FHA loans aim to make homeownership accessible to many middle-class Americans. They are ideal for those who can manage mortgage payments but may struggle to qualify for a standard home loan.
FHA loans have long been a preferred option for first-time homebuyers and others, thanks to their accommodating requirements. This popularity is evident, as FHA loans account for over 490,000 single-family purchase loans in 2023.
So what do you need to qualify for an FHA loan? Here’s a closer look at the various requirements of an FHA loan and what you need to do to meet them.
How Do FHA Loans Work?
FHA loans are government-backed mortgages that help people buy homes with less strict credit and down payment requirements compared to other loan types. Essentially, the Federal Housing Administration (FHA) insures these loans.
So if a borrower defaults, the FHA covers the lender’s losses, allowing lenders to offer these loans to individuals who might not qualify for standard mortgages, like first-time homebuyers.
FHA loans require a lower minimum down payment and have more flexible credit requirements, making homeownership more accessible for many people. However, borrowers must pay for mortgage insurance, which protects the lender in case of default.
FHA Loan Requirements
FHA loan guidelines are typically more flexible than other loan programs. Here’s a quick overview of FHA home loan requirements:
- Minimum down payment: 3.5% to 10% of the purchase price, depending on credit score
- Credit score: Require around 580 FICO score, but may accept 500-579
- Income: No specific income limit, but your debt-to-income ratio should be less than 43%
- Occupancy: FHA loans are only for primary residences
- Mortgage insurance: Mandatory upfront and annual premiums
- Loan limits: Specific limits cap how much you can borrow, which vary by region
- Interest rates: Typically lower due to government-backing
- Inspection: An appraisal is required and the property must meet certain safety, security and soundness standards
Now, let’s take a closer look at each of these requirements.
FHA Down Payment Requirement
A key aspect of FHA loans is the down payment. Borrowers can put down as little as 3.5% if their FICO credit score is 580 or above. Those with a credit score under 580 must contribute a minimum of 10% and may find securing a lender more difficult.
For FHA loans, the down payment can be funded through gifts or grants from approved sources like family or friends but not from the seller, broker, home builder or any other party benefiting financially from the property sale.
FHA Credit Requirements
You can technically qualify for an FHA loan with a credit score as low as 500, but finding a lender to approve such a low score may be difficult. Most lenders prefer scores ranging from 580 to 620, and securing approval with a score below that often requires extensive searching.
Loans with scores under 580 also attract higher interest rates and require a minimum 10% down payment. However, lenders may also consider borrowers with no established credit history, using alternative credit scoring based on non-loan payment records like rent and utility bills.
FHA Loan Income Requirements
While FHA loans do not have specific minimum income requirements, borrowers must demonstrate a stable income and the ability to repay the mortgage. The key factors considered include the borrower’s debt-to-income ratio (DTI), which should typically not exceed 43% of their gross income. However, some FHA lenders may accept DTI ratios up to 50%.
This ratio helps ensure that the monthly mortgage payments are manageable in relation to the borrower’s income and other debts. Keep in mind that FHA guidelines can be flexible, and lenders may make exceptions based on the overall credit profile.
FHA loans require borrowers to use the financed property as their primary residence. This means you must move into the home within 60 days of the loan closing and live there for at least a year.
These rules are designed to ensure FHA loans are used for personal homeownership rather than for investment or rental purposes, maintaining the program’s focus on aiding individual and family home purchases.
FHA Mortgage Insurance
Every FHA home loan mandates mortgage insurance, which compensates for the FHA’s insurance costs. This includes an upfront mortgage insurance premium and an annual premium.
The upfront insurance premium is a one-time fee equal to 1.75% of the loan amount and can be rolled into the loan amount. The annual premium varies based on your down payment and is incorporated into your monthly mortgage payments over 12 installments each year.
FHA loan mortgage insurance must be paid for the life of the loan unless your initial down payment is 10% or more. If a borrower puts down more than 10% of the loan amount, they’re only required to pay the monthly mortgage insurance for 11 years.
FHA Loan Limits
FHA loan limits vary based on location and housing type. These limits, set by the Department of Housing and Urban Development (HUD), reflect local home prices and vary from one county to another. The FHA updates these limits annually, so it’s important for potential borrowers to check the current limits in their specific area.
In 2024, the maximum amount available to borrow with an FHA loan in most areas is $498,257, but it can reach up to $1,149,825 in high-cost areas. This ensures that the FHA program remains accessible to a wide range of borrowers while adapting to different real estate markets.
FHA Interest Rates
FHA interest rates are considered competitive due to the government backing, which allows lenders to offer you a lower rate. However, your interest rate depends on several factors, including the current market, your income, credit score, loan amount, down payment amount, DTI ratio and more.
FHA Inspection Requirements
While FHA loans don’t require a home inspection, they do require a home appraisal. Your lender should help you locate an FHA-approved appraiser who will visit the property and do a thorough check of the home.
Some common issues include foundation damage, lead-based paint or asbestos, not having proper drainage or faulty utilities. The goal is to make sure the home passes the FHA’s minimum property standards and is safe to live in overall.
» MORE: See today’s refinance rates
FHA Refinance Requirements
If you’re considering refinancing your home through the FHA, it’s important to understand the specific requirements. The FHA offers several refinancing options, each with its own criteria.
Whether you’re looking for a simpler process with a Streamline Refinance, needing cash from your home equity or aiming to refinance for renovations with a 203(k) Rehab Loan, the FHA has tailored solutions.
To ensure you meet the qualifications, such as existing FHA loan status, timely payment history and occupancy requirements, check out our FHA refinance page for more detailed information and guidelines.