FHA Loan Requirements, Tips, and Advice

Updated August 28, 2024

Due to lower requirements, FHA loans help break down the barriers to homeownership in the United States. If you do not have the 20% down payment required for most conventional mortgages, you are in luck. An FHA loan requires a down payment lower than that. If you have just suffered a foreclosure or a bankruptcy, you will have to wait less than half the time of a conventional loan to qualify. Lenient gift funds and low closing costs are additional perks.

However, there can be downsides. After weighing the drawbacks, you might decide it is better to shop for a less expensive home or save up for a conventional mortgage.

To give you a better understanding of the ins and outs of this loan, Mortgage Professional America has listed everything you need to know about FHA loan requirements. We will also explore how this type of loan works, its advantages, and more. For the mortgage professionals who frequent our website, this is the perfect article to share with a client who has a question about this type of loan and its requirements. Feel free to send this to them!

What are the FHA loan requirements?

An FHA loan is a popular mortgage option backed by the Federal Housing Administration (FHA) for home buyers in the country. Since FHA loans feature more lenient requirements compared to conventional mortgages, they are suited for first-time and low-to-moderate income buyers.

To qualify for this type of loan, here are the factors to consider for FHA loan requirements:

1. credit scores
2. minimum down payments
3. debt-to-income ratios
4. mortgage insurance
5. loan limits

Here is a breakdown of each factor with the corresponding FHA loan requirements:

1. Credit scores

For the initial FHA loan requirement, your credit score can be as low as 500. However, you would need to make a down payment of at least 10%. A minimum credit score of 580 is more common and preferable. For comparison, you usually need to have a minimum credit score of 620 for a regular loan.

If your credit score is on the lower end, you will likely have to compensate with the following:

• higher down payment
• better debt-to-income (DTI) ratio
• better housing expense ratio

2. Minimum down payments

The FHA loan requirement for down payment is 3.5%. You will need to pay this minimum amount if your credit score is 580 or more. If your credit score is less than 580 (500 to 579), you will have to make a 10% down payment.

Check out this video about 10 FHA loan down payment tips and tricks:

Want to know more about down payments and other things to consider? Find out everything you need to know about the average down payment on a house in this article.

3. Debt-to-income ratios

To apply for an FHA loan, your debt-to-income ratio (DTI) has to be lower than 45% if your credit score is under 580.

4. Mortgage insurance

Regardless of the down payment, you have to pay mandatory insurance premiums (MIPs) for an FHA loan. This means an upfront payment and monthly premiums. However, you can roll the upfront payment into the loan.

If you put down 10% or more, you will have to pay MIPs for a shorter period. If you put down less, you must pay the premiums throughout the loan's life.

5. Loan limits

The FHA sets limits on the maximum loan amount that they will insure. These limits are higher in more expensive housing markets and lower in less expensive areas. For high-cost areas, such as major cities, the FHA loan requirement limit is $1,149,825. In lower-cost regions, the limits are set by county. For a single-family home in these regions, the limit is capped at $498,257.

If the home has multiple units, such as a duplex or triplex, the FHA loan limits may be higher. These higher limits reflect the increased cost of these multi-unit properties.

Is getting an FHA loan a good idea?

One of the main reasons for an FHA loan is to help anyone who might not qualify for a conventional mortgage buy a home. There are also many benefits that come with an FHA loan, from competitive FHA rates to low down payment requirements.

While there are both advantages and disadvantages to FHA loans, let’s look at 5 reasons why getting an FHA loan might be a good idea:

1. easy credit qualifications
2. short qualifying time after bad credit
3. low down payment
4. more lenient gift funds
5. low closing costs

Let’s take a deeper dive into the 5 reasons for an FHA loan:

1. Easy credit qualifications

Compared to conventional loans, FHA loan requirements are less strict. In fact, an FHA loan is one of the easier loans you can qualify for—especially if you have poor credit. But while the minimum credit score for an FHA loan is 500, your required loan-to-value (LTV) ratio must be 90%. Keep in mind, though, that lenders can set their own minimum credit score, which are called overlays. For instance, an FHA credit score of 620 is a common lender overlay.

Compensating factors also make qualifying for an FHA loan even easier. This means that you can provide proof of your creditworthiness and additional factors to bolster your application. Some examples of these compensating factors include:

• low debt
• residual income
• increased earning potential
• verified cash reserves
• minimal housing payment increase
• substantial non-taxable income

2. Short qualifying time after bad credit

While past foreclosures and bankruptcies can make a mortgage more difficult, FHA loans offer the chance to get a mortgage after you have had a negative credit event. For instance, you can get an FHA loan two years after a Chapter 7 bankruptcy waiting period. On the contrary, you would have to wait four years for a conventional loan.

Following a foreclosure waiting period, you can get an FHA loan in three years versus having to wait seven years for a conventional loan. In other words, you have a better chance of getting an FHA loan sooner than a conventional loan after a negative credit event.

