Lack Of Earnest Money And Down Payment Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront. If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances.
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
Lack of Confidence
Some believe going through someone whose qualified for a conventional loan will close quicker and have less obstacles along the way. Although this isn't true, which its closing success is nearly identical to conventional loans, some sellers still view buyers with FHA loans as riskier.
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
Reasons for an FHA Rejection
There are three popular reasons – bad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs of a home.
Whether you're interested in a listing or touring an open house, here's a list of things buyers can look for that may be considered red flags to an FHA appraiser: Missing handrails. Cracked windows. Termite damage.
In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. Here are some key differences between FHA and conventional loans: Credit score and history: FHA loans allow for lower credit scores than conventional loans.
This comparison can offer valuable insights for borrowers as they navigate their mortgage options. Conventional Loans: In 2022, conventional loans had a denial rate of 7.6%, significantly lower than the FHA's 14.4%.
FHA Loan Applicants Facing Tougher Hurdles
People seeking FHA mortgages—who often have less money to put down, weaker credit scores or both—are now rejected more often than in the past. In 2022, roughly 24% of loans were denied from the pool of originated and denied applications. That was up from 18% in 2021 and 2020.
The FHA's strict appraisal process helps ensure borrowers are purchasing properties that are safe, affordable and worth their investment. Although the FHA appraisal guidelines have developed a reputation for being unnecessarily strict, the standards have been relaxed.
The Bottom Line: Sellers Can Refuse FHA Loan Offers
Until then, striving for conventional loan approval may be a more straightforward option, if it's financially possible for you. Ready to take the next step toward homeownership?
Being pre-approved for an FHA loan doesn't guarantee your mortgage loan will reach conditional approval or final approval, but there are steps you can take if it's denied.
When applying for an FHA loan, you'll also need to show that you have the usual debt-to-income ratios. If you plan to rent out the extra unit, you'll be able to use that rental income in order to qualify, but only up to 75% of it.
How Long Does It Take for FHA Loan Approval? A lender must take action on your FHA loan application and inform you of the action within 30 days after you complete and submit your application. Your application needs to be totally complete before the 30-day period will begin.
FHA loan limits increase most years, and 2023 was no different. For this year, the FH floor — the cap in most housing markets — increased from $420,680 to $472,030, a 12% increase. The ceiling limit in high-cost markets also increased considerably, jumping from $970,800 in 2022 to $1,089,300.
In fact, anyone who meets the eligibility requirements can apply for an FHA loan. Whether you're a first-time buyer or a seasoned homeowner, if you're looking for a loan with a low down payment and flexible credit requirements, an FHA loan could be right for you.
The Bottom Line
Your underwriter will ask for documents like tax returns and bank statements. They will look at your income, assets, debt, liability and credit report before giving you an approval or denial.
FHA appraisal and inspection checklist
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Insufficient Debt-to-Income (DTI) Ratio
Having too much debt will hinder your ability to pay monthly mortgage payments, as more of your income has to go toward paying your debts. Lenders generally want a DTI ratio below 36% to demonstrate you can handle a mortgage on top of your current debts.
One of the most common reasons a mortgage is denied is because of a negative impact to a buyers credit score. It's extremely important that a buyer knows what their credit score is when they get pre-approved and have a strong understanding of how credit scores impact mortgages.
If you're denied preapproval with a lender, know that there are lenders out there with more lenient criteria; you'll just likely pay higher fees and interest rates. If time is on your side, it pays to be patient and spend the next few months shaping up your finances and credit score before trying again.
It's rare — but still possible — that loan requirements can change after a pre-approval is issued. Let's say that you applied for a home loan that allows a credit score of 620, and you're good to go because you have a score of 630. But then they move the goalpost, and now you need a credit score of 640.
FHA appraisal guidelines tend to be more stringent than conventional appraisal rules, but they also come with extra protections worth knowing if you're buying a home with an FHA loan.