FHA Loans 101
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A credit score of at least 500, a debt-to-income ratio of no more than 50% and two credit accounts are a few of the things you'll need.
FHA loan requirements for 2018 are contained in a 1,009-page “handbook” published by the U.S. Department of Housing and Urban Development. You would need at least a 20-ounce cup of coffee with a turbo shot just to stay awake through the first 20 pages. Good news: You don’t have to.
Here’s what you need to know about the requirements to borrow an FHA loan without the government jargon and footnotes.
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FHA loan down payment
A core requirement in getting an FHA-insured loan is a FICO credit score of 500 or better. That gets you in the door, but to snag the lowest down payment, you’ll need a much higher credit score.
You must take title in your own name or the name of a living trust, and the loan must be for a principal residence.
“To qualify for FHA’s minimum down payment of 3.5%, a borrower must have a credit score of 580 or above,” Brian Sullivan, HUD public affairs specialist, tells NerdWallet. “Between 500 to 579, the borrower must put 10% down.”
» MORE: Improve your credit score
FHA loan income requirements
There is no minimum — or maximum — salary you can earn that will qualify or prohibit you from getting an FHA-insured mortgage. However, you must:
- Have at least two established credit accounts. Examples: a credit card and a car loan.
- Not have delinquent federal debt or judgments — tax-related or otherwise — or debt associated with past FHA-insured mortgages
- Account for cash gifts that help with the down payment. These gifts must be verified in writing, signed and dated by the donor.
FHA debt-to-income requirements
Your total debt-to-income ratio — including the new mortgage, credit cards, student loans and any other monthly obligations — must be 50% or less, according to Sullivan.
FHA loan limits
The property must meet FHA geographic loan limits. In 2018, that’s generally $294,515 for single-family homes in low-cost areas and $679,650 in high-cost areas.
FHA property requirements
In addition to borrower qualifications, the property itself must meet certain requirements before you can qualify for an FHA mortgage.
- Investment properties are not eligible
- The property can’t be a flip: meaning you can’t buy a house within 90 days of a prior sale
- You must take title to the property in your own name or in the name of a living trust at settlement
- The loan must be for a principal residence, and at least one borrower must occupy the property within 60 days of closing
- An FHA appraisal includes a strict inspection, assessing a home not only on value but also on minimum property standards
Here is some of the documentation you will need when applying for an FHA home loan.
- You must show proof of a Social Security number
- Provide original pay stubs, W-2 forms or valid tax returns, as necessary
Of course, there are other stipulations — remember the handbook is 1,009 pages — but an FHA-approved lender will walk you through the details if other requirements apply to you.
There are lender requirements, too
The FHA is insuring the loan, but a lender makes the final decision — and can determine what specific qualifications it requires.
“We can set our standards, and we can say, ‘If you meet these requirements, FHA will insure a mortgage on that loan.’ And yet, lenders may add on what are called ‘credit overlays’ on top of our standards, and make it that much harder to qualify for a loan that they originate,” Sullivan says.
Those requirements can include a higher FICO credit score, or a better debt-to-income ratio. It’s a good reason to shop more than one lender.
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What if you don’t meet all FHA requirements?
“FHA’s standard underwriting criteria is rolled up into a ‘scorecard’ that considers many factors related to income and debt,” Sullivan says. “Under certain conditions, particularly when a borrower doesn’t fit into our general scorecard requirements, a manual underwriting is required.”
That means if your situation doesn’t neatly fit within all the guidelines, a lender may consider your loan application as a one-off instance, an exception. Frankly, lenders aren’t always eager to do that.
Is an FHA loan right for you?
“This [program] is for working families of relatively modest means,” Sullivan notes. It can be a good option, especially for first-time home buyers, he says. Not only are the credit qualifications easier to meet, but FHA loans also come with low mortgage rates, though lenders set rates, not the FHA.
However, a low mortgage interest rate and small-down-payment loan backed by the FHA do come at a cost. Borrowers with FHA-backed loans pay mortgage insurance premiums — an upfront payment as well as an ongoing fee built into their monthly payment for the life of the loan — that protect the lender from a loan default.
But an FHA-insured loan is not the only low-down-payment alternative. If you are serving or have served in the military, you may qualify for a loan backed by the Department of Veterans Affairs. A VA loan requires no down payment.
And if your credit history is in good shape, you might want to consider a low-down-payment conventional mortgage. You will likely pay a slightly higher interest rate, but the mortgage insurance can be canceled after you gain enough equity in your home, unlike with an FHA loan.