FHA Loan Requirements – How to Qualify for an FHA Loan

BY The Lenders Network

11 minute read

If you want to buy a home but you don’t have 20% to put down, or perfect credit. No worries.

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

But what are FHA Loans and who qualifies?

In this article we’re going to teach you everything you need to know about FHA home loans.

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FHA Loan Infographic

What is an FHA Loan?

FHA stands for the Federal Housing Administration, a Government agency created in 1934 by HUD, The U.S. Department of Housing and Urban Development to increase homeownership in America.

The low credit score and down payment requirements allow more homebuyers to qualify for home loans.

Borrowers are required to pay mortgage insurance (MIP) monthly, usually around 0.85 percent of the loan amount annually.

If a borrower defaults on an FHA mortgage, it is foreclosed on and  HUD will pay the balance to the lender and take possession of the property.

It is then listed as a HUD home on the hudhomestore.com website.

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FHA Credit Score Requirements

To qualify the borrower must have at least a 500 credit score for 90 percent loan-to-value ratio, or 10% down payment. However, it is not likely you will be approved as a subprime borrower with a score below 580.

If a borrower has a 580 credit score they will be required to have just a 3.5 percent down payment.

FHA loan credit requirements

If your credit score is below 580 it is highly recommended that you improve your credit score before applying.

Use our FHA loan calculator to see how much you qualify for

2018 FHA Loan Requirements

  • 500-579 FICO score requirement with a 10% down payment
  • 580+ FICO score requirement for borrowers with at least a 3.5% downpayment
  • 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

View more information in the HUD Handbook HUD 4155.1 here.

First-time Homebuyers

First-time home buyers love FHA loans because of the low credit and down payment requirements.

In 2017 approximately 46% of first-time buyers used an FHA loan to buy their first home.

However, you do not need to be a first-time homebuyer to qualify, you can use FHA loans multiple times.

But since they are only for owner occupied residence you cannot have two FHA loans open at the same time, unless you must move for work or your family outgrows your current home.

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Low Income Buyers

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

In some cases lenders are able to approve up to a 50% DTI ratio.

Many low income borrowers are able to get approved for a home loan through the FHA.

First-time homebuyers with bad credit

Since many first time buyers have poor credit, FHA loans make a lot of sense.

A 500 credit score is needed with 10% down. If you have a credit score of at least 580 you can qualify with just 3.5% down.

Of course having a poor credit history means you will have a higher interest rate and your monthly payments will be higher as well.

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 loan requirements

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 a low credit rating
  • 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 homebuyers

Down Payment Requirements

One of the greatest benefits of FHA home loans is the low 3.5% downpayment, which is much lower than other mortgage programs.

Typically, conventional loans 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.

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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 Closing Costs

Like any home loan, FHA-insured mortgages will have closing costs.

These fees include origination fees, home appraisals, title insurance, and more. Typically, FHA closing costs amount to 2%-5% of the purchase price depending on the lender you use.

You should always compare loan offers from multiple FHA lenders to make sure you’re getting the most competitive rates and lowest fees.

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New 2018 FHA Loan Limits

The loan limits were recently increased for 2018 from  $275,665 to $294,515 for low-cost areas.

This is the maximum loan limits for FHA loans in 60% of the U.S. The limits go up to $679,650 is high-cost areas, such as Los Angeles and San Fransisco.

Units Low-Cost area loan limit High-Cost area loan limit
1 Unit $294,515 $679,650
2 Units $352,950 $814,500
3 Units $426,625 $984,525
4 Units $530,150 $1,223,475

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

# of Units Guam, Hawaii, Alaska, U.S. Virgin Islands
1 Unit $721,050
2 Units $923,050
3 Units $1,115,800
4 Units $1,386,650

Mortgage Insurance Premium (MIP)

FHA loans require private mortgage insurance, referred to as MIP (mortgage insurance premium) or PMI (private mortgage insurance).

There are two types of mortgage insurance you will pay. An annual MIP and an up-front mortgage insurance premium of 1.75% of the loan amount which is often rolled into  the loan.

The annual 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.

MIP Chart 2018

fha mip chart updated for 2017

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 mortgage 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.

FHA Advantages

  • 580 FICO score requirement
  • The FHA mortgage rate is lower compared to a conventional mortgage
  • 3.5 percent dowpayment
  • Downpayment can be a gift from a friend or family member
  • Higher allowed debt-to-income ratios
  • Easier to qualify for
  • Can reduce your monthly payments with an FHA refinance
  • They are assumable
  • No prepayment penalty
  • Sellers can pay up to 6% of the closing costs
  • Non-occupying co-borrowers and co-signers allowed
  • Wide variety of FHA Lenders to choose from

FHA Disadvantages

  • 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 vs conventional loans comparison chart

FHA Property Standards

30 year, 15 year fixed-rate or Adjustable-rate mortgage 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.

Debt-to-Income Ratios

Your debt-to-income ratio, 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 FHA mortgage loans can be as high as 50% in certain cases. However, in most cases you will need a DTI of 41% or lower, 36% is considered a good DTI ratio..

Figure out how much house can you 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 renovation loan will allow you to purchase a property and get up to $35,000 additional cash to make renovations or repairs.

Because 203k rehab 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 Homebuyer Down Payment Assistance

FHA-insured mortgages allow you to use homebuyer programs.

If you are a first-time home buyer you may qualify for down payment assistance or Government grants.

You can search for your available state Government programs on the HUD website.

Good Neighbor Next Door Program – The program helps public school teachers, EMT’s, law enforcement officers, and fire firefighters purchase HUD homes at a reduced price. If you qualify you can purchase a home on the hudhomestore website for 50% off list price.

One Dollar Program – Local Governments can purchase HUD homes that have been on the market for more than 180 days and priced below $25,000 for just one dollar. These homes can be offered to low-income families.

For local county and city down payment assistance programs check out their websites for more information.

FHA Streamline Refinance

FHA streamline refinance infographic

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 apply for an FHA streamline refinance to quickly get a lower rate and lower monthly payments 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-Approved Lenders

FHA loans are offered by private mortgage companies that are approved by the FHA.

Most mortgage companies are FHA-approved lenders and you should not have a hard time finding one.

If you have a poor credit rating then you should find a subprime FHA lender to work with.

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Who can qualify for an FHA loan?

FHA loans are very popular because they are one of the easiest types of home loans to qualify for. If you have a credit score of 500-579 you may qualify with 10% down. If you have at least a 580 credit score the required down payment is 3.5%.

How long does it take to close on a house with an FHA loan?

The average time it takes to close is 48 days. However, the amount of time it takes 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 in a timely manner.

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.

In Conclusion…

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!

The Lenders Network has the largest network of mortgage lenders that specialize in home loans for borrowers with all types of credit scores. We will match you will the best lender based on your specific situation.