2020 FHA Loan Requirements, Rates & Benefits



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

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

This article will cover the FHA loan requirements, credit guidelines, loan limits, and everything else you need to know.

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What is an FHA Loan?

An FHA loan is a government-backed mortgage guaranteed by the Federal Housing Administration and issued by FHA-insured lenders. Because the FHA insures the mortgage, lenders can offer favorable loan terms and requirements.

Borrowers with a 580 credit score are eligible with a 3.5% down payment. Because FHA loans allow higher debt-to-income ratios, up to 50%, they are an excellent loan option for low-to-median income borrowers.

FHA Loan Requirements

FHA loans have low credit and down payment requirements making them more attainable, especially for first-time homebuyers. To qualify, you need to meet these minimum requirements.

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

Credit Requirements

FHA lenders look at more than just your credit score; what’s on your credit report is just as important. If you meet the credit score requirement but have negative information such as late payments or collection accounts, your FHA loan could be denied.

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

More » Complete FHA Credit Requirements

Compensating Factors for Low Credit Score Borrowers

Borrowers with a credit score below 620 are considered high-risk by mortgage lenders. If you have credit issues, a high DTI ratio, or low income, you may need compensating factors such as a large down payment of cash reserves.

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.)

Down Payment Guidelines

Your credit score determines the down payment amount you need. With at least a 580 credit score, Borrowers need 3.5% down, borrowers with a 500-579 score need 10% down.

Credit Score

Down Payment

500-579 credit score

3.5% down payment

580+ credit score

10% down payment

More » FHA Down Payment Guidelines

Down Payment Assistance Programs

FHA-insured loans 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

FHA allows the down payment to be a gift from a friend or family member so borrowers can qualify with no money out of pocket.

You will need to fill out a gift letter for the gifted funds for the down payment.

FHA Loan Limits

The FHA loan limit is the maximum amount you can borrow. FHA increased the maximum loan amount from $314,515 to $331,760 in low-cost areas and to $765,600 in high-cost areas for 2020.

2020 FHA Loan Limits by Property Type

Property Size

Low Cost Area "Floor"

High Cost Area "Ceiling"

Guam, Hawaii, Alaska, U.S. Virgin Islands

One Unit

$331,760

$765,600

$1,148,400

Two units

$424,800

$980,325

$1,470,475

Three units

$513,450

$1,184,925

$1,777,375

Four units

$638,100

$1,472,550

$2,208,825 

FHA Loan Rates

FHA rates are typically lower than conventional loans. Mortgage rates are currently at all-time lows, with a 30-year fixed-rate loan having a rate of around 3.5%.

FHA Loan Rates (October 2020)

Interest rate

APR

30-year fixed-rate mortgage

2.95%

3.05%

15-year fixed-rate mortgage

2.765%

2.875%

5/1 adjustable-rate mortgage

2.925%

3.04%

The advertised rates you see on mortgage lender websites are often the best available rate reserved for borrowers with excellent credit (750+). To get a rate quote, you need to speak with a mortgage lender.

Check Today’s Mortgage Rates

Property Requirements

FHA Eligible Properties

FHA loans are available for single-family homes and 2-4 unit multifamily properties. Most condos and townhomes are eligible for an FHA loan.

FHA Eligible Property Types

Single-family homes

2-4 unit multifamily properties

Manufactured and mobile homes

Condos and Townhomes

Minimum Property Standards

Property condition requirements for FHA loans are more strict than other types of home loans. All properties must meet the minimum FHA property standards to be eligible. The home must be free from any hazards and have adequate living conditions, not needing any major repairs.

FHA Minimum Property Standards

The home must be complete and "marketable"

The interior and exterior should be a complete home. If the kitchen is not complete, or other structures are not present, it will not meet the FHA home requirements.

Must be accessible

The property should have public access and not require trespassing on private property to enter.

Safe Access

The home should be safe to access from a public road.

Free from Hazards

The property should be free from any hazards such as lead-based paint, visible electrically wiring, etc.

Inspection and Appraisal

The FHA home appraisal is required before closing to determine the market value of the property. Depending on the size of the house, the average appraisal cost is $300-$600. Lenders use the property value to calculate the loan-to-value ratio.

An FHA home inspection is done before closing to ensure it meets the minimum FHA property requirements. FHA inspections cost $250-$400 on average.

Mortgage Insurance Premiums

FHA loans require mortgage insurance, which is how the Federal Housing Administration can guarantee the loan. The FHA is funded through mortgage insurance premiums paid by borrowers. Without mortgage insurance, the FHA mortgage program would not exist because they wouldn’t have the funds to insure the loans.

Mortgage Insurance Premium Rates

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

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

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

FHA Mortgage Insurance Premium Rates

Loan Amount $625,500 or less 

      Down payment

MIP rate

MIP duration

30-year fixed-rate mortgage

<10%

>10%

0.85%

0.80%

     Life of the loan

11 years

15-year fixed-rate mortgage

>10%

             0.45%
 0.70%
     Life of the loan

11 years

$625,500 Loan Amount or higher

Down payment

MIP rate

MIP duration

30-year fixed-rate mortgage

<10%

>10%

1.05%

1.00%

Life of the loan

11 years

15-year fixed-rate mortgage

<10%

>10%

             0.95%

0.70%

Life of the loan

11 years

Closing Costs

Closing costs are fees charged by mortgage 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 several factors, including your credit score, DTI ratio, and down payment.

