With minimum down payments of 3.5%, competitive interest rates, and lenient credit guidelines, FHA loans have enabled millions of people to buy homes when they couldn’t qualify for a mortgage otherwise.
What’s more, modern FHA mortgage insurance premiums are lower than they were a decade ago, making these loans more like low down payment conventional loans.
An FHA loan may be just what you need to become a homeowner this year.
What is an FHA loan?
FHA loans don’t actually come from the FHA. They come from private lenders, just like conventional loans and most other mortgage loans. The FHA’s role is to insure the loan.
In fact, you could think of the Federal Housing Administration, or FHA, as a giant insurance company. This government-run agency insures lenders against financial loss in case the borrower defaults on the loan.
Because of this financial protection from the FHA, lenders can afford to approve more low- to moderate-income borrowers for 3.5% down mortgages. Without FHA, many first-time buyers would be locked out of home ownership.
FHA loan requirements 2022
Since an FHA loan comes from a private lender — and not from the federal government — the lender must approve your loan. Your loan officer will pull your credit report to make sure you have an acceptable credit history.
Most FHA lenders typically require borrowers to have:
- A 3.5% minimum down payment
- A credit score of 580 or higher
- A DTI below 50%
- An employment history of two years
Compared to conventional mortgages, it’s easier for many borrowers to meet most FHA loan requirements. But it’s still important to know whether you meet these guidelines.
FHA minimum down payment requirements
The FHA’s minimum down payment requirement is 3.5%. This means you’d need to spend $3,500 out of pocket for every $100,000 the home costs. The mortgage loan would cover the remaining $96,500 of every $100,000.
So, a $300,000 home would need $10,500 down; the loan would cover the other $289,500.
The FHA’s 3.5% minimum down payment could increase to 10% for borrowers with credit scores between 500 and 579.
FHA credit score requirements
Most FHA-approved lenders look for FICO credit scores of at least 580, which is lower than most other loan programs will allow. (Conventional loans usually require a score of 620.)
Some FHA lenders will allow scores below 580 — and possibly as low as 500 — but only if the borrower makes a 10% down payment.
To increase your credit score before applying for an FHA home loan, make sure you’re paying your other bills on time. Also, check your credit reports for errors and then dispute any errors you find. You can download all three of your credit reports at annualcreditreport.com.
Debt-to-income ratio (DTI) for FHA loans
The lender will also look at your debt-to-income ratio to make sure you can afford your new monthly mortgage payment. This ratio compares your monthly debt payments — including your new house payment — to your gross monthly income.
For instance, if you make $5,000 per month, and your credit card, auto loan, and student loan payments, plus your proposed house payment, equal $1,750 per month, you have a debt-to-income ratio, or DTI, of 35%.
A DTI of 35% would be good. It’s well below 45%, which is the maximum many FHA-approved lenders will allow. Some lenders will allow DTIs as high as 50%.
When calculating your DTI, be sure to include all elements of your new house payment, including property taxes, homeowners insurance premiums, and HOA dues if any.
Lenders need to know the source of your monthly income. If you have two consecutive years of steady work history in the same job, or at least in the same profession, the lender will usually be satisfied by looking at your two most recent pay stubs or last year’s W2 forms.
Self-employed borrowers will need to take a few extra steps. They’ll need to show the past two years’ income tax returns and possibly financial documents for their business as well.
FHA loan requirements for the home itself
Along with meeting requirements as a borrower, the home you’re buying must meet a few guidelines for an FHA loan:
- It must fit within the FHA’s loan limits
- You must use the home as your primary residence
- The home can only have 1, 2, 3, or 4 units
- The home must be deemed safe, sound, and secure by an FHA appraiser
About FHA loan limits
The home’s geographic location, as well as the property type, will determine its maximum FHA loan amount. For instance, a single-family (1-unit) home in Burke County, N.D., has a limit of $420,680.
But, in Los Angeles County, the FHA limit for the same type of home is $970,800. Quite a difference.
Additionally, FHA loans have higher loan limits for multifamily properties — 2-, 3-, and 4-unit homes. In Miami-Dade County in Florida, the limit for a single-family home is $460,000, but $884,600 for a 4-unit home.
To look up limits for your geographic location, see HUD’s website.
