FHA Loan Requirements

For borrowers interested in buying a home with an FHA loan with the low-down payment amount of 3.5%, applicants must have a minimum FICO score of 580 to qualify. However, having a credit score that’s lower than 580 doesn’t necessarily exclude you from FHA loan eligibility. You just need to have a minimum down payment of 10%. The credit score and down payment amounts are just two of the requirements of FHA loans. Here’s a complete list of FHA loan requirements, which are set by the Federal Housing Authority:

• Borrowers must have a steady employment history or worked for the same employer for the past two years.
• Borrowers must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
• Borrowers must pay a minimum down payment of 3.5 percent. The money can be gifted by a family member.
• New FHA loans are only available for primary residence occupancy.
• Borrowers must have a property appraisal from a FHA-approved appraiser.
• Borrowers’ front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowner’s insurance) needs to be less than 31 percent of their gross income, typically. You may be able to get approved with as high a percentage as 40 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
• Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of their gross income, typically. You may be able to get approved with as high a percentage as 50 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
• Borrowers must have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
• Borrowers must have a minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
• Typically, borrowers must be two years out of bankruptcy and have re-established good credit.  Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
• Typically, borrowers must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
• The property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).

Benefits of FHA Loans

Low Down Payments and Less Strict Credit Score Requirements

Typically, an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low-down payment and you can have less-than-perfect credit. For FHA loans, a down payment of 3.5 percent is required for maximum financing. Borrowers with credit scores as low as 500 can qualify for an FHA loan.

Borrowers who cannot afford a 20 percent down payment, have a lower credit score, or can’t get approved for Private Mortgage Insurance (PMI) should consider whether an FHA loan is the best option for their personal scenario.

Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can “assume” the loan you have.  People who have low or poor credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.

Mortgage Insurance is Required for an FHA Loan

Being that an FHA loan does not have the strict standards of a conventional loan, it does require two types of mortgage insurance premiums:

One is the Upfront mortgage insurance premium (UFMIP) – This is a one-time up-front insurance premium based on a percentage of the loan amount, regardless of a borrower’s credit FICO score. (This premium can be financed into the mortgage loan).

The other is the Monthly Mortgage Insurance (MIP) – Also called Annual MIP: This is a monthly insurance premium that is calculated into the mortgage payment and is paid together with the monthly mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s Loan-to-value (LTV) ratio, loan size, and length of loan.

Example of an Up-front mortgage insurance premium:

$400,000 loan x 1.75% premium = $7,000 (This amount can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage).