Myth #1. FHA Loans Are Only for First-Time Homebuyers
Of course, FHA home loans are loved by first-time homebuyers because of their low down payment and credit score requirements. But, FHA loans are not just for first-time buyers.
The Federal Housing Administration guarantees mortgage loans for all types of borrowers, whether they’re purchasing their first home or their fifth. The FHA does not require borrowers to be first-time homebuyers to qualify.
2020 FHA Loan Requirements
• 580 credit score with 3.5% down
• 500-579 score with 10% down
• Maximum 50% debt-to-income ratio
• Two years of stable employment and income history
• For primary residence only
• 24 month waiting period after a foreclosure or bankruptcy
• 1% of student loan debt added to DTI ratio
Myth #2. FHA Loans Can Only be Used To Buy Single-Family Homes
FHA loans are available on a variety of different types of homes. Single-family homes are the most common home type financed with an FHA mortgage, but you can buy multifamily homes between 2-4 units. Townhomes, condos, and manufactured homes may also be purchased if the home meets the FHA minimum property standards.
FHA Eligible Property Types
• Single-family homes
• 2-4 unit multifamily properties
• Manufactured and mobile homes
• Condos and Townhomes
Myth #3. FHA Loans Are Only For People With Bad Credit
FHA loans have the lowest credit score requirements of any type of mortgage loan. Borrowers may qualify with a 500 credit score and a 10% down payment. Borrowers with at least a 580 credit score may be eligible for an FHA mortgage with just 3.5% down.
FHA loans allow for higher debt-to-income ratios than other types of home loans. Conventional loans have a maximum DTI ratio of 43%, while lenders can go up to a 50% DTI ratio for FHA loans. Borrowers with good credit, but low income or without a large down payment will have an easier time qualifying for an FHA loan than the alternatives.
FHA Credit Requirements
• No more than one late payment on any account in the past 12 months
• No late mortgage payments in the past six months
• Two year waiting period after bankruptcy or short sale
• Three year waiting period after a foreclosure
• Collections, judgements, and federal debt should be paid or on a payment plan
Myth #4. You Can Get an FHA Loan with a 580 Credit Score
Not every lender has the same minimum FHA credit requirements, and many lenders require a 620 score. There are lenders who can work with credit scores as low as 580, but lenders look at more than just your credit score.
Late payments, collection accounts, or significant debt can cause you to be denied even if you meet the minimum credit score requirement. If you have a credit score below, 620 lenders will want to see compensating factors that make the loan application stronger. Things like a high a low DTI ratio, high income, or a large amount of cash reserves will help increase your odds of being approved with poor credit.
You should speak with an FHA lender to see if you meet the minimum credit requirements.
* Limited payment shock
* 5+ years with the same employer or in the same industry
* High income
* Large amount in savings
* Good credit
* 20% down payment
* Low debt-to-income ratio below 36%
* Residual Income
* Limited debt (credit cards, auto loan, etc.)
Myth #5. FHA Loans Require MIP for the Life of the Loan
The FHA mortgage insurance premium, which is added to the monthly mortgage payment, is how the FHA loan program is funded. If you have a down payment of less than 10%, then you will be required to carry MIP for the life of the loan, or until you refinance into a conventional mortgage.
FHA borrowers with at least a 10% down payment will have to carry MIP for 11 years.
FHA Mortgage Insurance Duration
• Down payment of 10% or more MIP duration is 11 years
• Down payment of less than 10% MIP will be required for the life of the loan
Myth #6. Conventional Loans are Better than FHA
This could be true, but it all depends on the borrower’s situation. If they have a 20% down payment and a 620 credit score, then a conventional mortgage is a better loan option for them because they will be able to avoid paying mortgage insurance.
But there are many home buyers that simply can’t qualify for a conventional loan. Borrowers with a low income, credit score, or down payment will find that FHA loans are the best option for them.
500 with 10% down
10% down with 500 score
Up-front MIP payment Monthly MIP payments
Monthly PMI payments
Low-cost area - $331,760
Low-cost area - $510,400
43% - 50% max DTI depending on the lender
Max 43% DTI
Primary residence only
Myth #7. FHA Loans Have The Lowest Down Payment
FHA loans require just a 3.5% down payment, but it’s not the lowest down payment of any type of mortgage.
These mortgage loans have a lower down payment requirement than FHA loans.
- VA loan – VA loans are for qualified veterans that require no down payment or mortgage insurance.
- USDA loan – The USDA loan program is a zero down payment home loan for low-income borrowers in rural areas of the country.
- Home Possible loan – The Home Possible Loan Program from Freddie Mac is a type of conventional loan for low-income first-time homebuyers, which requires just a 3% down payment.
- HomeReady loan – The HomeReady program from Fannie Mae is very similar to the Home Possible program. First-time homebuyers who meet the HomeReady requirements are eligible with a 620 credit score and 3% down.
No and Low Down Payment Mortgage Options
Min Credit Score
Max DTI Ratio
No income limits
No down payment
No income limits
No down payment
115% of area median income
HomeReady /Home Possible Loans
80% of area median income