FHA Loan Requirements

Do I qualify for an FHA loan? This is a common question posed by first-time homebuyers and those who have heard how the Federal Housing Administration (FHA) can provide a way to buy a home, even with less than ideal credit. Like any type of mortgage, there are specific guidelines, including a minimum credit score for an FHA loan and how much down payment is required.

FHA qualifications fill hundreds of pages, but they generally fit into two categories: borrower requirements and home requirements. We’ll break down each and finish with the documentation you’ll need for qualifying for an FHA loan.

Borrower requirements for an FHA loan

The FHA is part of the U.S. Department of Housing and Urban Development (HUD). HUD creates FHA guidelines, but lenders ultimately determine who qualifies for an FHA loan. Borrowers must meet specific financial requirements with their credit history, down payment, and income.

FHA minimum credit score

The FHA is known for having less strict guidelines for credit scores. The minimum credit score for an FHA loan is 500, but each lender may have their own requirements, called overlays. A common requirement for an FHA loan credit score is 620, though some lenders will go as low as 580.

Conventional mortgages usually require a buyer to have a credit score above 620. That’s why the credit score requirements for FHA loans are so appealing. But keep in mind the higher your score, the better terms you’ll be offered. That includes the FHA minimum down payment.

FHA minimum down payment

The down payment requirements for an FHA loan depend on your credit score. If your score is at least 580, which most lenders will require anyway, you can enjoy a low down payment of just 3.5 percent. If your score is 500 to 579, you'll need a 10 percent down payment based on the sales price of the property.

Although there is no zero down option like VA loans offer, there are ways to get into a home with an FHA loan with little – or possibly no – money down.

• Gift Funds – Gift funds are a common way for borrowers to meet the FHA loan down payment requirements without paying for it out of pocket. The money has to be a gift and cannot be expected to be repaid. This gift can come from a relative, close friend, an employer or labor union, a charitable organization, or a government agency or public entity that provides down payment assistance. You'll need to document the contribution with a gift letter.
• Down Payment Assistance – Many local cities, county, and state governments offer first-time homebuyer down payment assistance. But these programs can take longer, and not all lenders work with them. Make sure to see what's available in your area.

For example, PenFed Foundation offers homebuying assistance with Dream Makers. Matching grants are available for eligible borrowers. Although most applicants will still need a down payment, this program can help cover some of the down payment and closing costs required.

• Seller Concessions – Sellers can contribute up to 6 percent of the sales price toward the borrower's closing costs, but they aren’t required to. These can go toward the closing costs, like mortgage discount points, appraisal costs, and attorney fees, but not the down payment. If you want the seller to help pay for your closing costs, make sure it’s written in the contract and called out to the seller’s real estate agent.

FHA loan income requirements

The guiding factor in any loan is demonstrating a borrower can repay the debt. Therefore, you must have a consistent income that can be documented. That can include a job, self-employment income, social security, pensions, and child or spousal support.

Additionally, lenders examine two ratios as part of income requirements for an FHA loan.

• Mortgage Payment to Gross Income – Another important income requirement for an FHA loan is mortgage payment to gross income. This ratio sets a limit for how much mortgage you can realistically afford based on your gross (pre-tax) income. To qualify for an FHA loan, it cannot exceed 31 percent. Your maximum monthly mortgage payment includes interest, property taxes, insurance, and other expenses.

For example, an annual household income of $78,500 is just over $6,500 per month. With that income, the total mortgage payment, including the costs mentioned, can't exceed $2,028 per month ($6,500 x .31 = $2,015) . If your gross family income is $5,000 per month, your total housing can't exceed $1,550 ($5,000 x .31 = $1,550).

• FHA Debt-to-Income Ratio (DTI) – Another important income requirement for an FHA loan, DTI compares your total debt to pre-tax income. The lower, the better. A lower DTI means you have more money to put toward a mortgage payment. Most FHA lenders will require 43 percent or lower, which is more lenient than other loan types. Some lenders may accept a 50 percent DTI as part of FHA loans income requirements.

DTI includes your housing costs and recurring bills like credit cards and car loans. To see how the following scenarios lead to an acceptable or unacceptable DTI, we divide the total monthly debts by the monthly income. For example: $2,828 ÷ $6,500 = .435

Home requirements for an FHA loan

Whereas the FHA is less strict on credit scores and DTI, they are more stringent on the home's condition and what it will be used for. There are also property value limits in place as part of FHA loan home requirements. For these reasons, you may see some home listings on sites like Zillow or Trulia that say that they are not approved for FHA funding.

