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FHA loans make it possible for some people to get a mortgage without a large down payment.
Saving up for a big down payment on a home is a financial obstacle for many would-be homeowners. Fortunately, FHA loans can help homebuyers afford a mortgage loan by offering flexible home loan requirements, including low down payments and lower minimum credit scores.
To help you figure out whether an FHA loan makes sense for you, we’ll go over the basic requirements for qualifying for an FHA loan — including the conditions that borrowers, and the property they want to buy, must meet. Let’s dive in.
What are FHA loans?
FHA loans are guaranteed by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development, or HUD. This means that if you buy a home using an FHA loan and stop making mortgage payments, the federal government will repay the guaranteed portion of the loan.
While FHA loans are a popular type of mortgage for first-time homebuyers because of their low down payment requirements and low minimum credit scores, they’re not limited to first-time homebuyers.
FHA loan requirements for homebuyers
FHA-backed loans have flexible lending requirements, but not all borrowers will be approved. Here’s what you need to know about qualifying for an FHA loan.
To be eligible for an FHA loan, you generally need to …
- Have a valid Social Security number
- Be old enough to enter into a contract in the jurisdiction where the property is located (in most states, the legal age is 18)
- Have no bankruptcies within the past two years
- Have no short sales, foreclosures or deeds in lieu of foreclosure within the past three years
- Intend to occupy the home as your principal residence — FHA loans are not available for investment property or vacation homes
Minimum credit score
To qualify for an FHA loan, you need to have a credit score of at least 500. But if your credit score is below 580, you will need to come up with a higher down payment. FHA loans allow borrowers with a credit score of 580 or above to purchase a house with a down payment as low as 3.5% of the purchase price. Borrowers with credit scores between 500 and 579 need at least 10% down.
Keep in mind, these are the minimums set by HUD, but lenders may have their own minimums. These are called “lender overlays” because they’re additional guidelines set by lenders that lay on the FHA guidelines. For example, some lenders may not approve FHA loans for borrowers with credit scores below 600.
Maximum debt-to-income ratio
Your debt-to-income ratio, also known as DTI, is the percentage of your monthly gross income that goes toward paying debts. For example, if your gross monthly income is $6,000 per month and your monthly debt payments (including your rent or mortgage) are $3,000, your DTI is 50%.
FHA lenders consider two DTIs when evaluating whether you can afford your mortgage:
- Front-end DTI — This includes only housing-related expenses, such as your mortgage’s monthly principal and interest payments, property taxes, insurance and any homeowners association dues.
- Back-end DTI — This includes all of your minimum required monthly debt payments, including housing-related expenses and payments toward credit cards, student loans, car loans, alimony, child support and other debts.
For many FHA borrowers, the maximum allowable front-end DTI ratio is 31%, and the maximum allowable back-end DTI ratio is 43%. But lenders may approve borrowers with higher DTIs if they have other compensating factors, which are other positive aspects of your loan application that help offset negatives. Compensating factors can include:
- Having a large amount of savings in reserves
- Having no discretionary debt, such as from credit cards or auto loans
- Having significant income beyond the income taken into account when calculating DTI, such as overtime, bonuses and part-time or seasonal work
Mortgage insurance premiums
Most FHA loans require borrowers to pay both an upfront mortgage insurance premium and a monthly premium, which protects the lender if you default on your mortgage. While conventional loans may require private mortgage insurance, or PMI, when the borrower puts less than 20% down, FHA loans require mortgage insurance regardless of your down payment.
The amount you’ll pay depends on the size of your loan. The upfront MIP is 1.75% of your loan amount. You can pay it in full at closing or finance it into your loan in full.
The monthly MIP depends on your loan amount, the size of your down payment, and your loan term.
FHA property requirements
FHA loans require an appraisal from an FHA-approved appraiser. This is to establish the fair market value of the property and ensure the home meets minimum requirements. The appraisal is not a home inspection and the FHA official site advises, “for your protection, get a home inspection” in addition to an appraisal.
FHA minimum property requirements are designed to minimize the FHA’s financial risk by requiring that any home financed with an FHA loan is …
- Safe — The property’s condition won’t threaten the health or safety of its occupants.
- Sound — The home is structurally sound, meaning it hasn’t decayed, deteriorated, or been damaged in a way that may be of structural concern.
- Secure — The home can serve as good collateral for the loan.
The factors the appraiser will consider are outlined in detail in HUD Handbook 4000.1. In general, the property must …
- Be safely and reasonably accessible
- Have working utilities, including electricity and/or gas and sewer
- Be free from contaminants and insect infestations
- Be free of chipping or peeling lead-based paint
- Have adequate ventilation in attic and crawl spaces
- Have access to clean water, either from a public water supply system or well
- Have a working heating system that can heat the property adequately
- Be free of interior or exterior health and safety hazards
If the appraisal uncovers issues that make it ineligible for an FHA loan, you may be able to work with the seller to make the necessary repairs before closing.
In addition to the property requirements, there is a limit to the amount you can borrow using an FHA loan. These loan limits vary by county and are subject to change. You can look up the limit for your area using HUD’s FHA Mortgage Limits Search tool.
If you’ve reviewed the FHA home loan requirements and think an FHA loan might be a good fit for you, the next step is to apply for a mortgage with an FHA-approved lender. Many banks and mortgage companies offer FHA loans, so consider checking with your local branch.
Be sure to shop with more than one lender, as different lenders have different overlays and mortgage rates can vary from lender to lender, even for the same type of mortgage.