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FHA Loan Requirements, Limits and Approval Tips

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The FHA loan is a government-backed mortgage that’s popular with first-time homebuyers — and repeat buyers with credit bumps in their financial history — because of its flexible qualifying requirements. If you have limited down payment savings and a lower credit score, you may find it easier to get approved for an FHA loan than a conventional loan.

Still, the FHA loan’s easier approval guidelines come with some extra costs and rules worth knowing before you decide it’s your best fit.

What is an FHA loan?

An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA), a government agency that follows lending rules set by the U.S. Department of Housing and Urban Development (HUD). You’ll pay two types of mortgage insurance to protect your FHA-approved lender against losses if you stop making mortgage payments.

You don’t have to be a first-time homebuyer to get an FHA loan, but you do have to live in the home you plan to buy as your primary residence for at least a year. Unlike many other first-time homebuyer programs, there are no income limits — which gives higher-income earners an additional home loan option if they don’t meet the minimum 620 credit score required for a conventional loan.

Some highlights that often appeal to homebuyers who choose an FHA loan include:

  • Lower credit score requirements for low-down-payment loans than conventional mortgages
  • The chance to qualify for a mortgage sooner after a bankruptcy or foreclosure than conventional loans allow
  • More leniency than conventional loans permit to qualify with more debt compared to your income

What is the FHA?

The FHA was created in 1934 to give renters in the U.S. better lending options for buying a home. Back then, a 50% down payment was common, which means you needed to earn enough income to pay off a mortgage in three to five years.

Over time, the FHA loan program guidelines allowed borrowers to make a down payment as low as 3.5% and pay off the loan over a 30-year term. Lenders were — and are still — willing to take the risk of making FHA loans because of the mortgage insurance premiums borrowers pay to protect them against financial losses in cases of mortgage default.

FHA loan requirements

FHA loans essentially work the same as other home loan programs. You’ll need to qualify based on your income, credit history and employment history and verify you have the funds for the down payment and closing costs. However, the minimum mortgage requirements are significantly different from other loan programs.

FHA loan down payment

You’ll need some upfront money, which includes your down payment, to get an FHA loan. The minimum amount you need depends on your credit score:

  • You’ll need a 3.5% down payment with a credit score of 580 or above.
  • You’ll need a 10% down payment if your credit score is between 500 and 579.

The good news is, you don’t have to save up for the down payment yourself. You can get a gift from a friend or relative, check out down payment assistance (DPA) programs in your area or even sell an asset like a car to come up with the money.

FHA mortgage income requirements

You won’t need to worry about making too much money to get an FHA loan because there are no income limits to qualify. Most of the conventional 3%-down-payment programs offered by Fannie Mae and Freddie Mac are restricted to low- to moderate-income homebuyers.

You’ll need a stable income history documented with pay stubs and W-2s for the past two years. Any big gaps in your employment history need to be explained.

FHA loan credit score and credit history

Homebuyers often choose FHA loans if they’ve had rough patches in their credit history. While 620 is the standard credit score benchmark for a conventional loan, FHA guidelines set lower minimum score requirements:

  • You’ll need at least a 580 score if you’re making the minimum 3.5% down payment.
  • You’ll need at least a 500 score for the 10% down payment.

FHA credit history

Borrowers with major credit events like bankruptcies or foreclosures also get a break, compared to more stringent conventional lending guidelines:

  • You’re eligible for an FHA loan two years after a chapter 7 bankruptcy (compared to four years for a conventional loan).
  • You’re eligible for an FHA loan three years after a foreclosure (compared to seven years for a conventional loan).

THINGS YOU SHOULD KNOW

FHA rules require lenders to use the Credit Alert Interactive Verification Reporting System (CAIVRS) to check for any defaulted government-backed loans. Defaults on federal student loans, Small Business Administration (SBA) loans or previous VA or USDA loans could prevent you from getting approved for an FHA loan.

FHA debt-to-income ratio

Lenders divide your total debt by your pre-tax income as a test of whether you’ll be able to afford your mortgage payment. In lender terms, this is known as your debt-to-income (DTI) ratio, and FHA guidelines set a preferred DTI ratio of 43%. You may qualify for a DTI ratio above 50% if you have strong credit scores and extra cash reserves.

