketable flooring.
Should the appraiser find issues like loose handrails or cracked window glass, he or she will “flag” them. The FHA may require the buyer or seller to correct problems prior to closing. Appraisers will often indicate that the property is “Subject To.”
The FHA flip rule and the requirement for a second appraisal are related to certain restrictions on financing recently sold or flipped properties. Under the FHA flip rule, if a property is being resold within 90 days of its acquisition by the seller, the lender may require a second appraisal.
What happens if an FHA inspection fails?
Issues that affect the safety, security, or soundness of the property may result in a failed inspection. Either the seller will have to tend to these repairs or the buyer must pursue alternative funding options, such as an FHA 203(k) Loan.
Any home that the seller sells between 91 and 180 days for twice its original price is also subject to the FHA flipping rule. According to FHA guidelines, a second appraisal might be necessary in this situation. A second appraisal helps the lender verify whether the seller is asking for a fair value on the house.
FHA doesn't approve loans. It only insures them after they've closed. Individual lenders underwrite and approve FHA loans. They should take no longer than any other loan—30 days or less from start to finish.
To recap: The FHA loan process in California can take anywhere from a month to 45 days, on average. That's from the time you first submit an application, to the final closing and funding process. And it can vary due to a number of factors. House hunting is one of the biggest variables.
On average, it takes 7-10 days to get a pre-approval, although in some cases it may take less time. To speed up the home loan pre-approval time, you should gather your financial documents that the lender will require (e.g., W2s, proof of income, tax returns, etc.).
