What You Need to Know About FHA Loan Requirements

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ByChristopher Boston
Edited byVictoria Copans
ByChristopher Boston
Edited byVictoria Copans

Updated: October 13, 2023

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FHA loans, backed by the Federal Housing Administration, offer a unique opportunity for borrowers who may not qualify for traditional mortgages. Unlike conventional loans, FHA mortgages are more forgiving when it comes to credit scores and down payments, making them a go-to option for first-time homebuyers, people with less-than-perfect credit and those who can't afford a hefty down payment.

To tap into these benefits, you need to understand FHA loan requirements. Lenders use these to gauge your eligibility, loan amount and interest rates. Knowing the requirements can help you prepare a stronger application, saving you time and potentially money.

How FHA Loans Work

The Federal Housing Administration (FHA) plays a pivotal role in the housing market by insuring FHA loans. Their backing makes lenders more willing to offer loans to a broader range of borrowers. Unlike traditional mortgages, FHA loans come with two key benefits: lower down payment requirements and more flexible credit score criteria. These make them an appealing choice, especially if you're new to home buying or have some credit challenges.

Eligibility for an FHA loan is generally more lenient compared to conventional loans. While lenders may have their own set of criteria, some common factors they use to gauge your suitability include your credit worthiness, stable income and a willingness to use the property as your primary residence. If you meet these basic criteria, securing an FHA loan to fund your home purchase becomes a much more attainable goal.

FHA Loan Limits

Loan limits dictate the maximum amount you can borrow through an FHA loan and are set annually by the FHA. The limits are broken down into two categories: floor and ceiling. The floor is the lowest loan limit, applicable to low-cost areas. The ceiling represents the highest amount you can borrow, typically relevant to high-cost locations like California and Hawaii.

The amount you can borrow varies by location, directly affecting the type of property you can afford. To find out the limits in your area, you can use the HUD's online tool. The HUD updates the database yearly, so make sure you're working with the most recent information to align your housing search accordingly.

Besides location, your property size also affects your FHA loan limits:

Property Size
Floor
Ceiling

One-Unit

$472,030

$1,089,300

Two-Unit

$604,400

$1,394,775

Three-Unit

$730,525

$1,685,850

Four-Unit

$907,900

$2,095,200

Source: HUD

Knowing your local FHA loan limits allows you to determine what you can realistically afford, guiding your homebuying journey toward a successful outcome.

FHA Mortgage Rates

Compared to conventional loans, FHA mortgage rates can be more forgiving. They're usually lower, especially for those with less-than-stellar credit. However, current FHA mortgage rates aren't set in stone. Staying updated can help you time your loan application better, potentially saving you money over the life of your loan. To better understand rate movements, it's helpful to know what influences them, including the following:

  • Federal Reserve Policy: When the Fed adjusts interest rates, it affects almost all types of loans, including FHA. For instance, if the Fed raises the federal funds rate, you can generally expect FHA mortgage rates to go up as well.

  • Economic Indicators: Factors like unemployment rates and inflation can swing mortgage rates. High inflation usually leads to higher rates as lenders want to keep up with rising costs.

  • Market Demand: If more people are buying homes, the demand for mortgages goes up, and so can rates. For example, expect to see higher FHA mortgage rates during a housing boom.

  • Global Economic Factors: Events in other countries can influence U.S. mortgage rates. If investors consider U.S. real estate stable compared to other markets, demand for U.S. mortgages may rise, affecting rates.

  • Your Financial Profile: Although most factors are economic, your personal finances, like credit score and down payment, also play a part. A stronger financial profile often leads to a lower rate.

Knowing what affects current FHA mortgage rates empowers you to shop around for the best deal. Multiple lenders offer FHA loans, and rates can vary between them, so take your time to compare and find the most favorable terms for your situation.

Mortgage Insurance

In the context of FHA loans, mortgage insurance functions as a safety net for the lender in case you default. It's a bit different from the private mortgage insurance (PMI) you'd find with conventional loans. Here's how:

  • Upfront vs. Monthly Premiums: FHA loans require both an upfront mortgage insurance premium (UFMIP) and a monthly premium. The UFMIP is typically 1.75% of the loan amount. If your loan is $200,000, your UFMIP would be $3,500. Monthly premiums depend on the loan's term and loan-to-value ratio, but expect to pay 0.15% to 0.55% of the loan balance per year. PMI, in contrast, usually only requires a monthly payment.

  • Discontinuation: With conventional loans, you can often cancel PMI once you've reached 20% equity in your home. For FHA loans, you usually pay the mortgage insurance for the life of the loan. However, if your down payment was 10% or higher, you can request discontinuation after 11 years.

While mortgage insurance makes FHA loans more accessible, it also increases the overall cost of your home loan. That means you'll pay more over time than you would for a similar loan without insurance.

Credit Score Requirements for FHA Loans

Your credit score is a snapshot of your financial reliability and a key consideration for lenders when you apply for an FHA loan. It influences not only your eligibility but also the terms of the loan, particularly the interest rates you'll be offered. Higher scores generally equate to more favorable terms.

While FHA loans do offer some flexibility with lower credit standing — sometimes accepting scores as low as 500 — poor credit scores often lead to less favorable loan terms, such as higher interest rates. So, if your score hovers near the minimum, consider improving it before applying.

Here are some tips to boost your credit score:

  • Pay Off High-Interest Debt: Reducing your debt, especially on high-interest credit cards, can improve your credit utilization ratio, leading to a better score.

  • Low Credit Card Balances: Try to keep your credit card balances below 30% of the credit limit to demonstrate responsible credit usage.

  • Timely Bill Payments: Consistent and timely payments contribute to a positive payment history, one of the most substantial factors in your credit score.