Not sure about getting an FHA loan or a conventional one? Know the pros and cons before you decide by watching this video:

3. Low down payment

For an FHA loan, you will need less time to save for a down payment on a home than you once thought. It is because they are designed to help borrowers who do not have the usual 20% to put down. This is especially beneficial in more expensive markets where higher down payments present a barrier to homeownership.

Keep in mind, however, that the FHA loan requirement for down payments is dependent on credit score. For instance, if you have a credit score under 580, you will have to make a higher down payment. If your credit score is 580 or higher, your down payment will likely be 3.5%.

4. More lenient gift funds

You can get help to pay your down payment if you do not have the money. For this FHA loan requirement, you can get a gift fund from:

• family members
• close friends
• employer
• union
• government down payment assistance program

But to be clear, a gift fund is just that—a gift. There cannot be any expectation of repayment. After you receive the gift fund from someone or from an organization, you will have to document it in a gift letter. If you are unsure what this looks like, you can ask your loan officer to provide an example. You can also read the guidelines from the official FHA loan documentation.

5. Low closing costs

Sellers can pay up to 6% of the sales price toward some of the homebuyer’s closing costs. Closing costs for FHA loans can average between 3% and 5% of the loan amount. If you negotiate with the seller to pay for some of these, it can help you move while paying less.

Here are some common closing costs:

• homeowners' insurance
• lender fees
• property taxes
• title insurance
• escrow fees

You can also pay less upfront if you roll over the closing costs into your loan. Another option is to pay slightly more in your interest rate. In that case, your lender will give you credit to help pay your closing costs.

Want to know more about closing costs? Read this article on what closing costs are and how they are estimated.

What is the FHA?

The FHA is a government agency which is part of the US Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders. The FHA insures mortgages on the following:

• single-family homes
• multi-family properties
• residential care facilities
• hospitals in the US and its territories

Mortgage insurance from the FHA protects lenders against losses. This is done by paying a claim to the lender for unpaid principal balance if a property owner defaults on their mortgage. Since this alleviates risk, lenders can offer more mortgage options to home buyers. Qualifying for this mortgage insurance means meeting the FHA loan requirements listed above.

The FHA generates its own income by collecting mortgage insurance premiums from borrowers through lenders. The income is then used to operate the FHA’s mortgage insurance programs which benefit renters, home buyers, and communities.

Why FHA insures loans

The FHA insures mortgages that are issued by the following financial institutions:

• banks
• credit unions
• commercial mortgage lenders
• non-banks and other lenders

The main reason for this insurance is to protect lenders if there is a default on the loan. Because of this setup, FHA lenders can offer more favorable terms to borrowers who would otherwise have more difficulty qualifying for a home loan.

A brief history of the FHA

The FHA was created as part of the National Housing Act of 1934 to alleviate foreclosures and to help make owning a home more affordable. In fact, the FHA established 20% down payment on a property as the new normal by insuring mortgages up to 80% of the property’s value.

Prior to this, homeowners could only borrow between 50% and 60%. Now, the FHA has been insuring loans for more than 40 million home loans in the US since 1934.

Interested in knowing more about the history of the FHA? Watch this short clip:

What are the advantages of getting an FHA loan?

The most obvious advantage of getting this type of loan is the flexibility it offers. FHA loan requirements are less restrictive and more forgiving as compared to other loan conditions. This is especially true when it comes to the down payment.

Other advantages are the easy down payment and low credit score criterion. For most buyers these days, the traditional 20% down payment required for most loans represents a major obstacle to homeownership. But if you get an FHA loan and reach the required credit score, you can make a down payment that is more affordable.

Is there a downside in submitting FHA loan requirements?

While there are many advantages to getting an FHA loan, there are also downsides. For instance, a small down payment could be a good indication that you are not yet ready to take on a mortgage. If you are only able to make the 3.5% down payment, it could mean purchasing a property is too risky for you.

With this, you may want to search for a less expensive property or hold off until you can save up enough for a larger down payment. Just keep in mind that the more money you borrow, the more interest you will have to pay. Ultimately, it means that your home will be more expensive in the long run.

Some downsides to FHA loans include:

• the home must meet strict health and safety standards
• the home loan amount must meet the conforming limit for the area (i.e., no jumbo loans)
• FHA mortgage insurance lasts the entire loan term with a down payment of under 10%

FHA loan requirements for first-time home buyers

Due to the flexibility and especially the lower down payment, an FHA loan is a great option for first-time home buyers. This type of loan is also popular among aspiring homeowners who have little savings or have poor credit scores. The lenient FHA loan requirements attract these buyers since it gives them a chance to own a property despite limited financial capacity.

Still, it is important for home buyers, whether they are the first-timers or not, to weigh all options before deciding to go for an FHA loan. And if you want to be sure about the type of home loan that best suits your personal goals and financial means, hire a mortgage broker. To find the best one for you, check out our Best in Mortgage page.

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