FHA loans are a type of mortgage that can help people achieve their dream of homeownership. Many buyers work with a mortgage broker to get these loans which are insured by the Federal Housing Administration, and they tend to be easier to qualify for than conventional loans. According to USA Today, the FHA insured 12.1 of mortgage originations in 2018. So, why would a home not qualify for an FHA loan?
Who Should Apply For An FHA Loan?
Homebuyers who cannot make a large down payment on a home and/or do not have a high credit score should consider applying for an FHA loan. Borrowers whose credit score is below 620 do not normally qualify for a conventional mortgage, but they could qualify for an FHA loan. The minimum down payment for these loans is just 3.5 percent for borrowers whose credit scores are 580 or higher.
Those seeking an FHA loan must live in the house as their primary home; it cannot be used for flipping or vacation homes.
3 Reasons Why A Home Might Not Qualify
FHA loans have a set of requirements and minimum standards that help to protect lenders. Because the property itself serves as the collateral for the loan, the lender needs to ensure they can reclaim as much of the money owed as possible by reselling the property if the borrower is unable to meet their obligation. These requirements also protect borrowers from having to pay repair bills on homes in bad condition that could be financially devastating.
There are three main tests used by HUD to determine suitability for FHA loans:
- Safety: The home must protect the safety and health of its occupants.
- Security: The security of the property must be protected.
- Soundness: The property must not have conditions such as physical deficiencies that affect its structural integrity.
An appraiser will observe the home with these three points in mind. Although cosmetic and minor defects should not affect an approval, those that impact safety and security may need to be repaired before the home can qualify.
Total Cost Of The Home
The U.S. Department of Housing and Urban Development sets limits each year for FHA loans, and the FHA can only insure amounts that do not exceed this limit.
The limit can vary depending on the area. For example, the highest loan limit is currently found in San Francisco County because it is a very high-cost area. The limit there for a single-family home is set at $729,750. A home that costs $800,000 with a borrower making the minimum down payment of $28,000 would not qualify because the loan amount of $772,000 exceeds the limit. However, if the borrower could make up the difference with a greater down payment, the home would then qualify for an FHA loan.
The Overall Condition
A home that an appraiser has indicated is in a serious state of disrepair might not qualify for an FHA loan. In some cases, specific deficiencies must be corrected before an FHA loan can be approved. For example, if an appraiser finds termite damage that impacts the structural soundness of the home, treating the home for pests could be a condition of the loan being approved.
Homes that are situated too close to potential hazards will not always qualify. An FHA loan might not be approved if the home is located near drilling or mining operations, high-voltage electrical wires or a high-pressure gas pipeline.
The Type Of Property
Only certain types of properties can qualify for FHA loans, and some property types have specific guidelines that must be met. In general, homes must primarily be residential to qualify.
FHA loans on condominiums are only allowed in HUD-approved complexes, which are listed on the HUD website. To qualify, they must meet HUD’s standards for liability insurance and financial stability.
Manufactured homes are another property type that must adhere to certain standards, such as being permanently affixed to their foundation, taxed as real estate and constructed after June 15, 1976.
Alternative Loans To Consider
If a homebuyer wishes to purchase a home that does not meet FHA standards, they might consider a non-FHA loan that gives them more leeway when it comes to acceptable conditions.
They might also consider an FHA 203(k) loan, which is a government-insured mortgage that essentially finances both the purchase of the home and its repairs. This option is often used for lower-income households who are able to update older properties and use them as their primary residence. It might also cover temporary housing if needed for the period of time that the home will be under rehabilitation.
Reach Out To Professional Mortgage Brokers
Whether you want to become a first-time homeowner or you are looking to change your primary residence, the loan process can be difficult to navigate without expert advice. Reach out to the professional mortgage brokers at MyLendingPal to learn more about your options so you can choose your ideal loan.