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.

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

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FHA Loan Requirements

FHA loans have more lenient borrower requirements conventional loans making them easier to qualify for, especially for first-time homebuyers. If you have at least a 580 credit score you may be eligible for an FHA loan with a 3.5% down payment.

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

FHA Credit Requirements

FHA lenders look at more than just your credit score; what’s on your credit report is just as important. Even if you meet the FHA credit score requirement of 580 if you have negative information on your credit report, such as late payments and collection accounts, your loan application to be denied.

2020 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

Compensating Factors

Borrowers with a credit score below 620 are considered high-risk by mortgage lenders. If you have credit issues, you may need compensating factors such as a large amount in savings or a low debt-to-income ratio to qualify.

Compensating Factors

  • 5+ years with the same employer or in the same industry

  • High income

  • Large amount in savings

  • Excellent credit (720+)

  • 20% down payment

  • Low debt-to-income ratio below 36%

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.

FHA Loan Limits Increased for 2020

The FHA loan limit is the maximum amount you can borrow. The FHA loan limit was increased from $314,515 to $331,760 in low-cost areas and $765,600 in high-cost areas starting Jan. 1st, 2020.

2020 FHA Loan Limits

Low-Cost area loan limit

High-Cost area loan limit

1-Unit

$331,760

$765,600

2-Unit

$424,800

$980,325

3-Unit

$513,450

$1,184,925

4-Unit

$638,100

$1,472,550

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

                            Units

Loan Limit

1-Unit

$1,148,400

2-Unit

$1,470,475

3-Unit

$1,777,375

4-Unit

$2,208,825 

FHA Loan Rates

FHA loans have lower interest rates than other types of mortgage loans. Mortgage rates are currently at all-time lows with a 30-year fixed-rate loan having a rate of around 3.0%.

FHA Loan Rates (September 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+). In order to find out what the interest rate will be on your loan, you must apply with a lender and receive a loan estimate.

Check Today’s Mortgage Rates

FHA Mortgage Insurance (MIP)

FHA loans require mortgage insurance, which is how the Federal Housing Administration is able to guarantee the loan. 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 Premium Rates

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

Length of time MIP is Required on FHA Loans

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 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%

     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

FHA 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.

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 (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 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

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

  • Fixed and adjustable-rate loan options

FHA Eligible Properties

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

FHA Eligible Property Types

  • Single-family homes

  • 2-4 unit multifamily properties

  • Manufactured and mobile homes

  • Condos and Townhomes

FHA Loan Terms

An FHA home 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

Other 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.

Down Payment Assistance

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

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 home 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.
  • 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.

Documents Needed for FHA Loans

  •  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

Conventional Loans vs. FHA loans

Conventional loans are home loans that are not backed by the Government. Instead of the Federal Housing Administration insures the home loan, conventional loans are insured by private mortgage insurance companies.

Conventional Loans vs. FHA loans

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 the 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

Low Down Payment Loan Alternatives

FHA loans aren’t always 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 Loan 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 type of home loan of just .35%.

Facts about FHA Loans Infographic

FHA loan infographic

FHA 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 could not 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?

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