FHA Loan Requirements: 5 CRITICAL Facts + 17 Questions (Answered)
FHA Loan Requirements: 5 Critical Facts + 17 Common FHA Questions
The FHA (Federal Housing Administration) is helping turn the American dream of homeownership into a reality. An FHA loan offers borrowers a greater opportunity at qualifying for a loan to buy a home by using a different set of requirements and guidelines that both protect lenders and give home buyers opportunity!
Without further ado, let's dive in and discuss FHA loans in detail
FHA loans are often one of the most misunderstood types of programs that a homebuyer can go with and it is important that we decipher some of these points, so thank you for jumping in! They have proved to be extremely helpful and an important tool for making the American dream of buying a home come true for so many.
Not everyone can afford the strict financial requirements of the mortgage industry we are living in today, so in comes a Federal Housing Administration loan. This is a government-insured loan that has more lenient standards the borrower has to meet and lower down payment requirements, so it is a very popular and effective option for thousands of borrowers. One of the reasons lenders are able to offer this government program is because the borrower is required to pay for mortgage insurance, which in turn ensures the lender if the borrower were to not make good on their mortgage. There are ways to get rid of private mortgage insurance on an fha loan for those of you who used an FHA loan prior to June 2013.
Just like anything else in life, there is some give and take between the borrower and the program that really allows it to benefit all sides involved. The required MI (mortgage insurance) on FHA loans gives lenders a good amount of flexibility to still offer very reasonable interest rates and qualify borrowers based on standards that you may not normally see for other mortgage programs. While FHA loans have mortgage insurance, keep in mind they don’t have the strict down payment guidelines.
The availability of this program certainly helps so many prospective home buyers out there make it happen, and most people don’t even realize it is available to them! Next, we will dissect the ins and outs of how the FHA loan process works.
How does an FHA Loan work?
Loan requirements for the FHA change annually so if you're buying a home in 2018 with an FHA loan make sure you brush up!
The process of the loan getting approved is very important to know because it is likely much different than what you may have read or researched about mortgages in general. First off, you will want to get pre-approved but it is imperative to know that while highly recommended, this is not required to eventually get approved for the loan. The lender will analyze the financial info that you provide to them to see if you would qualify and if so, how much they would be able to lend you for the mortgage. You will do this before you start house hunting, so you know what kind of home you will be able to afford. Thus the “pre” in pre-approval. Most sellers want to see something official from a lender in a way to show good faith towards buying the home.
This will give you a much better chance of being approved, assuming all your financial documents verify the info that you had given the lender originally in an attempt to be pre-approved. Okay good job, cross that step off the list. Once you have the accepted offer on a home you have fallen in love with, you will go to the lender and apply for the mortgage. This is where you will need to list all the important information that you will later have analyzed by the underwriter to see if you are approved. Credit, liabilities, income, and assets are among the sections that need to be completed truthfully. Most lenders will also have an application fee to be paid either upfront or they will just include as part of your closing costs. They must communicate this to you! So if they don’t, definitely ask.
Just like any other home loan, the property will need to be appraised to be sure the value/purchase price is on point and the lender is holding collateral that makes sense. This is done by a 3rd party not chosen by anyone working on your loan so there is no conflict of interest. The main result you will be looking for is for the property to appraise for at least the purchase price. If it does not, it may be time to look at renegotiating the purchase price with the seller or walk away depending on how that goes.
You are making progress! You have submitted all your credit, income, and assets documentation that was requested by the lender and it is ready to be underwritten for a decision. This is a huge step to get past and makes many borrowers very nervous. They will usually condition for more items for you to provide to be fully approved. If there is a major issue found in relation to any of the above categories it could derail the loan. Once initially approved, you are in the driver’s seat to be fully approved and closed the loan. You'll want to start searching for the best mortgage rate. This is definitely the turning point in the process.
