FHA Loan Requirements
To qualify for a traditional mortgage loan, you must typically have a FICO credit score of at least 620. FHA loans, on the other hand, provide more flexibility.
First, FHA lenders can approve you if you have a minimum credit score of 500, although you’ll need to make a 10% down payment. If you have a credit score of 580 or above, you can put down just 3.5%.
While you need a consistent income, income levels are not directly considered a determining factor.
There are also debt-to-income (DTI) ratio requirements. DTI measures your monthly earnings against all existing loan payments, including your potential new mortgage. The FHA-recommended limit is a DTI ratio of 43%. However, even if you have a higher DTI ratio, lenders can still consider you if you have considerable cash reserves and a high income.
Minimum FHA Credit Score
Credit score requirements for an FHA loan vary depending on how much of a down payment you are willing or able to pay. Currently, if you provide a down payment equal to 3.5% of the loan, you can qualify with a FICO score of 580 and above. A 10% down payment allows you to qualify with a lower score, starting at 500.
By comparison, the credit score requirements for conventional loans tend to start at 620. The leniency in considering credit scores may make FHA loans more appealing compared to conventional loans. Either way, if you have a higher credit score, you are typically offered loans with better interest rates.
FHA Down Payment Rules
With an FHA loan, if you have a score of 580 and above, you only need to prepare a 3.5% down payment. If you have a credit score between 500 and 579, you are still considered but will have to provide a larger down payment of 10%.
Your mortgage payments comprise the loan balance and interest, and they also include the mandatory mortgage insurance premium (MIP). Currently, the FHA requires MIP for either the life of the loan (with a down payment less than 10%) or up to 11 years (with a down payment greater than 10%).
For conventional loans, lenders typically require a down payment between 3% and 5% of the principal loan amount. However, providing less than a 20% down payment would require you to pay for private mortgage insurance (PMI), which can be removed once you have built up 20% equity in your home.
FHA Debt-to-Income Ratio
The DTI ratio compares the amount of debt you have to your available income (total debt divided by income). Reviewing your DTI ratio allows lenders to understand how likely you are to continue making mortgage payments without defaulting on your loan.
The FHA standard for a DTI ratio is 43% or less, and the calculation includes the future mortgage as a debt. However, lenders can use their discretion when applying this threshold to consider applicants with higher DTI ratios. Since a DTI ratio indicates the risk to lenders when providing a loan, your chances of approval will likely increase if you have a considerably lower ratio.
>> Related: Learn more about personal loan requirements
Other FHA Loan Eligibility Factors
FHA lenders will also consider your income, employment and other financial information as well as the type and value of the desired property. First off, FHA lenders can only finance primary residences, which means you plan to occupy it for at least one year. If you are seeking to purchase a rental or an investment property, you will need to consider other lending options.
While the FHA does not have income limits, lenders need to know you have a consistent income. You will need to explain any gaps in employment within the last two years. If you have a high credit score but do not meet the FHA-recommended debt-to-income ratio, lenders may consider cash reserves. If you have saved up a considerable amount to offset the costs of a mortgage for a few months or more, the lender may approve the FHA loan.
You will also need an appraisal to accurately determine the value of your home. If the appraisal deems the home does not meet the U.S. Department of Housing and Urban Development (HUD) criteria, you’ll need to repair or improve the property to address any concerns.
In addition, if you are paying less than a 10% down payment, you will need to pay FHA mortgage insurance on your mortgage for the life of the loan. If you’re paying more than 10%, you currently only pay mortgage insurance premiums for 11 years.
FHA Loan Limits
FHA loan amounts also differ according to location. Higher-cost areas are afforded higher loan limits compared to areas with lower costs of living. Loan limits are applied by the county, the metropolitan area or both. For this reason, FHA mortgage rates can vary from one county or metropolitan area to the next.
In most parts of the country, the loan limit is $498,297 in 2024 for a single-family home. High-cost areas have higher limits: The FHA loan limit for a single-family home in Los Angeles is $1,149,825. You can look up the limit in your area here.
Documentation Requirements
When you are ready to apply for an FHA loan, be prepared by having the following documents available:
- Identity verification: Your government-issued ID and Social Security number
- Employment and income verification: W-2s, pay stubs, employer letters and tax returns
- Rental or mortgage history: Your landlord’s name and information, existing home loan paperwork and utility bills
- Proof of cash reserves: Banking and other financial statements
- Property information: The address and purchase price for the property to be financed
You should also know what your credit score is and review your credit report. You will not need to provide a copy, but the lender will review this information. It will help to understand any issues you should prepare to address before or while meeting with the lender.
>> Related: Learn more about personal loan documents
Inspection and Appraisal Requirements
The FHA requires an appraisal of the desired property to ensure it meets HUD standards. This requirement helps protect the FHA, the lender and you. It also ensures the long-term value of the property.
During the appraisal, the FHA-approved appraiser visits the property and inspects both the interior and exterior condition, noting deficiencies to safety or security such as pest infestations, water damage or poor electrical wiring. The appraiser then determines the fair market value of the property.
If the appraised value matches or exceeds the purchase price, then the application process can move forward. In addition, the appraiser will provide you and the lender with a detailed report that will include the appraised value and any required repairs or improvements. If you need to make modifications to the property to meet FHA standards, you will have to ensure that they are completed before closing.
Tips For Meeting FHA Requirements
Are you ready to apply for an FHA loan? You can improve your chances of getting approval by reviewing the qualification criteria and identifying areas where you could improve.
You can start by calculating your debt-to-income ratio (all debts, including future mortgage payments, divided by income). If this ratio exceeds the FHA-recommended 43%, consider how you can pay down debts and/or increase your income to lower your DTI.
Review your credit report and see how you can improve your credit score by eliminating debt, staying on top of your payments, increasing your assets and investments or correcting any errors in the report. Also, create a budget plan to save for a down payment of 3.5% to 10% (or more) and for closing costs, which typically range from 2% to 5% of the loan amount.
The Bottom Line
Compared to traditional mortgage loans, FHA loans allow mortgage lenders more flexibility when considering homebuyer applications. With no income limits, lower minimum credit scores and the ability to consider compensating factors, you may find it helpful to consider applying for an FHA loan if you are unable to qualify for a traditional loan.
To improve your chances of success, consider how you can lower your debt-to-income ratio and increase your credit score to meet FHA-recommended thresholds. If your DTI ratio and credit scores do not meet the recommended standards, consider whether you have access to cash reserves that may support your application.
Whichever loan option you choose, always shop around to understand your different loan options, including FHA, conventional and alternative financing options.
>> Related: Learn more about low-income loans
Frequently Asked Questions About FHA Loan Requirements
When applying for an FHA loan, you may qualify at two different ranges depending on the size of your down payment. You may be eligible with a FICO score of 580 if you have a 3.5% down payment. If you have a score between 500 and 579, you will have to provide a larger down payment of at least 10%.
The size of your down payment will vary based on your credit score. If you have a FICO score of 580 and above, you’ll need a 3.5% down payment. If you have a lower score (500 minimum), you will need 10% down.
The FHA recommends a DTI ratio of 43%. In addition, the gross mortgage payment should not exceed 31% of your income. To help you qualify for an FHA loan, lenders may consider other compensating factors, such as large cash reserves or future income potential.
A FICO score of 579 is considered to be poor credit. The FHA loan criteria allow you to qualify with a minimum score of 500, providing you have a 10% down payment. This means that if you have bad credit, you may still qualify for an FHA loan.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team ateditors@marketwatchguides.com.
