2020 FHA loan requirements, rates, & benefits



FHA loan requirements

If you want to buy a home but you don’t have 20% down or perfect credit. You’re in luck!

With a low 580 credit score requirement and just a 3.5% down payment, FHA loans are the easiest type of mortgage to qualify for.

In this article, we will go over the FHA loan requirements, credit guidelines, loan limits, and everything else you need to know.

RATE SEARCH: Get Approved for a Mortgage Today

FHA Loan RequirementsFHA loan credit requirements

  • 580 credit score with 3.5% down
  • 500-579 score requires 10% down
  • Maximum 50% debt-to-income ratio
  • Two years of stable employment and income history
  • For primary residence only
  • No foreclosure in the last three years

The minimum requirements for FHA loans are much lower than traditional financing, making them easier to qualify for.

Borrowers with a credit score as low as 500 may be able to qualify for an FHA loan while conventional loans require a 620 score.

The FHA allows for a debt-to-income ratio of 50% compared to 43% for conventional loans making them the better option for buyers with a lot of debt or low-income.

What is an FHA Loan?

The Federal Housing Administration, a Government agency created by the U.S. Department of Housing and Urban Development, or HUD, to increase homeownership in America.

The FHA insures loans offered by private lenders and does not offer mortgage loans directly. Borrowers pay mortgage insurance (MIP), usually around 0.85 percent of the loan amount annually. If a borrower defaults on an FHA-insured loan the lender will be reimbursed by HUD thus reducing their risk allowing them to loosen their requirements.

Check Current Mortgage Rates

FHA Loan Infographic

FHA loan infographic

FHA Credit Requirements

Lenders look at more than just your credit score, what’s on your credit report is just as important. Late payments and debt can cause loan applicants to get denied.

  • No more than one late payment on any account in the past 12 months
  • No mortgage late payments in the past 6 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 an agreed payment plan

FHA Loan Limits Increased for 2020

FHA loan limits were increased from $314,515 to $331,760 in low-cost areas and $765,600 in high-cost areas starting Jan. 1st, 2020.

# of Units Low-Cost area loan limit High-Cost area loan limit
 
1 Unit $331,760 $765,600
2 Units $424,800 $980,325
3 Units $513,450 $1,184,925
4 Units $638,100 $1,472,550

Loan Limits for Guam, Hawaii, Alaska, U.S. Virgin Islands

# of Units Loan limit
 
1 Unit $1,148,400
2 Units $1,470,475
3 Units $1,777,375
4 Units $2,208,825

FHA Mortgage Insurance

FHA loans require mortgage insurance

The FHA is funded through mortgage insurance premiums paid by borrowers. Without mortgage insurance, the FHA loan program would not exist because they wouldn’t have the funds to insure the loans.

Mortgage Insurance Rates

The duration you will be required to pay for mortgage insurance depends on the amount of the down payment.

  • More than 10% down payment MIP duration is 11 years
  • Less than 10% down payment MIP is required for the life of the loan

The mortgage insurance rate depends on the length of the loan term and the original down payment amount.

FHA mortgage insurance chart 2020

FHA Closing Costs

Closing costs are fees charged by lenders for processing and funding a loan. They include origination fees, home appraisals, title insurance, and more. Typically, FHA closing costs are 2% – 5% of the purchase price, depending on the lender.

You should always compare loan offers from multiple FHA lenders. You can use loan quotes to help you negotiate closing costs and the interest rate.

Debt-to-Income Ratio

Your debt-to-income ratio is the amount of your monthly income that goes towards reoccurring monthly payments such as auto loans and credit card payments.

For example, if your monthly income is $5,000 per month and your total monthly payments are $1,000 your debt-to-income ratio is 20%. With an FHA loan, you will be allowed to have a mortgage payment up to $1,500.

FHA loans are suitable for low-to-median income first time home buyers. FHA allows lenders more flexibility on debt-to-income ratios than traditional mortgages.

FHA lenders can approve borrowers with a debt-to-income ratio of up to 50%. The maximum DTI ratio for conventional loans is 43%.

FHA Loan Pros and Cons

Benefits

  • Low credit requirements
  • 3.5%  down payment
  • Down payment can be a gift from a friend or family member
  • Higher debt-to-income ratio allowed
  • Easier to qualify for
  • They are assumable
  • No prepayment penalty
  • Sellers can pay up to 6% of the closing costs
  • Wide variety of FHA Lenders to choose from

Disadvantages

  • Lower loan limits
  • Homes that need renovations do not qualify
  • Mortgage insurance is required regardless of how much you put down
  • MIP costs are higher
  • Strict underwriting requirements

Conventional vs. FHA loan Comparison Chart

FHA vs conventional loan comparison chart

FHA Property Standards

FHA Loan Terms

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 loans are also available. The shorter the loan term the lower the interest rate will be.

  • 10, 15-year fixed-rate
  • 20, 25, 30-year fixed-rate
  • 5/1 Adjustable rate

FHA Construction Loans

If you would like to purchase a home with an FHA loan and get additional money to make repairs or renovations, you can with the FHA 203k loan program.

This renovation loan will allow you to purchase a property and get up to $35,000 additional cash to make renovations or repairs.

FHA Down Payment Assistance

FHA-insured mortgages allow you to use homebuyer programs. If you are a first-time homebuyer, you may qualify for downpayment assistance or grants. You can search for your available state Government programs on the HUD website.

For local down payment assistance programs, check out your local county or city website for more information.

Down Payment Gifts

Another excellent benefit for FHA borrowers is that the down payment can be a gift.

The down payment of 3.5% can be a gift, as long as the person gifting the down payment meets FHA guidelines.

This is a way that an 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 down payment.

How to Qualify

To get approved for an FHA loan you just need a 580 credit score, but lenders will look at many other factors such as, income, employment, credit history, and assets.

  • Improve credit before applying – Before you apply for an FHA loan you want to go over your credit report to make sure there are no errors. If you find any mistakes you should contact the credit bureau to file a dispute. How to dispute items on your credit report
  • Don’t open new lines of credit – Applying for credit and opening new accounts will lower your credit rating initially. You should put off that new car or opening a credit card until after you have closed on your mortgage.
  • Do not have any late payments – FHA lenders won’t be able to approve borrowers with more than one late payment in the last 12 months. Forget to pay your bills sometimes? No big deal just set up auto-pay for your credit cards and loans so you can’t forget to make your payments on time.

FHA Loan Alternatives

FHA loans aren’t always perfect for everyone. You should know all of the different types of loan options to find the best one for you.

FAQ

Who can qualify for an FHA loan?

FHA loans are popular because they are one of the easiest types of home loans to qualify for. If you have at least a 500 credit score you may qualify with 10% down. With a 580 credit score, just 3.5% is needed.

How long does it take to close on a house?

The average time to close is 48 days. However, the time to close depends on several factors. You can speed up the process by getting all of your documents to your loan officer as quickly as possible and responding to any requests promptly.

Are FHA loans only for first-time homebuyers?

No. Anyone can qualify for an FHA mortgage regardless if they’re a first-time buyer or not. You cannot get a second FHA loan at the same time unless you met certain conditions.

The Bottom Line

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 sometimes, no credit history at all.

Whether you’re a first time home buyer or looking for another home, FHA loans are a great option. Talk to an FHA approved lender for more information or to apply.

Are you ready to apply for an FHA mortgage?

Check Mortgage Rates and Get Approved