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How to Improve the Chances Your FHA Application Will Be Approved

By E Singer
Apr 22nd, 2013

FHA ApprovedHomeowners in the past who were not able to secure a conventional loan often sought out an FHA loan simply because they were easier to get. But as the housing market continues to improve, lending restrictions have gotten more stringent, and now acquiring even an FHA loan can be a challenge for many people.

Here are just some of the things that you can do in order to increase the likelihood that you will be approved for an FHA loan.

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Before you apply for an FHA loan, make sure that you have the funds for a down payment. The Department of Housing and Urban Development (HUD) requires that borrowers are able to put down at least 3.5 percent of the amount of the loan.

So, if you’re looking to buy a home that costs $500,000 that means that you’ll need to put down at least $17,500. If you want to buy a home in this price range, but you lack the cash reserves, then there really isn’t any point in applying in the first place. It’s best at that point to simply save up and work to get your finances in order. Or, of course, you can simply look for a home that costs less.

Furthermore, the down payment isn’t the only aspect of the upfront costs that you’ll need to worry about. The closing costs on the loan can often add up to several thousand dollars. The upside of this is that FHA loans allow sellers to add a certain percentage of the overall price of the home to pay off the closing costs.

Credit worthiness is also an important part of being able to get any sort of loan, including an FHA loan. The minimum credit score to get an FHA loan is 500, and you’ll need at least 580 in order to qualify for the 3.5 percent down payment option. Keep in mind that a lender is more than free to reject your FHA application even if it falls within the guidelines set forth by the HUD.

It is thus important to try to improve your credit score as much as you can. This can be accomplished in a number of ways. The simplest way is to pay down as much debt as possible. You may even want to consider consolidating your debt and paying it off with a low interest rate.

It’s also important to try to get your debt-to-income ratio (DTI) as low as possible. It has become considered one of the most important components of getting a modification on your home loan in 2013.

The DTI is calculated by comparing a person’s gross monthly income and dividing it by the total cost of the entire amount of monthly expenses that this person pays. Recurring payments such as credit card bills, car payments, etc. are factored into the equation.

The FHA changed what it considers to be the “gold standard” for DTI to 43 percent in 2012. Those with a DTI above 43 percent may find it difficult to get an FHA loan. Getting your DTI lower can be accomplished at least two ways.

First, you can cut down on monthly expenses as much as possible. Or second, you can increase your monthly income. Some combination of both of these approaches is usually preferable.