The FHA Loan Guide – 2020 FHA Requirements



FHA loans are one of the most popular types of home loans for first-time homebuyers cause of their low credit and down payment requirements.

Everything you need to know about FHA loans is in this guide.

2020 FHA loan requirements, credit guidelines, loan limits, who’s eligible, and anything else you need to know about FHA loans.

FHA Loan Rates (Novermber 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%

What is an FHA Loan?

An FHA loan is a government-backed mortgage guaranteed by the Federal Housing Administration and issued by private lenders who are FHA-approved. 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

Shop and Compare Loan Offers from Multiple Lenders

Credit Requirements

FHA loans require a 580 scredit score with 3.5% down, or a 580 score with 10% down. But 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.

No Credit History

If you have no credit history then your lender will ask for alternative credit lines, such as rent and phone payments to establish positive payment history

Bankruptcy

Bankruptcy will not disqualify you for an FHA loan. There is a 24 month waiting period after a chapter 7 bankruptcy, or 12 months if you have extenuating circumstances. You must reestablish positive payment history since your bankruptcy was filed.

Late Payments

A single late payment will not disqualify you however you should not have any. more than one late payment on any of your accounts in the past 12 months

Foreclosure

36 month waiting period after a foreclosure, 12 months with extenuating circumstances.

Collections, Judgements, and Federal Debt

FHA rules state that a lender must verify that judgments and Federal debt has been paid, or on a payment plan. Collections will not disqualify you, your lender may require you to pay off collections in certain situations.

More » Complete FHA Credit Requirements

Down Payment Guidelines

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

Credit Score

Down Payment

500-579 credit score

10% down payment

580+ credit score

3.5% down payment

More » FHA Down Payment Guidelines

Down Payment Assistance Programs

First-time homebuyers may qualify for downpayment assistance or grants. You can search for down payment and closing cost assistance programs available in your state on the HUD site here.

To be eligible for down payment assistance your household income should not exceed the maximum threshold based on the number of people in the home.

1 person household

$39,250

2 person household

$44,800

3 person household

$50,400

4 person household

$55,550

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

Down Payment Gifts

FHA allows up to 100% of the down payment funds to be a gift from a friend or family member.

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

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 Property Requirements

Eligible Properties

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

FHA Eligible Property Types

Single-family homes

2-4 unit multifamily properties

Manufactured and mobile homes

Condos and Townhomes

Minimum Property Standards

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.

FHA home inspections are done before closing to ensure the home meets minimum property requirements for an FHA-insured loan. Home inspections cost $250-$400 on average, depending on the square footage of the home.

FHA Mortgage Insurance Premium (MIP)

FHA Loans require a mortgage insurance premium (MIP) which is 0.85% of the loan amount and is required for the life of the loan with 10% or less down.

MIP Duration

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

FHA MIP Rates

The mortgage insurance rate depends on the length of the loan term, loan amount, and the down payment. For most borrowers, the rate will be 0.85% of the loan amount. The rate is recalculated annually based on the principal balance.

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. The amount of closing costs is dependent on your credit score.

Credit Score

Closing Costs Range

Interest Rate

720+

1%-2%

Premium Rate

680-719

1.5%-2.5%

+.50%

620-679

2%-3.5%

+1.00%

Below 620

2.5%-5%

+1.50%

Always compare loan offers from multiple FHA lenders. You can use loan quotes to help you negotiate the closing costs, mortgage rate, and loan terms.

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

CONS

  • Low credit score requirements

  • 3.5 percent down payment

  • Easier to qualify for

  • Low interest rates

  • Down payment can be a gift

  • 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

  • Lower loan limits

  • Includes upfront MIP fee

  • MIP required for the life of the loan

  • Strict underwriting requirements

  • For primary residence only

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.

30-Year Fixed-Rate

The 30-year fixed-rate mortgage is the most common term homeowners select. It will have the lowest monthly payment, and your rate will never increase.

15-Year Fixed-Rate

A 15-year mortgage loan will have a higher monthly payment than a 30-year loan, but more of your payment will go towards the principal balance. You will pay off your loan in half the time and save a ton in interest. 15-year mortgages also have a lower rate than 30-year loans; your mortgage rate could be as much as .75% lower with a 15 yr mortgage.

5/1 Adjustable-Rate

An adjustable-rate mortgage will have a low initial rate for the first five years of the loan. After five years, the interest rate will increase on an annual basis. An ARM mortgage is best suited for buyers who plan to stay in the home for less than five years or plan on paying off the loan in 5 years or less.

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.

Home Equity Conversion Mortgage (HECM)

The HECM is a reverse mortgage program that aims to help seniors aged 62+ convert equity in their home to cash while staying in the home.

FHA Section 245(a) Loan

A mortgage program for recent college graduated who expect their income to increase. Section 245(a) loans start with lower monthly payments that increase over time.

Low Down Payment Home 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.

Conventional 97 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 / Home Possible Loans

Fannie Mae and Freddie Mac created the HomeReady and Home Possible 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. Income limits apply.

Conventional Loans

A conventional mortgage requires a 620 credit score and a down payment of 5%-20%. No PMI required if putting 20% down.

VA Loans

Veterans of the U.S. military are eligible for a VA loan, which requires no down payment or mortgage insurance.

USDA Loans

USDA loans are for low-to-median income homebuyers in rural parts of the country. They don't require a down payment and have the lowest mortgage insurance rate of any home loan of just .35%.

How to Qualify for an FHA Loan

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

Debt-to-Income Ratio

43% to 50% maximum DTI ratio depending on the borrower

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%. 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 debt-to-income ratio requirements are flexible and allow lenders more flexibility on DTI ratios than conventional mortgages.

Employment and Income

FHA loans require two years of stable employment with the same employer or in the same industry.

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.

Credit

A minimum 580 credit score is required with 3.5% down, or a 500-579 credit score with 10% down.

If you have more than $2,000 in unpaid collection debt your lender may require you to pay it off or be on a payment plan.

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

Improve Your Credit Before Applying

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.

Pay down credit card debt

Your credit utilization ratio is the amount of available credit you're using; it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the card's limit.

Don't apply for credit

Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You're also adding debt to your report, which can negatively affect your score.

Pay your bills on time

Your payment history accounts for 35% of your overall score. Don't miss a payment on any bills, set up auto-pay to ensure you don't miss any payments.

Dispute Innaccurate Items

You can dispute accounts you don't believe are accurate with the credit bureaus directly. They will investigate the account and must either verify it or delete it within 30 days.

Get added as an authorized user

If you know someone who has a credit card in good standing with no negative account activity ask them to add you to their account as an authorized user. The entire account history will be added to your credit profile which can increase your credit score.

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.

Loan Documents

You should gather the loan documents you need to apply for a mortgage.

These documents include:

Documents Needed for a Mortgage

• Last two years of W2's from all employers

• Last two years of tax returns

• 30 days worth of paystubs

• Three months of bank statements

• Profit and loss statements if self-employed

• Driver's License

• Divorcee decree (if applicable)

• Bankruptcy paperwork (if applicable)

FHA Loan Facts 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.

What is the downside of an FHA loan?

FHA loans have lower loan limits than conventional loans. They also require mortgage insurance regardless of the amount you use as a down payment.

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, 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 mortgage 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.