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FHA Loan Requirements in 2021

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A Federal Housing Administration (FHA) loan can be an attractive option for borrowers with less-than-perfect credit and limited down payment funds. If you fit in this category, it’s crucial to first understand FHA loan requirements before applying for a mortgage.

FHA loan requirements for 2021

Minimum credit score  580+ with a 3.5% down payment
500-579 with a 10% down payment
Minimum down payment  3.5% with a 580+ credit score
10% with a 500-579 credit score
Maximum debt-to-income ratios  31% front-end ratio
43% back-end ratio
Loan limits  $356,362 in most U.S. counties
$822,375 in high-cost U.S. counties
Mortgage insurance  1.75% of the loan amount upfront
0.45%-1.05% of the loan amount annually

Credit score

FHA loans come with a lower barrier of entry than conventional loans. You may qualify for an FHA-insured mortgage with a credit score as low as 500.

Down payment

FHA loan guidelines restrict financing to a maximum 96.5% of a home’s value, which means you must put down at least 3.5% toward your home purchase. However, you need to have a minimum 580 credit score to qualify for the minimum down payment amount.

If your credit score is 500 to 579, you’ll need to contribute at least a 10% down payment.

Debt-to-income ratio

FHA home loan requirements include guidelines on acceptable debt-to-income (DTI) ratios. Your DTI ratio is the percentage of your gross monthly income used to make your monthly debt payments.

FHA lenders require a maximum 31% front-end DTI ratio, which focuses on housing payments. Your back-end DTI ratio, which encompasses all of your debt payments — including housing — shouldn’t exceed 43% in most cases.

You may still qualify for a loan if your DTI ratios are slightly higher, provided you have a good credit score, sizable cash reserves or other compensating factors.

Loan limits

Each year, the FHA releases a new set of loan limits that are tied to home-price changes in the housing market. For 2021, the FHA loan limit for single-family homes in most U.S. counties is $356,362. In high-cost areas, the limit is $822,375.

You can use the FHA loan limit lookup tool to get details on your county’s limits.

Mortgage insurance

You’ll also pay for upfront and annual mortgage insurance premiums (MIP) when you borrow an FHA loan. Mortgage insurance protects your lender in the event that you stop making your monthly payments.

The FHA’s upfront MIP is 1.75% of your loan amount. Your repayment term and down payment amount determine how much you’ll pay for annual MIP, which ranges from 0.45% to 1.05% of your loan amount.

Property standards

FHA loan requirements also include strict minimum property standards when it comes to safety and living conditions.

Properties must meet national and/or state building codes, and must be “marketable” units. They may include condominiums, townhouses and one- to four-unit properties. FHA loans are also available for purchasing or refinancing manufactured mobile homes.

CAIVRS check

An important step in meeting FHA loan qualifications is a clear Credit Alert Verification Reporting System (CAIVRS) check. The CAIVRS tracks people who are behind on government-backed loans. This includes existing FHA loans as well as:

  • Federal student loans
  • Small Business Administration (SBA) loans
  • U.S. Department of Veterans Affairs (VA) loans
  • U.S. Department of Agriculture (USDA) loans

If you’ve paid your debt in full or you’re under a repayment plan approved by the agency that you owe, you may be eligible to apply for an FHA loan. Otherwise, you’ll have to wait at least three years after the federal government pays your lender’s insurance claim.

How do FHA loans work?

The FHA doesn’t provide loans directly to borrowers; instead it insures the loans that FHA-approved lenders offer. The required upfront and annual mortgage insurance premiums borrowers pay help offset the risk lenders take on by accepting lower credit scores and smaller down payments.

When can you use an FHA loan?

One of the benefits of an FHA loan is that both first-time and repeat homebuyers can apply for one. You can take out an FHA loan to buy a home, refinance an existing loan or make home improvements.

Additionally, if you’re a homeowner who is 62 or older and you have at least 50% equity in your home, you may qualify for a home equity conversion mortgage (HECM). This type of loan, which is backed by the FHA, allows you to tap your home equity without making payments to your lender.

What if you don’t qualify for an FHA loan?

If you don’t meet standard FHA loan requirements, consider taking the following actions to eventually help you get approved:

1. Boost your cash reserves. Lenders care about reducing the risk that you’ll stop making your agreed-upon mortgage payments each month. If you can show you have a significant amount of savings to withstand a financial setback, this may help your loan application.

2. Clean up your credit. Make all payments on time, as your payment history has the most impact on your credit score. You should also review your credit reports for errors and dispute them.

3. Pay down your debt. The less outstanding debt you have, the lower your DTI ratio may go. A lower ratio indicates to your lender that you won’t be stretched thin financially by taking on an FHA loan.

 

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