What Will Disqualify You From an FHA Loan?

FHA loans make homeownership more accessible for individuals who may not meet stricter conventional mortgage criteria. Insured by the Federal Housing Administration, these loans protect lenders from borrower default. While offering flexible qualification standards, FHA loans still have specific requirements for applicants and properties.

Borrower Financial Qualifications

A borrower’s credit standing is a key consideration for an FHA loan. While FHA guidelines are more accommodating than conventional loans, a minimum FICO score is required. Borrowers need a FICO score of 580 or higher for the lowest down payment option, 3.5% of the purchase price. If a credit score falls between 500 and 579, a 10% down payment is required.

Individual lenders may impose stricter credit score requirements that exceed FHA minimums. For instance, some lenders require a minimum score of 620 for FHA loan approval. Lenders review credit reports for the past 12 to 24 months. A history of late payments or other credit issues during this period can lead to disqualification.

A borrower’s debt-to-income (DTI) ratio measures how much gross monthly income is allocated to debt payments. FHA loans have limits for both the front-end ratio (housing expenses) and the back-end ratio (all monthly debt obligations). Standard FHA limits are 31% for housing expenses and 43% for total debt.

These DTI limits can be flexible with “compensating factors,” such as a larger down payment, significant cash reserves, or a history of managing similar housing payments. With such factors, some lenders may approve DTI ratios as high as 50%. DTI is calculated by summing all monthly debt payments and dividing that total by gross monthly income.

FHA guidelines require stable, verifiable income, typically a two-year employment history. This history does not need to be with the same employer; consistency in work and income is more important than job longevity. Lenders verify employment for the most recent two full years.

Gaps in employment are permissible if adequately explained and documented. For example, breaks due to schooling, military service, or medical leave are accepted. Frequent job changes are acceptable if they reflect advancement in income or benefits within the same line of work. This demonstrates a reliable income stream to meet mortgage obligations.

Property Eligibility Standards

The property must meet specific standards for FHA financing. An FHA-approved appraiser conducts an appraisal to ensure the home satisfies the Department of Housing and Urban Development’s (HUD) Minimum Property Standards (MPS) and Property Acceptability Criteria (PAC). These standards ensure the property is safe, secure, and structurally sound.

Properties with immediate health, safety, or structural integrity issues will be disqualified. Examples include structural defects, active roof leaks, exposed electrical wiring, or damaged foundations. The FHA appraiser checks for peeling or chipping lead-based paint, which must be addressed. Essential utilities like potable water, electricity, and a permanent heating system must be functional.

Conditions impacting a property’s marketability or basic livability can lead to disqualification. This includes significant deferred maintenance, unpermitted additions, or zoning violations affecting the home’s value or legal use. The property must have proper grading for drainage away from the foundation and stable handrails. The roof must be in good condition with at least two years of remaining useful life.

FHA loans are for owner-occupied residential properties with one to four units. Certain property types have additional restrictions. Condominiums, for instance, must be within an FHA-approved complex. This approval requires the condominium association to meet specific criteria, such as having at least 50% of units owner-occupied and maintaining adequate financial reserves. Manufactured homes are also eligible, but must adhere to FHA guidelines regarding their foundation and condition.

Past Financial History

Past financial events like bankruptcy or foreclosure can affect FHA loan eligibility by imposing waiting periods. For Chapter 7 bankruptcy, borrowers must wait at least two years from the discharge date. This waiting period allows individuals to re-establish credit and demonstrate financial stability. In limited instances, this period may be reduced to one year if caused by documented extenuating circumstances, such as serious illness or job loss.

For Chapter 13 bankruptcy, the waiting period is shorter. Borrowers may qualify one year after the discharge date, provided all payments were on time. Qualification is also possible within a Chapter 13 repayment plan, after demonstrating at least 12 months of satisfactory, on-time payments and obtaining bankruptcy court approval. If a Chapter 13 case is dismissed, a two-year waiting period applies before FHA loan eligibility.

A foreclosure requires a three-year waiting period from the completion date. This period begins when the deed is transferred out of the homeowner’s name or from the sheriff’s sale date. Similar to bankruptcy, exceptions may be granted for extenuating circumstances, potentially reducing the wait to one year. Short sales and deeds-in-lieu of foreclosure are treated with the same three-year waiting period as foreclosures. However, if a borrower was current on all mortgage payments leading up to a short sale, they may qualify without a waiting period.

Borrowers with delinquent federal debt, such as overdue federal student loans or outstanding federal tax liens, are ineligible for FHA loans. Qualification requires these debts are either paid in full or a satisfactory repayment plan has been established and honored.

Other Key Requirements

FHA loans have a strict occupancy requirement: the property must serve as the borrower’s primary residence. This means the loan cannot be used for investment properties, second homes, or vacation homes. At least one borrower obligated on the mortgage must occupy the property within 60 days of closing and continue to occupy it for at least one year.

Eligibility for an FHA loan also extends to a borrower’s legal status. Applicants must be U.S. citizens, permanent resident aliens, or non-permanent resident aliens with a valid Social Security Number and current employment authorization.

FHA loans are subject to maximum loan limits that vary by county and property type. These limits are updated annually and reflect median home prices. If the desired loan amount for a property exceeds the FHA limit for that county, the borrower will be disqualified from using an FHA loan for that purchase.