FHA cash reserves

A high DTI ratio or low credit scores may trigger a requirement for mortgage cash reserves, which is money set aside to cover a minimum number of monthly mortgage payments. If you’re buying a multiunit property, you’ll need cash reserves if you’re using the rents on the other units to help you qualify for the loan.

FHA mortgage insurance

The FHA insures each mortgage closed by an FHA-approved lender with both an upfront and annual mortgage insurance premium. Unlike homeowners insurance, mortgage insurance only covers the lender’s costs if you can’t make your monthly payment and the lender has to foreclose on your home.

Here’s how FHA mortgage insurance works and how much it costs:

  • The upfront premium costs 1.75% of the loan amount. It’s paid at closing and usually added to your loan amount.
  • The annual mortgage insurance premium costs between 0.45% and 1.05%, is divided by 12 and added to your monthly payment.

You can reduce the percentage of monthly FHA insurance you pay with a higher down payment, shorter loan term or a smaller mortgage. Use an FHA mortgage calculator to try out different options and see how they affect your monthly payment. Or better yet, ask your loan officer to provide you with loan estimates featuring different variations.

FHA loan limits

Each year, the FHA sets new limits on the maximum loan amount you can borrow based on a percentage of the loan limits set by the Federal Housing Finance Agency (FHFA). FHA loan limits vary based on the county you live in and may be higher in more expensive parts of the country. You’ll also have more borrowing power if you’re buying a two- to four-unit home.

You can check the FHA mortgage limits website to find out the current limits in your area. The table below breaks down this year’s low-cost and high-cost area limits

Number of unitsLow-cost area limitsHigh-cost area limits
One unit$420,680$970,800
Two units$538,650$1,243,050
Three units$651,050$1,502,475
Four units$809,150$1,867,275

THINGS YOU SHOULD KNOW

If FHA loan limits don’t give you enough money to make a purchase work, you may want to check out the conforming loan limits in your area. For example, in most parts of the country, the one-unit conforming conventional loan limit is $647,200, which gives you an extra $226,520 toward a home purchase than the FHA limit for a single-family home.

FHA loan interest rates

An FHA loan rate can only be offered by an FHA-approved lender. This is especially important when you’re shopping, since not all mortgage companies offer FHA loans. Like any mortgage rate, the higher your credit scores are, the better your rate will be.

Always try to spruce up your credit before you apply for an FHA loan. Any of the following may give your credit scores a boost and help you snag a lower rate:

  1. Pay off those credit card balances. The less credit card debt you have, the better your score will be. If you have to use them, avoid charging more than 30% of your total available credit card limits.
  2. Make payments on time. On-time payments will keep your scores high, so set up auto payments to make sure you don’t miss any payments.
  3. Avoid new credit accounts. Don’t fall for the retail store discounts on new credit accounts and stay away from car dealership finance companies. Each credit application pushes your score down, and could cost you thousands in interest charges over the life of a 30-year loan term.

FHA closing costs

You can expect to pay between 2% and 6% of your loan amount toward FHA closing costs. Besides mortgage insurance, there are some other aspects of closing costs unique to FHA loans.

  • You’ll need an FHA appraisal for a purchase. FHA appraisals must not only assess the value, but the safety and livability of the home. As a result, FHA appraisals are never waived if you’re buying a home (only conventional loans offer an appraisal waiver option on a purchase).
  • You can ask the seller to pay closing costs. The seller is allowed to pay up to 6% of your closing costs, about 2% more than conventional guidelines allow with a minimum down payment. One tip: The seller can pay for your 1.75% upfront mortgage insurance premium as part of the 6% credit, which would save you big bucks in long-term interest charges.

Different types of FHA loans

The FHA offers a variety of different loan programs to meet the needs of homebuyers and homeowners throughout their financial lives.

FHA purchase loan

Most homebuyers choose a “standard” FHA loan to buy their home. Also called the 203(b) program, this type of FHA loan comes with all the down payment and credit score flexibilities we discussed above.

THINGS YOU SHOULD KNOW

No homebuyer wants to pay more for a home than what it’s worth, and the FHA makes sure you have an exit strategy in the form of the FHA amendatory clause. It’s required if you’re making an offer on a home financed by an FHA loan, and allows you to cancel the contract and receive any upfront earnest money back if the value doesn’t match the sales price.

