7 Myths about FHA Loans that Aren’t True



fha loan myths

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.

Compensating Factors

* 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.

FHA Loans

Conventional Loans

Credit Score

500 with 10% down
580 with 3.5% down

620

Down Payment

10% down with 500 score
3.5% down with 580 score

3%-20%

Mortgage Insurance

Up-front MIP payment Monthly MIP payments

>10% down MIP cancels in 11 yrs 
<10% down MIP required for life of the loan

Monthly PMI payments

PMI is canceled when LTV ratio reaches 78%

Loan Limits

Low-cost area - $331,760
High-cost area - $765,600

Low-cost area - $510,400
High-cost area - $765,600

Debt-to-Income

43% - 50% max DTI depending on the lender

Max 43% DTI

Residence Type

Primary residence only

Primary residence
Second home
Vacation home
Investment property

Comparing FHA vs. Conventional Loans

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

Down Payment

Max DTI Ratio

Income Limit

FHA Loan

580

3.5%

43%-50%

No income limits

VA Loan

580-620

No down payment

50%

No income limits

USDA Loan

640

No down payment

50%

115% of area median income

HomeReady /Home Possible Loans

620

3%

50%

 80% of area median income