Since we are talking underwriting and getting qualified for the loan you are probably curious how you are qualified and what those minimum requirements are. FHA has minimums but the lender can always choose to have stricter standards so it doesn’t mean the end if you aren’t approved by one mortgage lender for FHA because the next lender might be a little more lenient.
There are no maximum income limits like other first time home buyer programs, so don’t worry about that. You just need to be able to show that you can repay the loan. Your monthly liabilities ratio compared to monthly income needs to be within reason. For example, if you make $5,000 a month you will want your monthly housing payment to be under $1,600 and the rest of your monthly payments should be under $2,150. This means you have roughly a 31/43 DTI ratio (31 housing, 43 everything else). This means you would be in great shape for FHA. Lenders can go up to 50% total DTI including housing and all other payments, but they would have to discuss that with you.
The least amount you can put for down payment is 3.5% of the purchase price. Some lenders will accept credit scores as low as 580 with that down payment amount. There are certain loan limits that you need to be under depending on the area you are living in also, so be conscious of that when looking for a home. The upfront MI premium is 1.75% of the loan amount.
Once you have met the remaining conditions that the underwriter first approved the loan with, you will be cleared to close. At the closing is where you will sign all the final paperwork, and there will be tons of paperwork! You will also pay what is remaining to be owed for the down payment and closing costs. Don’t worry about that part because the agents and closing attorneys will be communicating that to you all throughout the process. Look at that, you now own a home!
Of course, you want to cover all your bases for the program so you know if you will definitely be approved. There are far too many to cover in this article, but we will be sure to prepare you as best we can. We have gone over some of the qualifications above but here is a summary so you can take a look at the minimum and at least see where you stand with most lenders and this program.
When putting 3.5% down you can have a minimum credit score of 580, but you actually can go as low as 500 if you have enough assets to put 10% down. There is give and take there if you have better credit than assets or vice versa. Also, don’t be afraid that you are going to get a super high-interest rate because of the lower credit score and down payment amount. This program helps protect against that. They also usually carry lower closing costs and fees because they know they are dealing with borrowers who don’t have a ton of cash to throw at the down payment in the first place. This program can also help if you are a younger person just establishing credit, as it only requires at least 2 tradelines like a credit card and car loan or 2 credit cards on your credit report minimum. If this all fits you, then FHA might be the way to go!
The property has requirements as well that you are trying to buy. You cannot be purchasing an investment property, a flip transaction, and it has to be for a principal residence. It has to be occupied by at least one of the borrowers within 60 days of the closing date. Also, the appraisal is often more strict than appraisals for conventional loans so be aware of that.
Finally, documentation is pretty similar to what you would provide for any other mortgage. The lender will need to verify your SSN by you providing a copy of your card or they will have you sign a form where they can verify through the SSA administration. 30 days pay stubs, W2s, tax returns, 2 months bank statements, are among some of the other documents that will definitely be required. You can go to their website to do your due diligence.
This next topic may be of interest to you more for informational reasons but could come into play depending on how much you are looking to spend on a home. The FHA does have maximum loan limits in play that it will ensure which could change annually. These limits are derived from the county based conventional loan limits for Freddie Mac and Fannie Mae. You just need to keep this in mind when searching for homes because this cannot be changed, it is a set and stone requirement. If this is the only loan program that you may qualify for then you may need to look at less expensive homes in that given area. You can check out these loan limits for the home you want to buy at
The national ceiling is $636,150 and the national floor is $275,665 but again you will want to reference the county limits when you are looking because it’s likely possible and each county is different.
For instance, Mecklenburg County, North Carolina (If you’re buying a home in the Charlotte area) is rising from $271,050 to $280,600 while San Diego County (San Diego, CA) recently raised their loan limits from $562,350 to $580,750. Keep in mind these update annually on January 1 so click here to learn more about your specific FHA loan limits!
This next section may be important for those of you that believe you may be able to qualify for both types of loans. It is important to remember that both have their advantages and disadvantages.
