Everything You Need to Know About FHA Loan Qualifications in Minnesota

Buying a home is an exciting milestone but qualifying for a mortgage can be challenging. That’s where FHA loans come in. These government-backed mortgages have more flexible credit and down payment requirements, making homeownership possible for more borrowers. If you want to get an FHA loan in Minnesota here’s what you need to know about qualifications and limits.

FHA Loan Basics

FHA loans are insured by the Federal Housing Administration (FHA). Because of that insurance, lenders can offer these mortgages to borrowers who may not qualify for conventional loans.

Some key features of FHA loans include:

• Down payments as low as 3.5% of the purchase price
• More flexible credit requirements
• Low mortgage insurance rates
• Ability to finance closing costs into the loan

To get an FHA loan, you’ll need to meet certain eligibility criteria set by the FHA. Let’s take a closer look at those requirements.

Minimum FHA Credit Score in Minnesota

One of the biggest factors in qualifying for an FHA loan is your credit score. The FHA’s minimum credit score is 500. However if your score is below 580, you’ll have to make a down payment of at least 10%. With a credit score of 580 or above, you can qualify with just 3.5% down.

Here are the credit score requirements for FHA loans in Minnesota

• Credit Score 500-579: At least 10% down payment required
• Credit Score 580+: 3.5% down payment allowed

So aiming for a credit score above 580 will give you the most favorable terms. Borrowers with scores in the mid 600s and higher tend to get the best mortgage rates as well.

Down Payment Rules for FHA Loans in MN

FHA loans allow down payments as low as 3.5% of the purchase price. So if you’re buying a $250,000 home, your minimum down payment would be just $8,750.

However, borrowers with credit scores below 580 must put down at least 10% of the purchase price. You can also make a down payment of more than 3.5% if you want to reduce your monthly mortgage costs.

The down payment for an FHA loan can come from these sources:

• Your personal savings
• Gifts or grants
• Down payment assistance programs

For most FHA loans, you cannot use a down payment borrowed from the seller, a family member, or another interested party.

Debt-to-Income Ratio Requirements in Minnesota

Lenders want to see that your total recurring debt payments aren’t too high compared to your income. This is known as your debt-to-income (DTI) ratio, and it’s a key factor in mortgage qualification.

For FHA loans in Minnesota, your maximum DTI ratio must be 43% or lower. That includes:

• Proposed mortgage payment
• Minimum required payments on credit cards, student loans, auto loans, child support, etc.
• Property taxes and homeowners insurance on the home you want to buy

A lower DTI ratio helps demonstrate you can afford the new mortgage payment along with your other monthly obligations.

Work History Standards for FHA Loans

While FHA loans don’t have strict income limits, you do need a steady source of income to qualify. Expect lenders to require proof of employment for the past 2 years through documents like W-2s, paystubs, or tax returns for self-employed borrowers.

Gaps in employment could make it tougher to get approved unless you have ample savings or other assets. Recent graduates or those returning to the workforce may need to build up their work history first.

If you have nontraditional income sources, like bonuses, commissions or rental income, provide documentation to your lender so they can consider it when evaluating eligibility.

Homebuyer Education with Minnesota FHA Loans

For first-time homebuyers using an FHA loan in Minnesota, at least one borrower must complete a homebuyer education course. These classes cover topics like budgeting, credit, shopping for a home, loan options, and more.

Many local housing agencies and nonprofits offer approved courses for $50 or less. You can take them online, in-person, or via teleconference. Completing this program will satisfy the FHA education requirement when you apply for a mortgage.

FHA Loan Limits for Minnesota Counties

In most parts of Minnesota, the maximum FHA loan amount for a single-family home is $498,257 for 2023. However, in higher-cost counties, borrowers can qualify for up to $515,200 with an FHA loan.

Here are the current FHA loan limits for select Minnesota counties:

• Hennepin County: $515,200
• Ramsey County: $515,200
• Dakota County: $515,200
• Anoka County: $515,200
• Washington County: $515,200
• St. Louis County: $498,257
• Olmsted County: $498,257
• Stearns County: $498,257

The FHA updates its loan limits annually, so be sure to check current figures when applying for an FHA mortgage. The limits can also be higher for 2-4 unit properties.

Alternative FHA Qualification Options

If your credit score or debt-to-income ratio are just shy of FHA requirements, you may still have options. Some alternatives include:

• Manual underwriting: FHA lenders can do a manual review of your application rather than relying solely on automated underwriting software. This allows them to take into account compensating factors like cash reserves or a strong payment history.

• Down payment assistance: Local and state programs provide grants, loans, or tax credits that can cover all or part of an FHA down payment. This reduces the amount you need to save upfront.

• Adding a co-borrower: Applying with a second borrower who has better credit or income numbers can improve your chances of approval. The co-borrower becomes equally responsible for repaying the mortgage.

• FHA 203(k) rehab loan: This program lets you finance repairs or renovations so you can purchase a fixer-upper property. It may expand your home search into lower price brackets.

Talk to a few lenders to go over all your FHA mortgage options. With the right approach, you can likely overcome credit or down payment hurdles.

Finding an FHA Lender in Minnesota

Many banks, credit unions, and mortgage brokers offer FHA loans, but not all are created equal. Take time to shop around and compare:

• Interest rates and fees
• Types of FHA loans
• Down payment assistance programs
• Credit score requirements
• Customer service reputation

Narrow down your list to 3-5 trusted FHA lenders in Minnesota. Meeting with loan officers can also help you determine if you’re on the right track for approval. Be ready to discuss your income, assets, debts, and credit history.

The FHA requires all borrowers to receive a case number through automated underwriting before closing on the mortgage. Your lender will take care of this part of the process.

With smart preparation and the right lender, your path to FHA loan qualification success is clear. You’ll be ready to buy your Minnesota home much sooner than you think. Don’t hesitate to reach out for help along the way.