It would be best if you always compare loan offers from multiple FHA lenders. You can use loan quotes to help you negotiate closing costs and the interest rate.

FHA vs. Conventional Loans

Conventional loans are home loans that are not guaranteed by the government but by private mortgage insurance companies. They require a higher credit score (620 minimum) with a down payment between 3% – 20%.

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

FHA Loan Pros and Cons

Pros and Cons of FHA Loans

Pros

Cons

Low credit score requirements

Lower loan limits

3.5 percent down payment

Includes upfront MIP fee

Low interest rates

MIP required for the life of the loan

Easier to qualify for

Strict underwriting requirements

Down payment can be a gift

For primary residence only

Fixed and adjustable-rate loan options

Up to 50% Debt-to-income ratio

They are assumable

• Seller can pay up to 6% of closing costs

More » FHA Loan Pros and Cons 

FHA Loan Terms

The loan term is the specified length of time the loan repayment period is. A shorter loan term will have a higher monthly payment but has a lower mortgage rate and will save you the most money over the course of the loan.

There are several different FHA loan terms available: 10, 15,20,25,30, and 40-year loan terms are available on FHA loans, with the 30-year term loan being the most common; adjustable-rate loans are also available.

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

Types of FHA Loans

FHA 203k

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 Energy Efficient Mortgage (EEM)

The FHA Energy Efficient Mortgage Program is available to borrowers who are purchasing an energy-efficient home. An EEM can also be used to make energy-efficient upgrades to an older home.

FHA Loan Alternatives

FHA loans aren’t perfect for everyone. Luckily it’s not the only low down payment loan that is offered. There are other types of low down payment home loans. You should know all of the different types of loan options to find the best one for you.

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

  • Conventional 97 loan: To complete with FHA loans, Fannie Mae and Freddie Mac created the Conventional 97 loan program, which requires just a 3% down payment. They are more difficult to qualify for, requiring a 680 credit score.
  • HomeReady loan – Fannie Mae created the HomeReady loan program to compete with low down payment home loans such as FHA loans. With just 3% down and a minimum credit score of 620, you may be eligible.
  • Home Possible loan – Designed for low-to-moderate-income first-time homebuyers requiring a 3% down payment.
  • Conventional loan – A conventional mortgage is not backed by the Government and meets the requirements of Fannie Mae and Freddie Mac, the two largest buyers of home loans.
  • VA loan – Veterans of the U.S. military are eligible for a VA loan, which requires no down payment or mortgage insurance.
  • USDA loan– USDA loans are for low-to-median income homebuyers in rural parts of the country. The biggest benefits are that they don’t require a down payment and have the lowest mortgage insurance rate of any home loan of just .35%.

How to Qualify

To qualify for an FHA mortgage, lenders look at many factors such as income, employment, credit history, and assets.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) 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 DTI ratio is 20%. With an FHA loan, you will be allowed to have a mortgage payment of up to $1,500.

FHA insured loans are suitable for low-to-median income first time home buyers. FHA’s flexible debt-to-income ratio requirements allow lenders more flexibility on DTI ratios than conventional mortgages.

Employment and Income

To qualify, you need two years of stable employment and income history. Lenders need to see the last two years of tax returns to verify your income. If you’re self-employed or work on commissions, lenders will use your average annual income over the last two years.

Assets

Borrowers should have enough money in savings to cover the down payment, closing costs, the home appraisal and inspection, and at least two months’ worth of mortgage payments in reserve funds.

Lenders look at your bank statements to ensure the funds are coming from your savings and not a loan. If someone is gifting you the down payment, the person gifting the funds needs to provide bank statements and a gift letter stating the funds are indeed a gift and do not need to be repaid.

Credit

If you have already made an offer on a home and are currently in the loan process or intend to purchase a home soon, you should not apply for new loans or credit lines such as an auto loan, student loan, or credit cards.

  • Don’t open new credit lines – Applying for credit and opening new accounts will initially lower your credit rating. It would be best if you put off getting that new car or credit card until after closing on the mortgage.
  • Improve credit before applying – Before you apply, go over your credit report to ensure 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
  • Make your payments on time  – 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.

Loan Documents

You should gather the loan documents you need to apply for an FHA loan. These documents include:

Documents Needed for Mortgage

Two years of W2's and tax returns

30 days of pay stubs

Three months of bank statements

Proof of seasonal, or part-time income

FHA Loan Infographic

FHA loan infographic

Frequently Asked Questions

How do I qualify for an FHA loan?

To qualify, you need a 500 credit score with a 10% down payment or a 580 credit score with 3.5% down—two years of stable employment and proof of income with two years of W2’s and tax returns. See if you qualify by applying with an FHA-approved lender.

Do FHA loans have income limits?

FHA loans do not have income limits. Your debt-to-income ratio determines the loan amount you qualify for, up to the FHA loan limit in your area.

Do FHA loans take longer to close?

The average time to close for most mortgage loans, including FHA loans, is 46 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 quickly and promptly responding to any requests.

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 have two FHA loans opened at the same time unless you met certain conditions.

Which is a better loan FHA or conventional?

If your credit score is below 620 and you have less than a 20% down payment, then an FHA loan will make the most sense. However, if you have great credit and 20% down, then a conventional loan is a better option because you can avoid mortgage insurance.

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?

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