The Federal Housing Administration (FHA) offers mortgage insurance on loans made by FHA-approved lenders. FHA mortgage insurance protects lenders against losses resulting from defaults on home loans. FHA insures mortgages on single-family and multifamily homes in all 50 states, Washington, D.C., and U.S. territories.
FHA loans have become widely popular, especially among first-time homebuyers, due to their relatively low down payment requirements and flexible credit standards compared to conventional loans. However, FHA loans do come with specific eligibility criteria that borrowers must meet.
FHA Loan Credit Score Requirements
To qualify for the best terms on an FHA loan in 2024, you’ll generally need a minimum credit score of 580. Borrowers with credit scores as low as 500 may still qualify, but they will need to make a down payment of at least 10%.
The FHA does set these minimum credit score thresholds, but individual lenders are allowed to set their own borrowing standards above these minimums. Many lenders prefer scores of 620 or 640 and above for FHA loans.
If your credit score is below 600, be prepared for the possibility that your FHA loan application may need to go through a manual underwriting process. Manual underwriting takes into account compensating factors beyond your credit score to determine your ability to repay the loan.
Having a poor credit history doesn’t automatically disqualify you from getting an FHA loan, but expect much more scrutiny from lenders. Past issues like bankruptcies, foreclosures, and collections accounts on your credit report can impact your eligibility and lead to higher interest rates.
FHA Down Payment Requirements
FHA loans are popular because they allow down payments as low as 3.5% of the purchase price. This assumes you have a credit score of at least 580. If your score is 500-579, you’ll have to make a minimum down payment of 10%.
Conventional loans typically require a 20% down payment to avoid private mortgage insurance (PMI). The low down payment feature makes FHA financing attractive to first-time homebuyers who haven’t had as much time to accumulate savings.
Gift funds and downpayment assistance programs can help you come up with the down payment on an FHA loan. FHA rules allow relatives or non-profits to gift you the cash. Downpayment assistance programs through state and local governments provide funds in the form of grants or low-interest second mortgages.
Seller concessions can also help cover your FHA closing costs, potentially bringing your out-of-pocket expenses to zero. FHA allows sellers to pay up to 6% of the home’s purchase price toward the buyer’s closing costs and prepaid items.
FHA Mortgage Insurance Requirements
FHA loans require you to pay mortgage insurance premiums (MIP) to protect the lender from losses in the event of default.
Upfront Mortgage Insurance Premium
You’ll pay an upfront MIP of 1.75% of the base loan amount. This premium can either be paid entirely at closing or financed into your loan amount.
Annual Mortgage Insurance Premium
The annual MIP varies based on your down payment amount and loan term:
- For loans with less than a 10% down payment, the annual MIP is 0.85% of the loan amount.
- For loans with 10-15% down, the annual MIP is 0.80%.
- For loans with over 15% down, the annual MIP is 0.45%.
On a typical 30-year FHA loan with a 3.5% down payment, the annual MIP works out to 0.85% of the loan amount divided by 12, or 0.07083% monthly.
For loans with less than 10% down, FHA guidelines require you to pay the annual MIP for the life of the loan. If you put 10% or more down, you only need to pay the annual MIP for 11 years.
The only way to remove FHA mortgage insurance is to refinance into a conventional loan once you’ve built up enough equity to do so.
FHA Loan Amount Limits
The maximum FHA loan amount you can borrow depends on which county you live in. The FHA sets maximum “conforming” loan limits for each U.S. county based on median home prices in that area.
For a single-family home in most counties, the 2024 FHA loan limit is $420,680. High-cost areas like San Francisco and New York City have much higher limits, exceeding $800,000. You can look up the FHA loan limits for your specific area using HUD’s loan limit lookup tool.
For 2-4 unit multi-family properties, the FHA loan limits increase. However, you must intend to occupy one of the units as your primary residence. The FHA does not insure loans for pure investment properties.
FHA Debt-to-Income Ratio Requirements
As part of assessing your ability to repay the mortgage, lenders will review your debt-to-income (DTI) ratio. FHA guidelines say your total monthly debt payments should not exceed 43% of your gross monthly income.
Of that 43% total debt ratio, no more than 31% should consist of your proposed mortgage payment and any existing housing expenses. This is known as your front-end DTI.
Some lenders may be willing to stretch these DTI limits through a manual underwriting process if you have a lot of assets or other compensating factors. But in general, it’s wise to keep your DTI within FHA’s guidance.
Refinancing an Existing FHA Loan
If you currently have an FHA loan, you may be interested in refinancing to a lower interest rate. FHA streamline refinances allow you to refinance with limited documentation and appraisal requirements.
To qualify for an FHA streamline refinance:
- You must have made at least six months of on-time payments on your current FHA loan.
