If you’re interested in getting a home loaned you don’t have 20% to put down or perfect credit. Don’t worry.
FHA Loans only require a 3.5% down payment with a 580 credit score.
But what are FHA Loans exactly and who qualifies?
Can you get an FHA loan with bad credit?
We’re going to teach you everything you need to know about FHA loans.
FHA mortgages are the easiest type of loan to qualify for in 2017. The credit and down payment requirements are very low allowing more home buyers to qualify.
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What is an FHA Loan?
FHA loans are mortgages that are insured by the Federal Housing Administration, a Government agency. A borrower is required to pay mortgage insurance (MIP) monthly, usually around 0.85% of the loan amount annually. If a borrower defaults on an FHA loan the Federal Housing Administration will pay off the balance of the loan and take possession of the home.
FHA Credit Score Requirements
In order for the FHA to insure a loan the borrower must have at least a 500 credit score for 90% LTV, or 10% down payment. If a borrower has a 580 credit score they will be required to have just a 3.5% down payment.
- 500-579 credit score = 10% down payment
- 580+ credit score = 3.5% down payment
If your credit score is below 580 it is highly recommended that you improve your credit score before applying.
First-time Home Buyers
Many people in America have heard of an FHA loan and believe it’s just for low income, or are bad credit home loans. However, this is not the case at all. FHA loans are the most popular type of home loan product used in the US.
Approximately 40% of all home loans in the U.S. are FHA home loans. They are very popular for first time home buyers because of their flexible qualifying guidelines and low down payments.
Low Income Buyers
FHA loans are good for low to median income first time home buyers well. FHA allows lenders more flexibility on debt to income ratios than traditional mortgages. Many low income borrowers are able to get approved for a home loan through the FHA.
First time home buyers with bad credit
Since many first time buyers have poor credit, FHA loans make a lot of sense. A 500 credit score is needed for FHA with 10% down. If you have a credit score of at least 580 you can qualify for FHA with just 3.5% down.
For borrowers with scores in the 500-579 range, you should work on improving your credit scores before applying for a mortgage. There are tips to increasing your score later on. Or you can skip to our article on how to improve your credit scores in 30 days.
Who should get an FHA Mortgage?
FHA Loans are great for anyone that’s looking to purchase a home. This is because the requirements and guidelines for FHA is much more linnet than traditional mortgages making them easier to qualify for.
Candidates for FHA Loans
- Borrowers will low credit scores
- Anyone that cannot afford a large downpayment
- If you are receiving your downpayment as a gift
- If your debt-to-income ratio is high
- First time home buyers
Down Payment Requirements
One of the greatest benefits of an FHA loan is the low 3.5% downpayment, which is much lower than other mortgage programs. Typically, conventional mortgages require no less than a 5% downpayment and can be as high as 20%.
As an example, if you’re buying a $200,000 house, a private loan will require no less than 5% down, or $10,000o, which is a best case scenario. If you get an FHA loan your down payment will be 3.5%, which is $7,000 for a home costing $200,000.
Down Payment Gifts
Another great benefit for FHA borrowers is that the downpayment can be gifted to you. The downpayment of 3.5% can be a gift, as long as the person gifting the down payment meets FHA guidelines.
A relative, charity, your employer or workers union, even a friend can gift you the funds for your downpayment as long as the friend has invested interest in the borrower. This is a way that a FHA loan can provide the borrower 100% financing with no down payment out of pocket. You will need to fill out a gift letter for the mortgage downpayment.
FHA Loan Limits 2017
The FHA loan limits were recently increased for 2017 from $271,050 to $275,665 for low-cost areas. This is the maximum loan limits for FHA loans in 60% of the U.S. The limits go up to $636,150 is high-cost areas, such as Los Angeles and San Fransisco.
|Units||Low-Cost area loan limit||High-Cost area loan limit|
FHA Loan Limits for Guam, Hawaii, Alaska, U.S. Virgin Islands
|# of Units||Guam, Hawaii, Alaska, U.S. Virgin Islands|
If you’re needing a loan that exceeds the FHA loan limits you will need to get a conforming loan, or conventional loan. Conventional loans require a higher down payment than FHA loans,typicvally between 5%-20%. And the credit score requirements are higher. You will need at least a 620 credit score to qualify for a conventional mortgage.
Conforming Loan Limits
|Units||District of Columbia and Puerto Rico||Guam, Alaska, U.S. Virgin Islands, and the Hawaii|
|Units||District of Columbia and Puerto Rico||Guam, Alaska, U.S. Virgin Islands, and the Hawaii|
If you need a loan for more than the conventional loan limit you will need to get a Jumbo Mortgage. Jumbo loans are non-conforming loans because they exceed the maximum loan amount that Freddie Mac or Fannie Mae will purchase. They require high credit scores, typically 700 or above. And high down payments of at least 15-20%.
