Federal Housing Administration loans were designed to meet the mortgage needs of low-income and first-time home buyers. An FHA-insured mortgage is an especially good option for first time home buyers, because they can get approval even with lower credit scores and higher debt ratios than many commercial lenders generally will approve.
Credit Score and History
Borrowers who may not qualify for a conventional mortgage due to a short credit history or low credit score may qualify for a FHA-Insured mortgage. The FHA requires that borrowers have a minimum 580 FICO credit score, but applicants who are accepted typically have a credit score above that minimum level.
Applicants who were accepted in 2014 for an FHA-backed mortgage had an average credit score of 683, according to Interest.com.
Conventional mortgages require that borrowers provide at least a 10 percent down payment, but it's likely closer to 20 percent with closing costs. Requirements for FHA-Insured mortgages, however, are much lower. The FHA requires a 3.5 percent minimum down payment, and the average for most borrowers is around 5 percent.
Proof of Income
Lenders have become stricter in the way they document and calculate a borrower’s monthly income. Qualifying for a conventional mortgage, therefore, is more difficult for people who are self-employed, earn a large portion of income in the form of bonuses or commissions, or have income that fluctuates from month-to-month. These applicants may be able to get a FHA-insured mortgage by providing tax returns and financial statements.
One of the ratios lenders calculate when evaluating an applicant is the back-end ratio. This ratio shows what portion of your gross monthly income goes to cover long-term debt obligations such as your mortgage, credit cards, student loans and car loans. Conventional mortgage lenders set their maximum back-end ratio between 36 percent and 45 percent. FHA-Insured mortgage borrowers, however, may be able to get approved with back-end ratios of 43 percent to 49 percent.