The obvious advantages for FHA include much softer credit standards (need 620 minimum for conventional) and lower down payment amounts. You can have a past foreclosure/bankruptcy and if cleared up still be approved. Also, you have the option to use a relative as a borrower who will not occupy the property to help you qualify if needed. They are also eligible for streamline refinances which allows you to refi cheaper and quicker when rates dip. Finally, many times FHA carries a lower base interest rate than conventional which they are able to do because of the other areas you are paying.
Conventional loans have the huge bonus of not having to pay MI if you are able to put 20% down for the home. No matter the down payment for FHA you will be required to have MI. PMI on a conventional loan will drop off at 78% LTV, but the FHA insurance will last the whole loan if you put down less than 10%. You can also purchase investment and vacation homes with conventional which is not an option for FHA unfortunately. Anything outside the loan limits would need to be conventional as well.
Finally, just a couple notes on important items to know during the loan process. If you are someone that is really tight on that 3.5% down payment, you do have the option to include most closing costs and fees in the loan. Sometimes, you can also negotiate some of them with the seller which you would want to talk to your agent about. Just remember that the 3.5% is completely separate from closing costs and that is required no matter the situation.
You cannot remove MI from an FHA loan by meeting any milestones throughout the term of the loan if you put less than 10% down on a 30-year loan. If you put more than 10% down, then you would be eligible for it to drop off after 11 years. Since this is not the case for most people, another way to get out of it at any time during the mortgage is to refinance to a conventional loan with no PMI. Of course, at that time you will need to be able to meet all of their standards and be at 80% LTV or lower. Just good to know you are not trapped for life.
Ready, Set, Go!
When you are ready to get a mortgage, just remember to factor in all that was discussed as this is going to be a decision that will impact your financial situation for the near and distant future. FHA may not be the best choice for you, but hopefully, this equips you better to make an educated decision. Always consult a loan officer who will be able to help fit you in a program that is best for you.
If you have any past experiences that you believe will be helpful to those viewing this article, please let us know in the comments section below! We would love to hear from you.
- What is an FHA Loan?
- How do I qualify for an FHA loan?
- What are the FHA loan requirements for buyers?
- What are the FHA loan requirements for sellers?
- What is the minimum credit score for FHA loans?
- What are the FHA loan limits?
- How much down payment do you need for FHA loan?
- What is the difference between FHA and Conventional?
- What is the max amount for FHA loans?
- What is Mortgage Insurance on FHA loans?
- Can closing costs be included on FHA loans?
- Are there income limits for FHA loans?
- What are the FHA student loan guidelines?
- Can I use an FHA loan for new construction?
- Can I use an FHA loan for a rehab?
- Can I refinance an FHA loan?
- Can I use an FHA loan after bankruptcy?
What is an FHA Loan?
An FHA (Federal Housing Administration) loan is a mortgage insured program that allows borrowers the possibility of homeownership when other programs may not. FHA loans are a great way to turn the American Dream into a reality! Mortgage insurance will be paid by the borrower and while it may have a bad rap it’s what allows the FHA loan to be possible by protecting the lender from a loss if the borrower defaults on the loan.
Anyone can qualify for an FHA loan if the meet the FHA requirements. Borrowers will need a 3.5% down payment and a credit score of 580 or higher OR a 10% down payment and a credit score above 500. The lower the credit score the more the borrower will pay in interest. FHA loan requirements are not as strict as other mortgage programs.
For buyers, an FHA loan is going to require a 3.5% - 10% down payment. It will also require you to pay mortgage insurance over the life of the loan which isn’t as bad as it sounds. You will also be required to have a credit score of over 500 (580 to qualify for the 3.5% down payment program).
The FHA requirements for sellers include owning the home for at least 90 days. This requirement is put in place to reduce the number of folks using the loan to flip a house. There are certain scenarios where the FHA may waive this restriction but don’t count on it, especially if the resale price exceeds the acquisition cost by greater than 20%.
