The U.S. Department of Housing and Urban Development offers loans with favorable payment terms for homeowners who may have trouble qualifying for a traditional mortgage. The Federal Housing Authority insures these loans to encourage lenders to take on the additional risk that these borrowers may represent. If the borrower defaults, the FHA will compensate the lender for its losses. Because of this financial risk to the FHA, you must meet certain requirements to qualify for a HUD loan.
Your credit report generally must show a score of at least 580, and no more than two 30-day late payments in the previous two years, to secure a HUD loan. In some cases, however, you can qualify if you have never established a credit score.
You may be able to justify some minor credit issues if you have recently gone through a major life change, such as losing your job, moving to a new location or suffering a serious injury This shows that you have a valid reason for missing payments and post a less serious risk of defaulting in the future.
Work History and Income Requirements
You must have be employed continuously for at least two years to secure an HUD loan. Job changes are permitted, but your chances of approval will be better if you have stayed with the same employer. Your income should have remained the same or increased during this two-year period of employment. Your monthly loan-related expenses should not be more than 29 percent of your gross income.
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Include all costs paid for mortgage insurance, property taxes and homeowner's insurance when calculating your income-to-debt ratio. For example, if your mortgage payment will be $500 per month, property tax impound payments are $100 per month and insurance premiums are $75 per month, your total monthly loan-related expenses will total $675.
Existing Debts and Liens
All outstanding accounts with collection agencies and court judgments against you must be resolved before you can close your loan. You may be approved with open collection accounts, so long as they are completely paid off on the loan closing date. You must pay any state tax liens in full. Federal tax liens may be paid on a payment plan, as long as you can still meet the FHA's income-to-debt ratio with the addition of the tax payment. If you have filed for bankruptcy, at least two years must have passed since your discharge. After a foreclosure, you must wait three years and avoid any future 30-day late payments.
Minimum Property Standards
The property itself also is subject to certain minimum requirements. The FHA wants to ensure that the home it receives as collateral for the loan is structurally sound and will hold its value if the lender is forced to sell it after a default. A licensed appraiser must examine the home and attest that it is safe and habitable. The main areas of concern are the electrical wiring, heating and air conditioning, roof, water heater, structure and appliances.
The maximum loan amount varies by county and type of property, due to regional differences in home prices. For example, the maximum loan amount for a single-family home in San Francisco is $625,500, while the maximum in Fresno County is $281,750 for single-family homes. Multi-family homes may be secured by larger loans. A four-plex in San Francisco may be secured by a loan of up to $1,202,925, for example.
How to Apply for a HUD Loan
The application process for FHA loans is similar to a traditional mortgage. You will be asked for your employment history, proof of income and a list of your assets. You also must consent to a credit check. If you prefer to apply online, you may do so directly from the FHA's website. You can also request preapproval to make home-buying process easier. Many sellers will treat a preapproval similar to a cash purchase, and offer you favorable terms to close the sale quickly.