FHA refinance loan

You can replace your current loan with a new FHA loan of up to 97.75% of your home’s value. You’ll need at least a 580 score and can roll your FHA closing costs into the loan amount. This is more commonly known as a “rate-and-term” refinance.

FHA streamline refinance loan

Homeowners with a current FHA loan may qualify to lower their payment with an FHA streamline refinance. You can skip the income documents and no home appraisal is required, making the process very easy.

FHA cash-out refinance loan

Borrowers with credit scores as low as 500 may be able to borrow more than they currently owe and pocket the difference with an FHA cash-out refinance. However, you can’t borrow more than 80% of your home’s value with this option.

FHA 203(k) renovation loan

You can buy or refinance a home and roll the renovation costs into one loan with the 203(k) mortgage program. You can choose the limited program for small projects (under $35,000), while the standard program gives you more cash for larger projects.

Home equity conversion mortgage (HECM)

Also called a reverse mortgage, the HECM loan gives borrowers aged 62 or older multiple ways to convert their home equity to cash and avoid a monthly payment. To be eligible, the borrower usually must  have at least 50% equity in their home. The amount of equity available is based on the youngest homeowner’s age.

FHA energy-efficient mortgage

Called an EEM for short, this program lets you add the cost of energy-saving upgrades to the balance of a purchase or refinance loan. Depending on the type of improvements you make, you may be able to get an FHA EEM loan for between $1,500 and $25,000.

FHA GPM/GEM loan

The graduated payment mortgage (GPM) gives borrowers the option to choose lower initial monthly payments that increase as their income rises. For borrowers who want to pay off their mortgage earlier, the growing equity mortgage (GEM) adds extra payments to the loan balance.

FHA loans vs. conventional loans

Often the choice between an FHA loan and a conventional mortgage comes down to credit scores and total debt. Conventional loans are the most popular mortgage type, but borrowers have to meet higher qualifying standards than for FHA loans.

However, conventional loans allow you to finance second homes and investment properties, whereas you need to live in the home you finance with an FHA mortgage as a primary residence for at least 12 months. And you may even be eligible for an appraisal waiver if you buy a home with a conventional loan, while FHA purchase loans require a more detailed home appraisal.

The table below highlights the major differences between FHA and conventional loans.

Loan featureFHA mortgageConventional mortgage
Minimum down payment
  • 3.5% with a 580 credit score
  • 3%
Minimum credit score
  • 500 to 579 with a 10% down payment
  • 620
DTI ratio
  • 43% with exceptions possible above 50%
  • 45% with exceptions up to 50%
Maximum loan limits
  • Lower loan limits than conventional loans
  • Higher loan limits than FHA loans 
Appraisal requirements
  • Required on all purchase loans
  • May be waived on purchase loans
Mortgage insurance
  • Two types of mortgage insurance required
  • Required regardless of down payment amount 
  • One type of mortgage insurance required
  • Requirement waived with a 20% down payment
Occupancy
  • Property must be a primary residence
  • Property can be a primary, second or investment home
Streamline refinance available?
  • Yes, for homeowners with current FHA loans
  • No, borrowers must fully qualify for refinance loans

THINGS YOU SHOULD KNOW

Even if your credit scores are above 620, you may want to compare how much you’d pay in FHA mortgage insurance with conventional private mortgage insurance (PMI), especially if you don’t have a 20% down payment. Conventional PMI premiums are based on your credit scores; FHA MI premiums aren’t, which could make a big difference in your monthly payment and how much you qualify to borrow.

How to apply for an FHA loan

Applying for an FHA loan is fairly similar to applying for any type of home loan, with a few exceptions. Here are six basic steps to follow to apply for an FHA loan.

  1. Shop several FHA-approved lenders. Not all lenders offer the same types of FHA loans. Compare the rates and costs of at least three to five lenders, including mortgage brokers, mortgage lenders or your local bank or credit union. Or you can input your basic financial information on an online rate comparison site and let lenders call you with their best offers.
  2. Complete an FHA loan application. You’ll need basic information handy about your income, monthly debts and down payment funds as you fill out the application.
  3. Give the lender permission to verify your credit scores. The lender pulls a credit report to verify you meet the minimum FHA credit score requirement.
  4. Provide two years of employment and income history. Collect pay stubs for the last 30 days and the last two years of W-2s or federal tax returns, along with employer contact information. You won’t need as much paperwork if you’re applying for a special FHA program, like a reverse mortgage or FHA streamline refinance.
  5. Document your down payment source. Lenders typically review two months’ worth of bank statements, or a letter explaining where the down payment and closing cost funds are coming from, if you’re buying a home. You might need a few months’ worth of cash reserves in the bank if your credit scores are below 580 or your DTI ratio is high.
  6. Explain and document any defaulted federal debt. If you recently paid off defaulted student loans or other government debt, provide a letter of explanation and documents to the lender in case they need it to clear your CAIVRS report.