  • Check for Errors: Regularly review your credit report for any inaccuracies or fraudulent activities that could adversely affect your score.

  • Diversify Your Credit Mix: Having different types of credit, like a car loan or a credit card, can positively impact your score. But only take on debt you can manage.

By understanding the credit score requirements for FHA loans, you're taking an important step toward a more secure financial future. However, while your credit score is crucial, lenders consider a fuller financial picture, so make sure other areas, such as your credit history and debt-to-income ratio, are in good shape as well.

FORECLOSURE AND FHA LOAN ELIGIBILITY

Foreclosure is when you lose ownership of your home because you can't make the required mortgage payments. It's a mark on your credit report that makes lenders hesitant to offer you another loan. FHA loans have a foreclosure waiting period — usually three years — which is generally shorter than for conventional loans. During this time, focus on rebuilding your credit. Pay your bills on time, keep your credit card balances low and try to save money. Once the waiting period is up, you'll be in a better position to qualify for an FHA loan.

Down Payment Requirements for FHA Loans

Your down payment can be a significant hurdle, but FHA loans offer some flexibility here. While conventional loans often require a down payment ranging from 5% to 20%, an FHA loan could let you buy a home with as little as 3.5% down (assuming your credit score is 580 or higher). If you're dealing with a lower credit score (between 500 and 580), you may need to put down a higher amount — usually around 10% — but an FHA loan remains a viable option.

In terms of where the down payment can come from, here are some options:

  • Savings: The traditional method — simply saving up for the down payment.

  • Employer Programs: Some employers offer down payment assistance as an employment benefit.

  • Government Grants: Local or state government programs might provide down payment assistance.

  • Gift Funds: Acceptable for FHA loans, you may receive these from family, friends or even specific nonprofit organizations.

  • Investments: Liquidating stocks or other investments can also be a way to generate a down payment.

Knowing these funding avenues can help you align with FHA loan requirements and make your home-buying process smoother and more cost-effective.

Debt-to-Income Requirements for FHA Loans

When you apply for an FHA loan, lenders pay close attention to your debt-to-income ratio (DTI), which compares how much you owe each month to how much you earn. It lets the lender know how comfortably you can take on a new loan. Typically, FHA loan lenders prefer a DTI ratio of 43% or lower. If your DTI is higher, you risk being seen as financially stretched, which could lead to higher interest rates or loan denial.

Here are some strategies to improve your DTI ratio:

  • Pay Off Small Debts: Eliminating smaller loans or credit card balances can quickly positively impact your DTI.

  • Increase Income: If you can, look for opportunities to boost your income, be it a side job or asking for a raise at your current job.

  • Avoid New Debt: Try not to take on additional debt that could worsen your DTI ratio.

  • Refinance Existing Loans: If you can get a better rate or terms, refinancing can lower your monthly obligations.

  • Budget and Cut Expenses: Reducing your monthly expenses also lessens your debt relative to your income.

Improving your DTI allows you to align with DTI requirements for FHA loans and be better positioned for loan approval. Being proactive also helps you build healthier financial habits.

Income Requirements for FHA Loans

Your income is also a significant consideration when getting an FHA loan. Lenders want to know you can make your loan payments. The income requirements for FHA loans vary but generally involve proving you've had consistent income for at least two years. You'll need documents like pay stubs, tax returns or, if self-employed, profit and loss statements.

Don't worry too much if you have gaps in your employment history. Just keep these points in mind:

  • Explain Gaps: Write a letter detailing the reasons for employment breaks. Whether it's for school or caregiving, a reasonable explanation can help.

  • New Job Field: If you've changed fields, lenders prefer you've been in the new field for at least six months.

  • Freelancers/Contractors: Maintain detailed records and multiple income proofs. The more, the better.

Understanding your income requirements for an FHA loan can put you in a stronger position for approval and help you get one step closer to owning your dream home.

Inspection and Property Requirements for FHA Loans

A key step to getting an FHA loan is the home inspection. It's designed to ensure the property meets the FHA's stringent standards, known as the "3S" — safety, security and soundness. Inspectors look at everything from potential health hazards like exposed wiring (safety) to the locks on windows and doors (security). The home's overall structural integrity must also be up to par (soundness).

Beyond these standards, be aware of property types ineligible for FHA financing, such as commercial properties, vacation homes and those in flood zones. Be on the lookout for red flags like outdated electrical systems, poor water drainage or structural damage, as these could cause issues with your loan approval. If these issues arise, you might consider necessary repairs or improvements to meet FHA guidelines.

Homeownership Requirements for FHA Loans

FHA loans primarily aim to help people buy a home they'll live in, also known as a primary residence. Occupancy clauses usually stipulate that you move into the property within 60 days of the loan closing and live there for at least one year. Various property types qualify, from single-family homes to multi-unit properties. Rental income possibilities exist, too. If you're buying a multi-unit property, you can rent out the additional units, but you still need to occupy one unit yourself.

If you violate these basic ownership rules, you could face penalties like the acceleration of your loan repayment or even foreclosure. Keeping informed ensures you make the most of your loan without any hitches.

Frequently Asked Questions About FHA Loan Requirements

We designed our FAQ section to offer you in-depth information about FHA loans, from eligibility criteria to property requirements.

Is an FHA loan right for me?
What is the minimum credit score for a home loan with FHA?
How does my credit history impact my eligibility for an FHA loan?
What are the income requirements for an FHA loan?
How much down payment is needed for an FHA loan?
What is the debt-to-income (DTI) ratio requirement for an FHA loan?
What types of properties are eligible for an FHA loan?
What disqualifies a house from an FHA loan?
What documents are needed to apply for an FHA loan?
Are there any waiting periods after foreclosure or bankruptcy for an FHA loan?

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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