FHA Underwriting Guidelines

Kathleen Esposito
House made of money

While FHA underwriting guidelines are subject to change every year, the basic rules tend to stay relatively the same.

FHA Loans

The purpose of an FHA loan, which gets its name from the Federal Housing Administration, is to help low income buyers -especially those who are buying their first home- have a better shot of getting approved for a competitive home loan. It can also help individuals who have less than stellar credit or bankruptcies on file. The FHA itself does not provide the financing, but instead guarantees the mortgage. The buyer still has to work with a third party lender to ultimately get approved.

About FHA Underwriting Guidelines

Getting approved for an FHA loan can help the buyer acquire a mortgage loan because the FHA insures the loan. That means if the borrower defaults, the burden of selling the home falls on the Department of Housing and Urban Development, not on the mortgage lender. Because the FHA is taking a risk by insuring these loans, it has its own set of underwriting guidelines that borrowers must meet.

These guidelines include the following:

  • You must have held a steady job for at least two years. It's best if you've stayed with same employer.
  • Your income should be increasing or staying the same, not decreasing over time.
  • You should meet minimum credit score requirements and have fewer than two delinquent payments on your credit file.
  • You should have perfect credit following a bankruptcy or foreclosure.
  • You should not have declared bankruptcy within the past two years or faced foreclosure within the past three years.
  • Your potential mortgage payment should not be larger than 30% of your monthly income.
  • Your annual income should be 70% larger than your total debt.
  • You must be able to provide a down payment of at least 3.5%. As of summer 2010, you must put down a larger down payment - about 10% - if your credit score is lower than 580.
  • You must pay for an upfront mortgage insurance premium as part of your closing costs. This will cost you 2.25% of the purchase price, as of summer 2010.
  • You must be purchasing a home that you plan to use as a primary residence.
  • The seller is only allowed to help with closing for up to 3% of the home's price, as of summer 2010.

Changes to FHA Loans

Before the mortgage crisis in the late 2000s, only a small percentage of buyers applied for loans with help from the FHA. Due to a huge increase in applicants, the FHA underwriting guidelines changed in 2010 in order to prevent the agency from losing money and being unable to settle debts resulting from homeowners defaulting on their loans.

Because the guidelines change from time to time due to circumstances such as this, you should check the website for the Federal Housing Administration before you apply for your mortgage loan to make sure you have the most current information available. Your real estate agent should also be able to provide you with some advice, especially if he or she deals with FHA buyers on a regular basis.

Note that just because you get approved for an FHA loan doesn't mean you will necessarily be able to buy the house you want. Some sellers do not like to work with FHA buyers, and not all mortgage lenders deal with FHA loans. It is a good idea to find this out from your real estate agent before you waste time putting in a bid to purchase a home with an FHA loan.

FHA Underwriting Guidelines