Questions to ask your loan officer about FHA loans

The FHA loan program is a specialized government loan program that not all loan officers are familiar with. Some lenders set stricter rules than those set by the FHA, so it’s worth it to ask a few extra questions when  you’re shopping.

  • What’s your minimum credit score? Lenders may set a higher minimum credit score limit than 500 or 580. Let your loan officer know if your score is below 620. 
  • Do you specialize in 203(k) loans? The 203(k) loan has more moving parts than a regular loan because not only do you have to qualify based on regular FHA requirements, but your project and all of the people involved need to be approved. Some mortgage companies have entire departments dedicated to FHA 203(k) loans, which could mean a faster path to approval and completion of your renovations.
  • Are you approved to offer DPA with your FHA loans? Some down payment assistance programs require bank or lender approval. Verify your lender is approved with the housing finance agency that offers the DPA program you’re interested in.

Pros and cons of FHA loans

The upside of FHA loans is you may qualify with much lower scores than conventional loans allow and a down payment as little as 3.5% of the home’s price. If you have a few extra dollars in the bank and a higher credit score, you may even be preapproved with a DTI ratio above 50%.

The extra cost of mortgage insurance is one of the drawbacks of FHA financing. If you live in a part of the country where home prices are high, an FHA loan may not make sense, due to the lower maximum loan limits compared to conventional loans. Here’s a brief recap of FHA loan pros and cons.

FHA loan prosFHA loan cons

  Lower credit score minimums than conventional loans

  Higher DTI ratio limits than conventional loans

  Mortgage insurance premiums are the same regardless of credit score

  Multiple programs including renovation, reverse mortgage and energy-efficient loan options

  No maximum income limits

  Higher mortgage insurance costs

  Lower maximum loan limits than conventional loans

  Mortgage insurance is required for the full loan term with a minimum down payment

  Mortgage insurance is required regardless of down payment

  Limited to primary residences

Frequently Asked Questions

Any borrower who meets FHA loan requirements can qualify for an FHA loan as long as they apply through an FHA-approved lender.

PMI doesn’t apply to FHA loans. Instead, borrowers pay a lump-sum, upfront mortgage insurance premium (UFMIP) charge equal to 1.75% of your loan amount and an annual mortgage insurance premium (MIP) ranging between 0.45% and 1.05% of the loan amount, divided by 12 and added to the monthly payment.

FHA 203(b) is the official program code referring to the standard program for FHA purchase and refinance loans.

Yes. Recent changes to FHA guidelines make it even easier for aspiring homeowners to apply for a mortgage with student loan debt and qualify based on their actual student loan payment. Prior to the change, which went into effect in the summer of 2021, FHA-approved lenders were required to calculate 1% of the student loan balance to qualify, regardless of whether the actual payment was lower.

Yes. FHA-approved lenders can preapprove you for an FHA loan after reviewing your income, down payment cash, credit score and credit payment history.

In most cases, yes, it’s easy to get an FHA loan compared to a conventional loan. The FHA loan program’s flexible guidelines provide borrowers who have less-than-perfect credit and little savings with a shot at homeownership, so they can build wealth and a foundation of stability for their families.

You can either wait 11 years after making a 10% down payment on an FHA loan, or refinance to a conventional loan. Only conventional loans offer different options to get rid of mortgage insurance.

There are three factors that determine the maximum amount you can get from an FHA loan.

  1. Your DTI ratio, which lenders calculate based on your income and total debt (including the new mortgage payment)
  2. Your location, which sets the FHA loan amount limits for lenders
  3. Your property type and number of units (loan limits are higher for two- to four-unit homes)

Your best bet is to get preapproved with a loan officer for the most accurate estimate of the FHA loan amount you qualify for.

 

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