About FHA’s primary residence requirement
The goal of the FHA loan program is to help more renters move into homes they own. The program is not intended for buying second homes, investment real estate, or vacation homes.
FHA loans are strictly for owner-occupied primary residences. That said, you could buy a duplex, triplex (3-unit) or four-plex (4-unit) — as long as you live in one of the units (see our article on multi-unit properties).
About FHA’s appraisal process
The FHA wants borrowers to buy “safe, sound, and secure” homes — homes you could move into on closing day. So, before you close on your home purchase loan, the FHA will send an appraiser to check out the quality of the home you’re buying.
If the home has exposed lead paint or asbestos, or if the HVAC or plumbing system isn’t working properly, the FHA won’t insure the loan, and your home-buying process will grind to a halt.
Before you can buy the home, the seller will need to fix the problems — or you’ll need to look into the FHA 203(k) loan program which is designed for fixer-uppers.
Types of FHA loans
The FHA home loan program insures a variety of mortgage types for different purposes. These include:
- Purchase loans: Finances a new home purchase with 3.5% down. Most of this article covers FHA purchase loans
- FHA 203(k) loans: Finances a home purchase plus home renovations simultaneously
- Rate/term refinance loans: Replaces an existing mortgage with a new FHA loan
- Streamline Refinance loans: Replaces an existing FHA loan with a new FHA loan that can offer lower monthly mortgage payments and/or a lower interest rate
- Cash-out refinance loans: Replaces an existing mortgage with a new and larger FHA loan. The difference in loan sizes gets paid to the homeowner at closing
All of these FHA loans are open to U.S. citizens and also for permanent resident aliens and non-permanent resident aliens who provide proof they are eligible to work in the U.S.
But not all FHA-authorized lenders offer every type of FHA loan. You may need to shop around more to find a 203(k) loan, for example.
FHA loan requirements vs conventional loan requirements
FHA loans give buyers an alternative to conventional mortgage loans. For many buyers, however, a conventional loan is still the best choice.
To help you decide, here’s a breakdown of each loan type’s minimum requirements:
|FHA loans||Conventional loans|
|Minimum credit score||580 (500 is possible with 10% down)||620|
|Minimum down payment||3.5%||3%|
|Base loan limit for 2022||$420,680||$647,200|
|Upfront mortgage insurance||Always required||Not required|
|Annual mortgage insurance||Always required||Required with >80% LTV|
For many home buyers, there’s no room for debate. They know right away what type of loan they need:
- Buyers with lower credit scores or higher DTIs will likely need an FHA loan to buy a home. They won’t qualify for a conventional mortgage
- Buyers who put 20% or more down, have credit scores above 720, and have lower monthly debt ratios will save money with a conventional loan
It’s the in-between buyers who will have a tougher decision to make:
- If you barely qualify for a conventional loan, you may save more with an FHA loan, despite its upfront mortgage insurance premium
- If you have one underwriting weakness — a high DTI, for example — an FHA loan may save money despite its annual mortgage insurance premiums
The best way to find out is to get pre-approved for both loan types and compare the offers. Be sure to compare upfront and ongoing costs for the same home purchase price.
As you compare, remember that unless you put down 20% or more, a conventional loan will require private mortgage insurance (PMI) each month until you’ve paid off 20% of the loan.
FHA mortgage insurance rates & requirements
If there’s a downside to the FHA loan program, it’s the FHA’s mortgage insurance premiums. Yet these premiums make FHA loans possible. They can be money well spent when you need them to buy a home.
FHA borrowers pay both upfront and annual mortgage insurance premiums (MIP). For most borrowers, the upfront fee is 1.75% of the loan amount and the yearly fee is 0.85% of the loan amount.
The upfront mortgage insurance is usually financed into the loan amount, but it can also be paid in cash at closing. The yearly premium is divided into 12 monthly installments which are included in the home’s mortgage payment.
For instance, a $250,000 loan would require $4,375 in upfront mortgage insurance, resulting in a $254,375 total loan amount. In addition, the borrower would pay $177 per month in FHA mortgage insurance.
FHA mortgage insurance rates are determined by loan amount, loan term, and the loan-to-value ratio (LTV). Here are current FHA monthly mortgage insurance rates. Keep in mind that the yellow box represents the vast majority of all FHA loans.
