A FHA loan is a mortgage that is insured by the Federal Housing Administration. It has different qualifications and underwriting requirements than conventional mortgages and is advantageous for first-time home buyers. Although it’s advantageous for first-time home buyers, FHA loans are often denied in underwriting. This can happen for many different reasons, let’s check these out.
Summary
- FHA Loans are rejected more often than conventional mortgages
- The number one reason that FHA loans are denied is due to a high DTI ratio
- FHA loans can be denied for other reasons such as poor credit score, high levels of debt, and low income
- FHA loans are a great option for first-time home buyers who don’t have good credit or the cash to make a large down payment for a house
What Percentage of FHA Loans Are Denied?
Although there isn’t any definitive data on how often FHA loans are denied in underwriting, there are data reports which show FHA loans tend to have a lower closing rate than conventional mortgages. According to a study conducted by the Federal Reserve looking at millions of mortgage applications, 14% of government mortgage applications get rejected. These included:
- FHA
- VA
- USDA
It was also discovered that rejections for conventional mortgages had a lower rejection rate of 10.8%. It’s worth noting that there are differences between FHA loans and conventional mortgages. In addition to this, the study revealed that the number one reason for mortgage denials was due to excessive DTI ratios.
What Would Cause an Underwriter to Deny FHA Mortgage
There are many different reasons that can cause an underwriter to deny an FHA mortgage. The three most common reasons include a poor credit score, high levels of debt, and low income.
Poor Credit Score
Bad credit history or overall poor credit score can cause an underwriter to deny an FHA mortgage. Most lenders will deny your FHA loan application if your credit score is below 600. However, the Federal Housing Administration recommends a credit score of 500 or higher.
High Levels of Debt
As previously mentioned, the number one reason FHA loan applications get rejected is due to a high DTI ratio. The DTI measures the ratio of your monthly revolving debt obligations to your gross income. Most lenders will reject your FHA loan application if your DTI exceeds 43%. It’s worth noting that some lenders are willing to go as high as 50% for your DTI, but most will deny your loan if it’s higher than 43%.
Low Income
Low income can also be a contributing factor to your high DTI. However, it’s important to mention that borrowers still need to have enough cash to cover the down payment as well as pay the associated closing costs. Borrowers need a 3.5% down payment in order to qualify for an FHA loan. If you can’t come up with that, this is another common reason why your FHA loan can be denied.
FHA Loan Requirements 2022
If you’re in the process of trying to qualify for an FHA loan it’s important to know the FHA loan requirements. The main requirements include:
- The home must be the borrower’s primary residence
- Credit score of at least 500 = 3.5% down payment
- Credit score of 500 -579 = 10% down payment
- Mortgage insurance is required
- DTI up to 43%
If you’re a first-time home-buyer an FHA loan is a great option if you don’t have the best credit score or enough cash for a large down payment.
How Long Does it Take for Underwriters To Approve A FHA Loan
The amount of time it takes for an underwriter to approve an FHA loan depends on a multitude of different factors. In general, if the borrower supplies all the required documentation in a timely fashion an FHA loan should take no longer than 2 weeks to get approved.
However, it’s important to make the distinction between a loan getting approved and a loan closing. A loan approval simply means that the borrower is eligible for an FHA loan and that the underwriter has cleared all the conditions.
A loan closing is the last step in the mortgage process and is when you sign all the relevant mortgage documents and take responsibility for the mortgage. On average FHA loans take approximately 55 days to close. In general FHA loans take a bit longer to close than a conventional mortgage.
Do Underwriters Look at Spending Habits?
Underwriters analyze different aspects of your spending habits that may impact FHA loan eligibility. They look at your monthly revolving credit obligations to determine your DTI as well as how much money you earn.
They also analyze your credit history to determine if you have any late payments and how much credit you have used in the past. If they see that you have poor spending habits or a history of not managing your debt well, they may deny you.
Things You Shouldn’t Do During The Mortgage Underwriting Process
During the underwriting process, you should avoid participating in financial activities that may cause you to fall outside the FHA loan qualification requirements. Some of the activities you should avoid include:
- Making large purchases that impact your DTI
- Taking out additional loans
- Lying to your lender
- Changing jobs
- Fail to make payments to your existing consumer debt or current mortgage
If you happen to participate in any of the following above during the underwriting process, they can impact your FHA eligibility.
FAQ’s
Can an FHA loan close in 30 days?
Although rare, there are instances in which an FHA loan can close in 30 days. This will depend on how quickly the borrower submits all of their required documents along with how quickly the underwriter approves all the loan conditions.
