Homebuyers

Applying for an FHA Loan? Here are 5 Ways to Help You Get Approved

If you have less-than-ideal credit, debt, or don’t have a lot of money parked in a savings account, that doesn’t mean homeownership is out of reach.

Government-backed Federal Housing Administration (FHA) loans were created to help people who might not be approved for other types of mortgages buy a home. These loans are popular with first-time and other buyers who may have lower credit scores and smaller down payments.

“FHA [loans] are not nearly as challenging as some other loans out there” to qualify for, said New American Funding Sales Manager William Chase. He’s based in Orlando, Fla.

That’s not to say FHA loans are requirement-free. Borrowers will need a minimum credit score of at least 500 and at least 3.5% of the purchase price, some of which may come from down payment assistance programs.

However, getting your financial ducks in a row might be easier than you think. Below are five steps you can take to increase your chances of being approved for an FHA loan. 

“If people are aware of it and put conscious effort into paying their bills on time and keeping their debts low, they’re going to end up having a lot more success with a home purchase,” said Chase.

1. Improve your credit score before applying for an FHA loan

One of the best ways to set yourself up to be approved for an FHA loan is to focus on improving your credit score.

Buyers need scores of at least 500 to qualify for FHA loans, although some lenders require higher scores. However, you will need a score of at least 580 to be able to put down just 3.5%. Those with lower scores will need to kick in 10% of the purchase price of the home they hope to buy.

That’s why you should take an in-depth look at what lenders will see when they pull your credit. Then you can begin to address any issues and take steps to increase your score.

“Before you even apply, know what’s on your credit report,” said New American Funding Branch Manager Brenda Robinson in Inglewood, Calif. “That should not be a surprise when you meet with the loan officer.”

Robinson recommended seeking out a free annual credit report from the three major credit reporting bureaus, Experian, Equifax, and TransUnion. A thorough investigation can reveal problem areas as well as incorrect information.

Working on keeping your credit utilization low and your late payments to a minimum will make you a better bet in the eyes of lenders. Paying down balances and not opening up new credit cards can also help to boost your score.

2. Pay down debt so you can qualify for a larger FHA loan

Your debt-to-income ratio plays a major part in whether lenders feel they can offer you a mortgage with another required monthly payment.

Paying off or reducing the balances on other debt, can increase your odds of being approved for an FHA loan. It can also help you qualify for a larger loan.

To be approved for an FHA loan, borrowers need to keep their debt-to-income ratio at or below 57%. This is how much debt they have compared to how much they earn. Some lenders require lower ratios.

“Try to get your credit in check by paying off the small debts first to open up your debt-to-income ratio,” said Chase. This will also help to boost your credit score. “If you have a bunch of high [balance] credit cards, try to pay those down.”

3. Stabilize your income before trying to get a mortgage

Lenders think about mortgage repayment in periods of 15 to 30 years. A recent increase in income won’t matter as much to them if your employment record is spotty or if your income fluctuates dramatically.

Working longer hours and sticking with the same job while you’re seeking a loan is a good way to signal to lenders that you’re a steady and reliable buyer who is likely to be able to repay the loan.

4. Know how much home you can afford

Many FHA loan recipients are first-time homebuyers. As such, it’s important to set reasonable expectations of how much home you can afford.

If you find it particularly difficult to save up the required 3.5% of the purchase price for an FHA loan down payment, it might mean you’re shopping outside of your price range.

You may also want to look into down payment assistance programs that can help you to cover the down payment and closing costs. Closing costs are typically 2% to 6% of the loan amount. 

“Make sure you have enough money saved for the down payment and closing costs,” said Chase.

5.  Don’t despair if you don’t get approved for an FHA loan right away

You may not get approved for an FHA loan the first time you apply. That just means you have to work on improving your credit score, paying down debt, and saving.

One of Robinson’s clients wasn’t able to qualify for an FHA loan at first. The buyer had a credit score in the 400s.

“We talked about what needed to be done,” said Robinson. “They’re now looking to purchase their second property.”

William Chase NMLS# 1532921

Brenda Robinson NMLS# 954742