FHA loan limits

FHA loan limits are updated annually and vary based on location. Limits are influenced by the conventional loan limits set by Fannie Mae and Freddie Mac. In 2022, the single-family maximum FHA lending amount ranged from $420,680 to $970,800.

Find the FHA loan limits by county via the search tool on the HUD website.

If you’re considering an FHA loan to buy a home, be sure to know your county’s limit before starting your search. Tell your real estate agent so they can show only properties that meet your guidelines and help you work with the seller.

Owner occupancy

FHA funding is only for owner-occupied properties. You can't use FHA funding to buy a second home, a vacation home, or investment properties. You may be able to buy a multifamily building of up to four units as long as you have landlord experience and live in one of the units as your primary residence.

At least one obligated borrower must live in the home as a primary residence. If there are two or more borrowers, but one or more is not living in the property, the maximum mortgage is a 75 percent loan-to-value (LTV) ratio.

FHA appraiser guidelines

Every home purchased with an FHA mortgage must meet the program’s minimum property standards to ensure it is in safe and adequate condition. A certified FHA appraiser will review the property to evaluate its worth and if it meets the FHA inspection requirements.

Property guidelines are stricter for an FHA loan, so it's not uncommon for the appraiser to call out certain things that need to be fixed before funding. These can include:

• Dry rot (interior and exterior)
• Broken windows
  
• Exposed wiring
  
• Exterior doors that don't close right
  
• Missing appliances
  
• Old roofs that won't last for three more years

The appraisal is completed by an FHA-certified appraiser. While their standards may be higher than a traditional appraiser, it is no substitute for a true inspection. It’s generally recommended to have an inspection and an appraisal before purchasing any property.

Mortgage insurance premium (MIP)

Regardless of your down payment, every home purchased with an FHA loan comes with mortgage insurance to protect the lender in case of default. This is a contrast to conventional loans, which require private mortgage insurance (PMI) only until a borrower reaches 20 percent equity.

With MIP, it depends on your down payment. For a down payment of under 10 percent, MIP is paid for the loan's entire life. With a 10 percent down payment or more, the MIP is paid for the first 11 years.

MIP includes an up front mortgage insurance premium (UFMIP) as well as an annual premium that’s paid monthly.

• Up Front Mortgage Insurance Premium (UFMIP) – Upon closing on an FHA loan, there is an upfront mortgage insurance premium of 1.75 percent of the loan amount. This can be rolled into the loan or paid as a closing cost.
• FHA Monthly Insurance Premium (MIP) – There is also an annual MIP that can range from 0.45 percent to 1.05 percent depending on your loan parameters. This is usually split into monthly installments as part of your mortgage payment.

MIP is often viewed as a disadvantage of FHA loans, but it’s not necessarily a reason to avoid them. In some cases, an FHA loan payment with MIP can be lower than a conventional loan without MIP – especially if your credit is less than stellar. Plus, MIP is what makes the FHA home loan program possible for millions of Americans to become proud homeowners.

Documentation requirements

Several documents are required when you apply for an FHA loan. Being prepared and organized will help the process go more smoothly. Depending on your situation, your lender may require other documents before final FHA loan approval and closing.

A borrower's income is typically considered stable when they have been employed at their current job for six months or more.

• ID (Driver's License or U.S. Passport) – you must meet your state's legal borrower age requirement, usually 18
• Bank Statements – from the last 60 days
  
• Pay Stubs – from the last 30 days or more
  
• W2 Tax Forms – if employed, you’ll need the previous two years of W2 tax forms
  
• Schedule K-1 (Form 1065) – if self-employed
  
• Income Tax Return – previous two years
  
• Asset Account Statements – including retirement savings (401k, IRA), stocks, bonds, and mutual funds
  
• Divorce Documents – if using alimony or child support as qualifying income
  
• Gift Letter – if funding your down payment with a qualifying financial gift or grant, you must provide bank statements of source and transfer of cash funds from the giver to the receiver

FHA loans can be a wonderful option for first-time homebuyers or anyone who may not qualify for a conventional mortgage. If you’re ready to get started with FHA loan preapproval, contact a trusted loan officer today.