Requirements & Eligibility for a FHA Mortgage
If you’re a first-time homebuyer dreaming of owning a home but don’t know where to start, a government backed FHA mortgage loan could be the answer.
FHA loans provide a lifeline for first-time purchasers or individuals with less than ideal credit.
However, getting pre-approved can feel like navigating a homeownership maze. In this guide, you’ll learn everything you need to know about how FHA home loans work. This includes understanding FHA requirements, loan limits, and more.
Are you ready to get into an FHA mortgage now? Start the process by applying for a mortgage pre-approval and begin the path to your new home today!
What Is an FHA Loan?
An FHA home loan is a loan program insured by the Federal Housing Administration (FHA). It’s designed to help low-to-moderate income borrowers achieve homeownership.
Some top benefits of FHA loans include low down payment, flexible credit criteria, and the different FHA loan options.
FHA Loan Requirements in 2024
Although FHA loan requirements are more lenient than those of other mortgage types, certain standards must still be met. Below are a few basic FHA Loan requirements:
What Credit Score Do I Need for an FHA Loan?
One of the benefits of FHA loans is their lenient minimum credit score requirement. You can qualify with a lower credit score, starting at 500, if you're able to make a minimum down payment of 10%.
The amount you need to put down as a down payment depends on your credit score.
FHA Down Payment Requirements
Another appealing feature of an FHA loan is its low down payment requirement. If your credit score is 580 or higher, you can qualify for a down payment as low as 3.5%.
That’s much lower than the traditional 20% down payment many people assume is necessary when buying a home, whether for a fixed-rate or adjustable-rate mortgage.
Here’s a quick breakdown of down payment requirements:
- 3.5% Down Payment option: For credit score 580 or above borrowers
- 10% Down Payment option: For customers with credit scores ranging from 500 to 579
- Options for gift funds and down payment assistance programs.
Debt-to-Income (DTI) Ratio Requirements
To qualify, the Department of Housing and Urban Development (HUD) requires that your debt-to-income ratio (DTI) doesn’t exceed 43%. This means that your total monthly debts like credit card payments, student loans, and the mortgage—shouldn’t go over 43% of your gross monthly income.
Employment and Income Verification
You’ll need at least 2 years of stable employment history and consistent income. Self-employed borrowers must provide two years of tax returns. Any employment gaps must be explained, and recent job changes might require additional verification. Seasonal or variable income is acceptable if it shows stability over time.
Property Requirements and Eligibility
The property must meet FHA’s safety, livability, and structural standards. It must also be your primary residence and pass an appraisal by an FHA-approved appraiser. Investment or vacation homes don’t qualify.
FHA Loan Limits and Mortgage Insurance Premiums
2024 FHA Loan Limits
The 2024 FHA loan limit for single-family homes starts at $498,257 and goes up to $1,149,825 for a single-unit property in certain high-cost areas 2024. This loan limit will help borrowers find more homes within their budget in this competitive market.
FHA Mortgage Insurance Premiums
FHA loans require private mortgage insurance (PMI) or MIP (Mortgage Insurance Premium), to protect lenders in case of default. You'll need to pay an upfront mortgage insurance premium (UFMIP) at closing, which is 1.75% of the loan amount.
Upfront Mortgage Insurance Premium (UFMIP): This is 1.75% of the loan amount paid either at closing or rolled into the loan.
Annual Mortgage Insurance Premium (MIP): This ranges from 0.15% to 0.75% of the loan amount, depending on factors like the loan length, amount, and loan-to-value (LTV) ratio. These premiums are paid monthly.
Additionally, there's an annual MIP ranging from 0.45% to 1.05%, depending on the loan amount, term, and loan-to-value (LTV) ratio.
FHA Mortgage Rates
FHA mortgage rates are typically lower than conventional rates, thanks to government backing that minimizes risk for lenders. Your credit score, loan amount, and term length all play a role in determining the rate you’ll receive. It’s a good idea to compare current FHA rates from multiple lenders, as rates fluctuate regularly based on market conditions.
FHA Loan Options
FHA loans offer a variety of options to suit different borrower needs. Here’s a quick look at the main FHA loan products available:
FHA Purchase Loans
Perfect for first-time homebuyers, these loans offer down payment options as low as 3.5%, making it easier to become a homeowner.
FHA Streamline Refinance
This refinancing option quickly reduces your interest rate with minimal documentation and no appraisal required, simplifying the FHA Streamline refinancing process.
