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Minimum Requirements to Qualify for an FHA Loan in California

The FHA loan program is popular among home buyers who cannot afford to make a large down payment. Many first-time buyers in California rely on this program, though it’s not restricted to that group.

But how does one qualify for this government-backed mortgage program? What are the minimum requirements for an FHA loan in California?

In short, borrowers who want to use an FHA-insured home loan need to have: sufficient income, a credit score of 580 or higher, a down payment of at least 3.5%, and a manageable level of debt.

Let’s take a closer look at these California FHA loan requirements for borrowers:

Income Requirements for a California FHA Loan

In order to qualify for an FHA-insured mortgage loan, borrowers must demonstrate that they have the ability to repay the debt. Mortgage lenders must┬áverify and document the borrower’s income level. They do this by looking at bank statements, tax returns, and other financial documents.

You’ll also need a sufficient level of income to meet the FHA’s debt-to-income guidelines. During the application and approval process, your lender will compare your gross monthly income to your monthly recurring debts. This is referred to as the debt-to-income ratio, or DTI.

To qualify for an FHA loan in California, you’ll probably need to have a total debt-to-income ratio no higher than 50%. In some cases, the DTI ratio is capped even lower, at 43%. There’s a bit of flexibility here, and exceptions can be made for borrowers with “compensating factors.” But having a debt-to-income ratio above 50% could make it harder to qualify for an FHA loan.

Minimum Down Payment for Borrowers

Down payments are another important requirement for government-backed mortgage loans. To get approved for an FHA home loan in California, borrowers must make a down payment of at least 3.5%. Specifically, that’s 3.5% of the purchase price or appraised value.

Another way to put it: The mortgage loan can account for no more than 96.5% of the home’s value.

Other government lending programs, such as the VA and USDA loan programs, offer 100% financing for certain borrowers. But that’s not the case for the FHA program. According to the Federal Housing Administration’s guidelines, you’ll need to make a down payment of at least 3.5% to qualify for the program.

If your credit score is below 580, you may be required to put down 10%.

Minimum Credit Score Needed to Qualify

Thus far, we’ve covered some important requirements for the FHA loan program in California. We talked about the basic income requirements, down payment guidelines, and debt-to-income ratios. There’s one more element we need to cover, and that’s the all-important credit score.

Your credit score is a three-digit number that indicates how much risk you carry, as a potential borrower. Ideally, you’ll have a credit score that’s somewhere in the “average” range, or higher. This can improve your chances of getting an FHA loan. A high score shows that you’ve borrowed and repaid money successfully in the past.

A lower score, on the other hand, can make it harder to qualify for an FHA loan in California (or any type of mortgage, for that matter) A low credit score usually indicates that a person has had problems repaying their debts in the past.

So, what credit score do you need to get an FHA loan?

The Department of Housing and Urban Development (HUD) has two official numbers: 500 and 580. The minimum credit-score cutoff is 500. In order to qualify for the 3.5% down payment option (the main reason people use FHA loans in the first place), you will need a credit score of 580 or higher.

If your score falls between 500 and 579, you might still qualify for the program. But you’ll probably be required to invest 10% or more.

FHA Requirements Can Be More ‘Forgiving’

FHA loans tend to have more flexible requirements for borrowers, when compared to conventional or “regular” mortgage loans. This is true for credit scores, debt-to-income ratios, and the other criteria mentioned in this article.

These loans receive government backing. As a result, lenders can be a bit more flexible when offering FHA-insured mortgage loans to borrowers. In fact, the program was designed to help home buyers who might not qualify for other financing programs.

As it states on the HUD website:

“FHA mortgage insurance protects lenders against losses. If a property owner defaults on their mortgage, we’ll pay a claim to the lender for the unpaid principal balance. Because lenders take on less risk, they are able to offer more mortgages to homebuyers.”

Disclaimer: This article explains the minimum requirements to qualify for an FHA loan in California. But it does not cover every aspect of the program, or every qualification “checkpoint.” If you plan to use an FHA loan to buy a house in California and have questions about the program, please contact our staff.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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