- The new loan amount can’t exceed your current loan balance minus any refund of your upfront MIP (if financed with the original loan).
- Your existing FHA loan must not be delinquent or in default.
FHA streamlines let you roll your closing costs into the new loan amount. You can also switch from an adjustable-rate to a fixed-rate FHA mortgage this way. Streamline refis don’t require any home appraisal or income documentation.
Applying for an FHA Loan
Follow these key steps when applying for an FHA mortgage:
1. Check your credit and get pre-approved
Pull your credit reports and check for any errors or discrepancies. Pay down balances and take other steps to improve your credit score before applying. Shop around with a few lenders to get pre-approved. Compare the interest rates and fees quoted on the loan estimates.
2. Find a home and make an offer
Once pre-approved, you can confidently start searching for homes within your price range. Make an offer and submit your pre-approval letter to the seller.
3. Complete the full mortgage application
After your offer is accepted, complete the full application forms and submit documentation of your income, employment, assets, and debts to your chosen lender. Be responsive to any additional requests for documentation.
4. Get an appraisal and home inspection
The lender will order an appraisal to verify the home’s value. Get your own home inspection to uncover any defects unknown to the seller. Submit requests for repairs based on the inspection findings.
5. Approval and closing
If approved, your lender will provide a loan estimate with the final loan costs. Review this carefully. Schedule a closing date once all conditions are cleared. Bring certified funds and a photo ID to the closing appointment to get your keys!
The Bottom Line
FHA loans provide a path to homeownership for buyers who may not qualify through conventional channels. Credit standards are more flexible, and down payments as low as 3.5% make these mortgages appealing, especially to first-timers.
But FHA home loans still have guidelines borrowers need to meet, including minimum credit scores, debt-to-income ratios, and down payments. Understanding these key eligibility criteria helps you evaluate if an FHA loan is right for your situation.
Be sure to work with an approved FHA lender who can walk you through the documentation and approval process. Shop around to compare rates and fees across multiple lenders. Come prepared with a strong credit profile and steady income to improve your chances of getting approved on favorable terms.
While they involve upfront and annual mortgage insurance premiums, FHA loans open the door to ownership for many buyers. The low down payment feature also reduces the upfront cash needed to buy and makes your first home more affordable overall.
FHA Loan Requirements FAQs
Do FHA loans have income limits?
No, FHA does not set any maximum income limits to qualify for an FHA-insured mortgage. Your income just needs to be enough to support the monthly mortgage payment and other debts.
What FICO score is needed for an FHA loan?
The minimum FICO score for an FHA loan is 500, but scores of 580 or above are preferred to get the best rates and terms. Each lender sets their own credit score cutoffs above FHA’s minimum.
How much down payment is needed for an FHA loan?
FHA allows down payments as low as 3.5% with a credit score of 580 or higher. You need at least 10% down if your score is 500-579. Gifts and grants can help cover the down payment.
Can I remove FHA mortgage insurance (MIP)?
For FHA loans with less than 10% down, MIP must be paid for the life of the loan. With over 10% down, MIP cancels after 11 years. The only way to remove MIP earlier is to refinance into a conventional loan.
Are there loan limits on FHA loans?
Yes, FHA sets maximum loan limits for each U.S. county based on median home values in that area. Most counties have a limit of $420,680 for a single-family home in 2024. High cost areas can go up to $970,800.
Can I buy a condo with an FHA loan?
Yes, you can purchase a condominium with FHA financing, provided the condo development is approved by FHA. Certain owner-occupancy ratios and budget allocation requirements must be met for project approval.
What credit score is needed to refinance an FHA loan?
To qualify for an FHA streamline refinance, most lenders require a minimum credit score around 580. No appraisal or income verification is needed if you’ve made 6 months of on-time payments on your current FHA loan.
Can I use gift funds for an FHA down payment?
Yes, FHA allows down payment gift funds from your close family members, employer, charitable organizations, or government agencies. Lenders require a gift letter proving the funds don’t need to be repaid.
How long do I have to wait after a short sale to get an FHA loan?
After a short sale, you must wait 3 years from the date the sale was finalized to qualify for a new FHA mortgage. If there were extenuating circumstances, you may qualify for an exception to shorten the waiting period.
What debt-to-income ratio is needed for an FHA loan?
FHA wants your total monthly debt payments to stay under 43% of your gross monthly income. And your mortgage payment plus housing expenses shouldn’t exceed 31% of your income (front-end ratio).
Can I buy investment properties with an FHA loan?
No, FHA loans are only for primary residences you plan to occupy. All borrowers must plan to move into the home within 60 days and occupy it for at least one year. The FHA does not insure loans for pure rental properties.
In another related article, How to Become an Appraiser on the FHA Roster: A Comprehensive Guide
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