The minimum credit score for FHA loans is 500 with 10% down payment and 580 with a 3.5% down payment. This means that people with bad credit can still afford a home! The lower your credit score the higher your interest rate will be. The FHA loan is a great loan for folks with low credit scores to be able to buy a home (albeit while paying a premium).
The FHA has a loan limit floor of 65% of the Federal Housing Agency’s conforming loan limit where every county will be different. The FHA calculates the loan limits annually by using a value worth of 115% of the median home price in each area. For instance, in North Carolina, Raleigh and Durham will have different county loan limits even though the two cities are next to one another!
You will need a 3.5% down payment for an FHA loan. However, FHA guidelines state you will need a credit score of 580 or higher in order to qualify for the 3.5% down payment option. If your credit score is between 500 and 579 you will need a down payment of 10%.
There are several differences between FHA and Conventional loans. The main difference is that an FHA loan has a greater likelihood that people can qualify while conventional loans may be a bit more challenging. FHA loans require 3.5% down while Conventional loans require 5% down. FHA loans will have mortgage insurance over the life of the loan. Conventional loans require at least 20% equity in the home. Once you have paid down the mortgage balance to 80% of the home’s appraised value call the lender and ask them to cancel PMI. They are not required to remove PMI until the balance reaches 78%. That’s a big saving for you so make sure to call!
The max amount of an FHA loan depends on what county you live in. Click here to see a list of how each county differs from one another and what the max FHA limit is for your area!
Mortgage insurance on FHA loans is required. It’s a way for people to qualify to buy a home they may not have otherwise been able to buy, however, they will need to pay mortgage insurance. Mortgage insurance is still a good thing because it allows you the possibility of homeownership where other programs may fall short.
In short, yes, your closing costs can be included in an FHA loan. There are specific sets of rules that apply to including closing costs in an FHA loan. You still need to bring a minimum 3.5% down payment. If the seller is paying part of your closing cost expenses another set of FHA rules kick in: “The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value of the buyer’s closing costs, prepaid expenses, discount points and other financing concessions."
No. There are no income limits or restrictions that prohibit you from qualifying for an FHA loan. As long as you meet the other FHA requirements and guidelines you have the opportunity to use an FHA loan to help when purchasing a home.
The FHA once allowed lenders the option to exclude student loans from a borrower’s debt-to-income ratio. This is no longer the case. The FHA summed up their decision to make the change to their guidelines by stating ‘Debt is Debt.’ Student loans will now play a factor in the FHA requirements and guidelines when qualifying for a loan.
Yes. You can use an FHA loan for new construction no matter if the home is to be built or is an inventory home ready for move-in. The same FHA requirements and guidelines will apply to this loan known as the ‘one-time close.’ The one-time close allows lenders flexibility to offer FHA loans to borrowers who want to build a new house, buy a manufactured or modular home. The FHA one-time close allows lenders to dictate what types of homes will be included in their one-time close guidelines.
Yes. Known as the FHA 203(k) rehabilitation mortgage. This FHA loan allows lenders and borrowers to use an FHA loan in order to rebuild or rehab a home. Each lender will have different guidelines on what they require to meet the loan requirements. It is possible to use an FHA loan for a rehab.
Yes. You can refinance an FHA loan to a conventional loan or even a different FHA loan. Refinancing an FHA mortgage to conventional loan makes sense when your goal is to remove the mortgage insurance from your FHA loan. In some cases, especially when you intend to own the home for a long time, refinancing an FHA loan can make sense. There is a large cost to refinancing though!
Borrowers are typically ineligible for an FHA loan after Chapter 7 bankruptcy until two years have passed. There are times when a medical emergency or a death to a spouse, or any other life-altering event can cut the wait time down to one year. It takes three years for an FHA loan if you had a foreclosure, short sale or deed in lieu of foreclosure.
Co-Authored by Realtor, Ryan Fitzgerald of Raleigh Realty and Mortgage Lender, Mark McLaughlin of Guaranteed Rate