Does your financial history prohibit you from qualifying for a conventional mortgage? If so, you may still qualify for a loan backed by the Federal Housing Administration (FHA). FHA loan requirements are generally much looser than other mortgage programs.
Do you qualify for an FHA loan? Learn more about what to expect from the FHA loan program and how to apply.
What Is an FHA Loan?
Lenders design FHA loans for borrowers with a less-than-perfect financial history. Borrowers can secure a home loan with a minimum down payment, even if their credit score is in the 500s. However, lenders will still expect borrowers to pay for mortgage insurance.
These loans are backed by the Federal Housing Administration (FHA), an agency that operates under the Department of Housing and Urban Development (HUD). Since the loans are insured by the FHA, the owners of the mortgage are protected if the borrower defaults on the loan.
How to Qualify for an FHA Loan
FHA loans are popular options for first-time homebuyers, as well as anyone with an imperfect financial history. What exactly are the FHA loan requirements? Here are the qualifications needed for an FHA loan.
Credit Score Requirements
When qualifying for an FHA loan, you’ll need a credit score of at least 500 or better. With a score of 500, you’ll also need a down payment of at least 10%. However, if you have a credit score of 580 or higher, your down payment requirement drops to only 3.5%.
Keep in mind that while the FHA sets guidelines for credit scores, individual lenders may set higher requirements to minimize their risk. This is one of several reasons to compare lenders to find the one that’s right for you.
Steady Employment and Income
In addition to reviewing borrower credit scores, mortgage lenders will look for steady employment and income to cover the loan. Lenders will verify that you have an income history of at least two years or proof of enrollment in school/Military.
If you are using cash gifts in any way to fund your down payment, the gift must be verified in writing and signed and dated by the person supplying the funds. In addition, the gift must be provided by an acceptable donor. The transfer of the funds from the gift donor documentation is required.
Additionally, FHA borrowers must not have any delinquent federal debt or judgments against them. This can include tax debt as well as other forms of federal debt, especially debt associated with past FHA loans.
Your debt-to-income (DTI) ratio refers to the relationship between your monthly income and your monthly debt. For example, if your monthly income is $5,000 but you have $1,700 in debt, your DTI is 34% ($1,700/$5,000).
With a credit score of 580 or higher, you may qualify for an FHA loan with a DTI as high as 50%, though this can vary between lenders.
Calculate Your Debt-To-Income
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Your down payment requirement varies depending on your credit score and relationship to the seller:
- With a credit score of 580 or higher: 3.5% down payment
- With a credit score of 500 to 579: 10% down payment
- Higher down payments may be required when purchasing from a family member, builder, landlord, or if it's a corporate transfer
You may see these down payment requirements listed as the “minimum required investment,” or MRI.
FHA Down Payment Assistance Programs
Are you struggling to come up with a down payment? The FHA offers national and local down payment assistance programs. You may be able to use these options to put homeownership in easier reach.
Mortgage Insurance Premiums
Typically, when you put down less than 20% on a home, you’ll be expected to pay something called “private mortgage insurance,” or PMI. FHA loans do not have PMI payments, but they do require you to pay a monthly mortgage insurance premium (MIP).
There are two payments associated with mortgage insurance premiums. The first is upfront MIP, typically financed into the total loan amount. The second is annual MIP which is paid monthly in the mortgage payment.
How much is a typical MIP? The exact number can vary based on factors that include:
- Your total mortgage amount
- Your mortgage term
- Your loan-to-value (LTV) ratio / size of your down payment
Borrowers can generally expect their MIP to run between 0.15% to 0.75% of their base amount. These payments will be rolled into your monthly mortgage payments, making it easier to keep track of your MIP.
In addition to the above financial requirements, there are specific FHA loan requirements that relate directly to the property you’re purchasing. To qualify for an FHA loan, the property must meet the following requirements:
- The home must be your primary residence, not a second home or vacation property
- It can’t be an investment property unless you occupy one unit in a multi-unit dwelling
- The home must pass an FHA appraisal unless you’re renovating with a 203(k)
- The title must be in your name (or the name of a living trust as long as the beneficiary of the living trust is a borrower on the loan) at the settlement
Beyond these basic requirements, the property must be a single-family residence such as a detached house, townhouse, or condominium. It’s possible to use an FHA loan to purchase a multi-family home of up to four units, but as noted, you must occupy one of those units. 3-4 unit properties must also meet additional requirements such as self-sufficiency.
Legal Residency and Citizenship
The FHA requires that the loan apply to your primary residence. What counts as legal residency? According to the FHA, the home must become your primary residence within 60 days of signing the security instrument. Afterward, you must continue occupying the residence for at least one full year.
This also means that you can’t use an FHA loan to flip a house. That is, you can’t buy a home within 90 days of a prior sale. There are exceptions to this rule, such as if you received the home as part of an inheritance.
While citizenship is not explicitly mentioned as a requirement, applicants must have a valid Social Security number (SSN) and be a lawful resident of the United States. This implies that non-U.S. citizens, including permanent residents (green card holders) and certain non-permanent residents with legal residency status, may be eligible.
FHA Loan Limits
FHA loans also come with loan limits. This means that the FHA sets guidelines for how much you can borrow, though the exact amount depends on what type of property you’re financing as well as the location in which you’re buying. In 2024, the FHA loan limit is $498,257 for a single-family home.
