FHA loans are the most popular of the three government-backed home loan programs. The VA loan is a very attractive option for those who are eligible such as veterans and active duty personnel and the USDA loan has income limits and the property must be located in an approved area. The FHA loan does require a down payment yet it only it is 3.5% of the sales price, making it an attractive option for first time home buyers and is also considered a bit more lenient as it relates to credit. Still, an FHA loan isn’t automatic. Here are five reasons why FHA loans get turned down.
Low Credit Score. While the Department of Housing and Urban Development sets a minimum credit score of 500, most lenders won’t approve a loan with that low of a score. Today, borrowers seeking an FHA loan need a minimum score of at least 600 if they plan to finance the maximum amount of 96.5% Lower scores can cause an FHA application to get turned down.
Occupancy. 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. Most lenders ask the total amount of monthly credit obligations, including the mortgage, should be no higher than 43 percent of gross monthly income. However, there are exceptions for those borrowers that higher credit scores, more down payment, etc.
Appraised Value. All FHA loans used for a home purchase require an independent property appraisal. The appraised value must be at least the same as the sales price. If the appraisal comes in lower, the borrowers must either come up with more money to make up the difference or have the home seller reduce the sales price of the home. If none of these options work, the buyer must cancel the transaction. The lender will use the lower of the sales price or appraised value when establishing a loan a basis.
Insufficient Funds. You’ll need to verify you have enough cash available for both the down payment and closing costs. If you don’t have enough cash and don’t have the ability to obtain a financial gift from a family member or non-profit, having insufficient cash to close won’t get you an approval.
Your mortgage loan officer can help walk you through the process and let you know exactly what you need to do in order for a loan approval. With a good job history, manageable credit and sufficient funds available to close on your FHA loan, there should be no problems. Contact us today to learn more or to get started.