A home is one of the biggest investments the majority of people will make in their entire lives. For most, the purchase requires a 30-year commitment. That being said, if you are a first time homebuyer, you want to get the best possible loan terms available to you. For many that means an FHA loan. 

One of the first things you need to understand is that the Federal Housing Administration (FHA) does not lend money directly to home buyers. You will fill out an application with a regular lender just as you would if you were applying for any other type of mortgage. What the FHA does is ensure your loan to help protect the lender in case you default. You will be required not only to meet the FHA guidelines to qualify for a loan but also meet any additional qualifications required by the lender.

The following is a checklist to guide you through how to qualify for FHA loan terms.

Down Payment
The minimum down payment necessary is 3.5% of the purchase price or the home’s appraised value, whichever is less. If you are short on cash, the FHA will allow you to accept a gift or donation from a family member or someone else who is approved to make the down payment. This is not the same as a loan. The donation must be just that, a gift with no expectation of repayment. 

Another source for down payment money can come from grants. These are most often available through housing agencies at the state, county, and local levels. You can do an online search by entering down payment assistance, then your city, county, and state to find out what is available. 

Decent Credit
You will be required to have a minimum credit score of 580 to get a 96.5% loan with a 3.5% down payment. This is the minimum established by the Department of Housing and Urban Development (HUD) which oversees the FHA. It is also possible that your lender will require you to have an even higher score to qualify for your loan. This is called an overlay. Many lenders in today’s market require a minimum credit score of 600 for loan approval.

You can still get a loan with a lower credit score. Borrowers with credit scores between 500 and 579 have to come up with at least 10% for the downpayment to be approved for a 90% loan. If your credit score is less than 500, you will not qualify for an FHA loan. In this case, your best idea is to work on improving your score before trying to purchase a home.

Reasonable Debt
Lenders want to make sure you can repay the money they lend you. They will look at how much money you have coming in, in the form of income, and how much money you have going out, in the form of debt, to determine that you are not taking on too much additional debt, in the form of a mortgage. Generally speaking, lenders will not approve a loan if the borrower has a debt to income ratio greater than 43%.

There can be exceptions to this, however. If you have an exceptionally high credit score or a history of making your previous mortgage payments on time, they make allow a higher debt to income ratio.

Reliable Income
You must show steady and reliable income to qualify for a mortgage. Your lender will want to see your tax returns and W-2 forms for the two previous years at the very least. You should be prepared to present bank statements and pay stubs to verify your income. Lenders will verify your employment and any additional sources of income you have before approving your loan.

Home Inspection and Appraisal
Before loan approval, the FHA requires a home appraisal to ensure the current market value is in line with the purchase price. The inspection will also ensure that the property meets the FHA’s minimum property requirements when it comes to structural integrity and other factors such as safety and health.

The FHA research library is a great source of information with articles and tutorials to help you understand how to qualify for FHA loan terms.