Original loan term more than 15 years (most FHA mortgages)
|Loan amount||Loan-to-value||Annual mortgage insurance rate|
|$0-$625,500||Above 95% (most FHA mortgages)||0.85%|
|$0-$625,500||At or below 95%||0.80%|
|Above $625,500||Above 95%||1.05%|
|Above $625,500||At or below 95%||1.00%|
Original loan term at or less than 15 years
|Loan amount||Loan-to-value||Monthly mortgage insurance|
|Above $625,500||Above 90%||0.95%|
|Any Amount||At or below 78%||0.45%|
FHA pros & cons
FHA loan pros
- Relaxed underwriting extends competitive rates to buyers without perfect credit
- Minimum down payment requirement is 3.5%
- The seller can pay most, if not all, closing costs
- You can use gift money for the down payment
FHA loan cons
- FHA mortgage insurance premiums (MIP) remain in place for the life of the loan in most cases. You would have to refinance into a conventional loan to cancel mortgage insurance
- FHA cannot be used for second homes or investment properties
- The property has to be in fairly good condition. Otherwise, an FHA 203k loan must be used
- Loan sizes can’t exceed area loan limits; limits are higher in high-cost areas
FHA loan guidelines FAQs
What is an FHA loan and how does it work?
An FHA loan is a home mortgage loan that’s insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). This insurance from the federal government allows lenders to approve loans for buyers with lower credit scores and higher monthly debts. These loans help credit-challenged Americans become homeowners.
What are the limitations of an FHA loan?
FHA loans won’t finance a vacation home, second home, or investment property. They work for primary residences only. FHA loans also require annual mortgage insurance premiums (MIP) for the life of the loan in most cases.
What are the guidelines for an FHA loan?
Borrowers with credit scores of 580, debt-to-income ratios of 45% or lower, and a steady employment history for the past two years will likely qualify for an FHA loan. The loan must finance a primary residence, and the residence must be safe and properly maintained.
Are there income guidelines for FHA loans?
No. Unlike USDA loans which set maximum income limits, FHA loans work for home buyers of any income level.
What will disqualify you from an FHA loan?
A credit score below 500 and a debt-to-income ratio about 50% will disqualify FHA borrowers. A credit score below 580 disqualifies FHA buyers unless they can put 10% down instead of making the usual 3.5% minimum down payment. Also, unemployed borrowers won’t be approved. People who just started new careers will have a harder time getting approved.
Are FHA appraisal guidelines different than conventional loan appraisal guidelines?
Yes. Both loan types require an appraisal, but the FHA has its own specific appraisal process. Along with assessing the home’s value, the FHA will assess the home’s condition. The home must meet minimum requirements for safety to be approved for FHA insurance.
How do you apply for an FHA loan?
Apply with a private lender. The FHA authorizes most private lenders to underwrite FHA loans. The best first step is to get a pre-approval. This estimates your maximum loan amount and payment amount without a hard credit check or any obligation to proceed with the loan.
How much money do you have to make to qualify for an FHA loan?
There’s no income minimum or maximum for FHA loans. However, you must earn enough money to afford the new house payment. Lenders measure this by calculating your debt-to-income ratio, or DTI.
Is FHA only for first-time home buyers?
No. FHA loans work for anyone. But first-time home buyers often benefit from the lower down payment and lower credit score requirements.
Is an FHA loan right for you?
An FHA loan is right for you if you want to become a homeowner but can’t qualify for an affordable conventional mortgage. An FHA loan could also be right when you barely qualify for a conventional loan. Why? Because conventional lenders charge higher rates to riskier borrowers; FHA insurance helps insulate borrowers from this expense.
Ready to apply for an FHA loan?
Without FHA loans, many would-be homebuyers would not be able to overcome traditional barriers to homeownership like the initial out-of-pocket expense or less-than-perfect credit.
If you’d like to start your homeownership journey despite having an average credit score and limited savings, apply today.
If you qualify, the lender will issue a pre-approval and you can start looking for a home within the price range approved. You will submit documentation such as pay stubs, W2s, two years of tax returns, and bank statements.
If all goes well, you will receive a final approval, sign loan paperwork, and you will own your home.