FHA Cash-Out Refinance*
Access your home’s equity to pay off high-interest debt or finance large expenses, potentially securing lower rates.
FHA 203(k) Rehabilitation Loans**
Combine purchase and renovation costs into a single FHA 203(k) loan, ideal for homes needing significant repairs or updates.
FHA Loan Eligibility and Qualification Criteria
To qualify for an FHA loan, borrowers need a minimum credit score of 500, steady employment and income for at least two years, and U.S. residency or eligible non-resident status.
A debt-to-income (DTI) ratio below 43% is recommended, but exceptions are possible if you’re a strong applicants.
The property must serve as your primary residence and meet FHA’s safety and structural standards. Meeting these criteria ensures access to the flexible financing options FHA loans offer.
Can I Qualify for an FHA Loan with a High Debt-to-Income Ratio?
It depends. Some lenders may approve you with a higher debt-to-income ratio if you have strong compensating factors, like a large down payment or an excellent FICO score. However, in most cases, a DTI above 43% makes it difficult to qualify.
Can I Buy a House with an FHA Loan if I Have a Bankruptcy or Foreclosure in My History?
Yes, you can still buy a home with an FHA home loan even if you’ve experienced bankruptcy or foreclosure. However, you’ll need to wait a certain period. For bankruptcy, you must wait at least two years after the discharge date to apply. If you’ve had a foreclosure, the wait is three years.
Can You Have a Cosigner on an FHA Loan?
Yes, FHA loans allow cosigners. A cosigner can help you qualify if your income or credit score falls short of the lender’s requirements.
Can FHA Loans Be Used for Investment Properties?
No, the property requirements for FHA loans are only available for primary residences. You must live in the home for at least one year before you can rent it out or use it as an investment property.
Why Would I Not Qualify for an FHA Loan?
Despite FHA loans having more lenient requirements than conventional loans, some factors could still disqualify you.
Here are some common reasons why you might be disqualified from an FHA loan:
- High debt-to-income ratio: If your monthly debt payments exceed 43% of your income, it could be difficult to qualify.
- FHA loan limits: Your requested loan amount might exceed the set loan limits in your area, especially in high-cost areas.
- Poor credit history: While FHA loans are more forgiving when it comes to credit scores, a history of missed payments, bankruptcies, or foreclosures can still hinder your approval.
Pros and Cons of FHA Loans
Pros
FHA loans offer flexibility for future homeowners with lower credit scores and smaller down payments, with options as low as 3.5% of the purchase price. These loan products allow higher debt-to-income (DTI) ratios, making qualifying easier for a wider range of borrowers.
FHA loans can be used for various types of homes, such as single-family homes and condos, providing versatility for different home purchase scenarios.
Cons
FHA loans come with mandatory mortgage insurance, which increases your overall borrowing costs and monthly mortgage payments. The strict property standards may limit the type of home that qualifies, and you may face higher monthly payments depending on the loan term and type of mortgage.
Also, closing costs might be higher compared to conventional loans due to additional fees.
Why Some Sellers Do Not Like FHA Loans?
Some sellers may be hesitant to accept offers from FHA borrowers due to stricter appraisal requirements.
There’s also a misconception that FHA borrowers are less financially stable, though this isn’t necessarily true.
Are FHA Loans Hard to Get?
Compared to conventional mortgages, FHA loans are generally easier to obtain. The more lenient credit and income requirements make FHA loans an excellent choice for many borrowers.
However, it’s important to remember, easier qualifications don’t necessarily mean automatic approval.
FHA Versus Conventional Loans
FHA loans are more lenient with credit scores and allow lower down payments, making them a good option if your financial history is limited.
Conventional loans typically have stricter underwriting requirements from mortgage lenders, but they may offer more flexibility, like removing mortgage insurance once you reach 20% equity.
With FHA, mortgage insurance usually remains for the life of the loan. If you have steady income with pay stubs and a strong credit score, conventional loans could be more beneficial.
Get Pre-Approved with Rate Today
Ready to take the next step? Complete our Digital Mortgage application now to see if you can get pre-approved.
In addition to FHA home loans, we are an FHA-approved lender that also offers other loan types such as conventional mortgages, VA loans, and USDA loans.
*Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information
**Credit score and down payment requirements higher for 2-4 unit, investment properties and renovation products.
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