Mortgage Insurance Premium (MIP)
FHA loans require private mortgage insurance, referred to as MIP (mortgage insurance premium) or PMI (private mortgage insurance). The mortgage insurance premiums can be cancelled if you acquired your loan after December 31st, 2000, and before July 3rd, 2013 and have a LTV balance of 78% or less, and you meet the requirements in mortgagee letter 2000-46.
HUD changed the rules about cancelling FHA mortgage insurance. If you got your mortgage after July 3rd, 2013 the FHA will not let you cancel mortgage insurance if you put less than 10% down. However, if you have paid down the balance to under 78% LTV and original put a 10% or higher down payment you can cancel PMI. You can refinance out of an FHA loan into a conventional loan to remove PMI.
FHA MIP Chart 2017
FHA Loan Requirements
- 500-579 credit score requirement with a 10% down payment.
- 580+ credit score requirement for borrowers with at least a 3.5% downpayment.
- The Federal Housing Administration requires you to pay for an appraisal of the home. An appraisal must be done by an FHA approved appraiser.
- Mortgage insurance (MIP) is required.
- Steady employment and be able to prove income with recent tax returns, W2’s, and paycheck stubs.
- Two years of employment at the same company.
- Non-occupying co-borrowers allowed
- At least 18 years of age.
- Must occupy the home as primary residence.
- Social security number is not required.
View more information in the HUD Handbook HUD 4155.1 here.
Comparing FHA vs Conventional Loans
There are many differences in FHA vs Conventional loans. For one, FHA requires a low down payment of just 3.5% with a 580 credit score. You can get approved for an FHA loan with a 500-579 credit score with 10% down. However, it is very difficult to process a loan application with a credit score in this range. If you have at least a 580 credit score it is easier to qualify for an FHA mortgage.
- Lower 580 credit score requirement
- Lower interest rates than with conventional loans
- 3.5% dowpayment
- Downpayment can be a gift from a friend or family member
- Higher allowed debt-to-income ratios
- Easier to qualify for
- They are assumable
- Sellers can pay up to 6% of the closing costs
- Non-occupying co-borrowers and co-signers allowed
- Lower loan limits
- Homes that need renovations do not qualify
- Mortgage insurance is required regardless of down payment
- PMI costs are higher
- Upfront PMI is required
- More required paperwork
Conventional vs FHA loan Comparison Chart
FHA Property Standards
- Single family and 2-4 unit properties
- FHA approved condos and town homes
30 year and 15 year Fixed rates or Adjustable loans
An FHA loan can take various forms. It may be a fixed-rate mortgage or a 15 year fixed rate or 30 year fixed rate, adjustable rate mortgages are also available.
Your debt-to-income, or DTI ratio. Is the amount of your monthly debt obligations compared to your monthly income. If you make $2,000 a month and you have a car payment, credit card payment, and a mortgage payment that is $800 combined. You have a a DTI ratio of 40%.
The maximum DTI ratio on a FHA loan can be as high as 50% in certain cases. However, in most cases you will need a DTI of 36% or lower.
Figure out how much you can afford using our calculator
FHA 203(k) Loans
If you would like to purchase a home with an FHA loan and get additional money to make repairs or renovations. Now you can with the FHA 203k loan program. This rehab loan will allow you to purchase a property and get up to $35,000 additional cash to make renovations or repairs.
Because 203k loans provide more cash than the purchase price it is viewed as a risker type of loan for lenders. Because of this the minimum credit score is 640. However, all other loan requirements are very similar to a standard FHA(b) loan.
You should speak to a 203k lender to get more details. Click here for more 203k loan details from HUD.
First Time Home Buyer Down Payment Assistance
If you are a first time home buyer you may qualify for down payment assistance or Government grants or programs. You can search for your available state Government programs on the HUD website. For local country and city down payment assistance programs check out their websites for more information.
FHA Streamline Refinance
If you have an FHA loan you may be eligible to refinance your mortgage under the FHA streamline program. If it’s been at least 210 days since you closed on your mortgage and rates have improved, you can refinance your home quickly and without much paperwork with a streamline refinance program.
The great thing about these refinances is that they do not require a credit check or income verification. This allows everyone to be able to refinance their FHA loan to get a lower interest rate and lower monthly mortgage payment.
FHA loans offer a wealth of benefits for many home buyers. They are easier to qualify for, offer lower interest rates and lower loan fees. They’re available for many people who would not otherwise qualify for a home loan due to poor credit or in some cases, no credit history at all.
Are you considering using an FHA loan to buy a home? Simply fill out the form on our home page to compare multiple home loan offers and get a free no-hassle consultation with lenders in our network. Home ownership may be well within your reach!
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