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What are the Requirements for an FHA Loan?

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If you're a first-time homebuyer, you may be considering an FHA loan. Like any type of mortgage, this loan has specific guidelines, including an acceptable FHA credit score and how much down payment is required. Besides low FHA interest rates, there are many reasons first-time borrowers love this type of loan. Let's check out a few and answer some of the most common questions. 

How much down payment for an FHA loan?

When the Federal Housing Administration (FHA) was established, the main goal was to help expand the housing industry. The central concept was that lenders would be more willing to loan money if the mortgages were insured. And more people would be able to buy homes. Along with the insurance for lenders came the ease of entry for borrowers. And speaking of ease — with FHA loans, a borrower only needs a down payment of 3.5% of the home's purchase price.

Can you get an FHA loan without a down payment?

There are ways to get an FHA loan without a down payment — from your own pocket. Some options are easier than others. Let's see what they are.

The Use of Gift Funds for a Down Payment

FHA is part of the department of Housing and Urban Development (HUD). HUD creates the guidelines for FHA loans. Here's what they have to say about gift funds:

An outright gift of the cash investment is acceptable if the donor is:

  • The borrower's relative
  • The borrower's employer or labor union
  • A close friend with a clearly defined and documented interest in the borrower
  • A charitable organization
  • A governmental agency or public entity with a program providing homeownership assistance to low- and moderate-income families or first-time homebuyers

Many local cities, county, and state governments offer first-time homebuyer down payment assistance. Make sure to see what's available in your area.

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.

What credit score do you need for an FHA loan?

Compared to a conventional mortgage, the FHA has less strict guidelines for credit scores. But each lender who offers FHA mortgages may have their own requirements. Generally, the minimum score is 620, but some lenders go as low as 580.

This type of government backed loan is also more lenient on the borrower's debt-to-income ratio (DTI). That's the comparison of how much debt they have compared to their income. But the guiding factor in any loan is that the borrowers must demonstrate they can repay the loan.

What are the FHA requirements on house condition?

Whereas the FHA is less strict on credit scores and DTI — they are more stringent on the home's condition. So much so that if you shop for houses on Zillow or Trulia, you may even see some listings that say that they are not approved for FHA funding.

And when it comes to getting an appraisal — only specific appraisers are FHA certified. The appraisal process is more in-depth than an appraisal for a conventional loan. And there may be several items the appraiser calls out that need to be repaired before lending on the property. Additionally, there are different property requirements for the various parts of the country.

So, if you're a first-time homebuyer shopping for a home and getting an FHA loan, make sure you're looking at well-kept homes. And be sure to avoid any properties with bad roofs. The FHA won't fund on a house with a bad roof. Keep in mind, the house can be ugly and dated — but it can't have deferred maintenance or missing essentials like central heat or a functioning kitchen.

Lastly, if you're considering a condominium, make sure it's on the FHA-approved condo list. These property guidelines are similar to what you'd encounter if you were to get a VA loan. Since the government backs these loans, they want to ensure the property is safe and in good condition.

Do FHA loans require PMI?

Conventional loans have private mortgage insurance (PMI). FHA also has mortgage insurance. They refer to their insurance as a mortgage insurance premium (MIP). All FHA loans require MIP for 11 years or the loan's life, depending on the amount of your down payment. That is the most significant disadvantage of this type of loan.

In the past (before 2013), once you had 20% equity in your loan, you could ask the lender to remove the MIP. That's how it works on a conventional loan. But since, 2015 that changed.

But that's not necessarily a reason to avoid FHA loans. Besides VA loans, FHA interest rates are some of the lowest of all mortgage products. The key is to compare your payment with the MIP to a loan that does not have MIP. In some cases, an FHA loan payment with MIP is less than a conventional loan without MIP. That's especially true if your credit is less than stellar. In which case, your interest rate on a conventional loan could be much higher. That is if you were able to be approved at all. Overall, FHA has less stringent borrower guidelines. And that's why they're so popular with borrowers preparing to buy a home who don't have a big down payment.

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