FHA-insured mortgages have some of the most lenient qualification requirements, but borrowers are expected to meet specific criteria before getting approved.
Contrary to what many homebuyers may believe, it’s not uncommon for an FHA loan application to be denied. If you failed to qualify for an FHA loan, it could be due to one (or more) of the following reasons:
1. You don’t have enough money for a down payment.
The Department of Housing and Urban Development’s (HUD) current criteria require all FHA borrowers to put down at least 3.5 percent of the loan amount. This condition immediately rules out borrowers who simply lack the cash reserves for a down payment.
These days, the only possibilities for 100% mortgage financing are VA and USDA loans, while a down payment of at least 5%, sometimes as much as 20%, is required for conventional loans.
2. You are unable to cover the closing costs.
You’ll have to pay loan closing costs, which can add up to hundreds of dollars. The FHA enables sellers to contribute a portion of the purchase price toward the buyer’s closing fees. These so-called “seller concessions” are becoming increasingly rare in today’s real estate market.
When applying for an FHA loan, the lender will look at your bank account to see how much money you have. You can be turned down for an FHA loan if you don’t have enough money to cover your down payment and closing charges.
3. You have an excessive amount of debt.
The debt-to-income ratio, or DTI, is one of the essential mortgage criteria. When you take out a loan, lenders analyze your gross monthly income versus your monthly expenses, including debt payments.
The 43 percent guideline has emerged as the “gold standard” for FHA loans. You may have problems securing an FHA loan if your debt-to-income ratio exceeds 43 percent. You’ll have to go through a more thorough underwriting process.
4. Your credit score is insufficient.
Within the FHA loan program, there are two official credit-score limits set by the HUD:
First, borrowers must have a credit score of at least 500 to qualify for the program. Second, you’ll need a credit score of 580 or better to qualify for the 3.5 percent down-payment option.
Furthermore, the mortgage lender may enforce its credit score guidelines and HUD. This is called a lender overlay. Even if your credit score falls within HUD’s criteria, the lender has the right to reject your FHA application if it is below their qualification standards.
5. You underwent foreclosure recently.
HUD has particular rules regarding borrowers with records of foreclosure. If you’ve had a foreclosure within the last three years, you’ll almost certainly be denied an FHA loan.
According to the official standards, borrowers may be eligible for the program if it has been three years after they were foreclosed on and only if they have reestablished solid credit during that period.
These are some of the most prevalent reasons lenders turn down FHA applicants. However, they are not the only ones. Other circumstances, like problems with the home itself, might also cause delays in the mortgage process.
Still, the HUD allows for compensating variables and exceptions to many of their standards, so don’t be put off by anything you’ve read so far. The only way to know if you qualify is to apply for an FHA loan through a HUD-approved lender near you.