However, in high-cost areas, the FHA loan limit can climb to $1,148,825, and the limit climbs even higher ($1,724,725) in areas with high construction costs, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The HUD website offers a tool to let you look up FHA loans in your area.
Types of FHA Loans
Not all FHA loans are the same. While some FHA loans are designed expressly for the purchase of a house, others can be used to refinance your existing FHA mortgage or provide the funding you’ll need to renovate a recently purchased home.
FHA Purchase Loans
The most popular type of FHA loan is the basic home mortgage 203(b). This loan works exactly as described above and is designed for homebuyers looking to purchase a primary residence. Usually, when people speak of an “FHA loan,” they’re speaking of a loan of this type.
Homebuyers also have the option of an FHA energy-efficient mortgage. In this program, borrowers take out just a bit more than what they need to purchase the home. The remainder of the loan is used to perform energy-efficient upgrades. The exact amount depends on the needs of your home, which must be assessed by a qualified professional.
FHA Specialty Purchase Programs
The FHA offers two specialty loan programs that can assist borrowers in purchasing a home.
- FHA HUD $100 Down Program: This allows for a down payment of only $100 when purchasing a home that is owned by the HUD through foreclosure.
- HUD Good Neighbor Next Door Program: Law enforcement officers, teachers, firefighters, and emergency medical technicians are incentivized to purchase homes in revitalized areas with this program. HUD offers 50% off the listing price for homes listed on their site.
FHA 203K Standard Loan
An FHA 203K Standard loan is sometimes referred to as a “rehab mortgage.” That’s because it’s designed for buyers who save money by purchasing a fixer-upper. But because the cost of renovation can be high, this FHA loan type provides additional funding beyond the home’s purchase price so that buyers have the money they’ll need to repair and modernize the home, all within the same mortgage loan.
To qualify for this type of mortgage, the home must be at least one year old, and the rehabilitation cost must be at least $5,000. Keep in mind that the property’s total value (which now includes the rehabilitation costs) must still meet the FHA’s mortgage limits and guidelines for that location. Once the renovations are completed, the home must meet structural and energy efficiency standards.
FHA 203K Limited Loan
The FHA 203K Limited, or Streamline, loan is for a home that is closer to move-in ready and needs cosmetic repairs. Think updating carpet, painting, or purchasing new appliances. If the home can be remodeled or updated for $35,000 or less the limited version of the FHA 203K is the right fit.
Unlike the FHA 203K Standard loan, the limited does not have a minimum value requirement for the renovation work.
FHA 203K Loans
Standard? Limited? Whichever product is right for you, get started by connecting with a loan officer.
Get Started With An FHA 203K
FHA Cash-Out Refinance
If you currently have an FHA loan, you can perform a cash-out refinance. The process is simple: you’ll replace your current mortgage with a brand-new one, though your new mortgage will be high enough that you can take out the excess in cash.
This allows you to tap into the equity you’ve built into the home and use this cash for purposes ranging from home improvement projects to debt consolidation and more.
FHA Streamline Refinance
In an FHA Streamline Refinance, the process is accelerated by reusing the paperwork from your original loan. By doing so, you’ll reduce the process from months to only a few weeks. The refinancing process is designed for borrowers looking to lock in lower interest rates or lower their monthly payments.
To qualify for a streamline refinance, you must meet the following requirements:
- Your current loan must be an FHA mortgage
- You must have made at least six on-time payments on your current mortgage
- At least 210 days must have passed since you closed on the original mortgage
Remember, when you refinance your mortgage, you’ll be required to pay closing costs on the new mortgage. These costs can’t be rolled into your monthly payments, so you’ll need to have the money on hand to cover the cost of refinancing.
FHA Cash-Out Refinance
Tip into your home equity with a cash-out refinance. Connect with a loan officer to get started.
Get An FHA Cash-Out Refinance
How to Get an FHA Loan
To apply for an FHA loan, simply follow these basic steps.
Find an FHA Lender
First, you'll need to find an FHA mortgage lender. You can use the HUD's lender list, do independent research, or ask for recommendations.
Gather Your Documents
To demonstrate your ability to meet the FHA loan requirements, you’ll need documents that highlight your financial situation. Gather things like:
- Tax returns
- Pay stubs
- Bank statements
- W-2 forms
- A valid form of ID
Your lender will perform a credit check, but it never hurts to check your credit report first and address any errors that may artificially lower your score.
Apply or Get Pre-Approved
Most lenders will allow you to get pre-approved for a mortgage, which will give you a definitive picture of how much you can expect to borrow. And a pre-approval letter will give your offer greater legitimacy in the eyes of sellers.
Complete an Appraisal
Before you can close on the sale, an FHA-approved appraiser must inspect the property to ensure it meets the HUD’s minimum standards. This process also applies to rehabilitation loans, so you know what sort of funding you’ll need to renovate the home.
Finalize the Loan
Finalize the loan with the lender by establishing the payment terms and signing the documents. You’ll also pay closing costs at this time, usually 3% to 6% of the total loan amount.
The Importance of Understanding FHA Loan Requirements
FHA loans are great options for first-time homebuyers and anyone who may struggle with the financial requirements of a traditional mortgage. By understanding the FHA loan requirements, you’ll be better prepared to walk through the application process and secure the home of your dreams.
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