FHA Loan Requirements: Do You Qualify?

Buying a home is one of the largest financial transactions you’ll make. Few people can afford to pay cash for a home, so they take out a mortgage loan to finance the purchase. Conventional loans may require larger down payments and have higher credit score requirements, but that may not be an option if you live in an expensive housing area or need to buy a home before you can set aside that much money.

Instead, other loan programs allow people to make smaller down payments and are more flexible with credit requirements. In particular, Federal Housing Administration (FHA) loans allow qualifying borrowers to take out a mortgage with a down payment as low as 3.5%. Here’s what you need to know to see if you might qualify for this loan program.

What is an FHA loan?

An FHA loan is a mortgage loan program designed to help people afford to buy a home without putting down a large down payment or having to meet high FICO score requirements. The FHA program allows qualifying borrowers to buy a home by putting down as little as 3.5% of the purchase price.

FHA loans are offered through private lenders approved by the FHA. These lenders determine the mortgage rate and can offer loan terms of up to 30 years. Your loan term is how long the loan will last. Having a low down payment opens up these lenders to risk, though.

That’s where the FHA steps in. This government entity, which is part of the Department of Housing and Urban Development, guarantees part of these loans. This removes some of the risk from the lenders, making these loans possible. That means private lenders can write loans under this program, batch them together, and sell them.

Of course, the FHA can’t take on the risk without being compensated for it. For this reason, these loans come with FHA mortgage insurance fees the borrower must pay. These come in the form of an upfront fee and an annual fee.

The FHA backs several types of home loans, including loans for buying, refinancing, and rehabilitating a home. It can also help homeowners tap into their equity with a reverse mortgage. This article focuses on the requirements for a home purchase loan.

FHA loan requirements

FHA loans have rules in place to ensure the program remains solvent and able to continue backing loans. Here are the requirements to know.

Down payment

FHA loans used to be a popular choice with first-time homebuyers largely because of its low down payment requirement. To take out an FHA loan, you must put down at least 3.5% of the home value under most circumstances. You could put down more if you’d like.

You’re allowed to use funds from many sources for your FHA loan down payment. These include:

• Cash
• Savings or checking accounts
• Investment funds
• Gifts
• Funds from the sale of a property
• Loans
• Grants
• Employer down payment assistance

Credit score and history

The FHA loan program inspects your credit score and credit report when determining whether you qualify for a loan. You must have a minimum credit score of 500 to qualify. If your score is 500 to 579, the only way to qualify for an FHA loan is by putting down 10% or more on the home purchase. People with a credit score of 580 or higher can qualify for a down payment of 3.5%.

It's important to note that these are the FHA’s minimum requirements. FHA lenders can set their own minimum credit scores, and often do. For example, some lenders require a minimum of a 580 FICO score to qualify for an FHA loan.

Lenders will also look at certain things in your credit history. For example, you must pay off all court-ordered judgments before you can be approved, unless you have a regular and timely payment plan in place. Other examples of things that could disqualify you include:

• A foreclosure or deed-in-lieu of foreclosure in the past three years
• A Chapter 7 bankruptcy in the previous year or two years, depending on your circumstances
• A Chapter 13 bankruptcy in the previous year
• You’ve entered a consumer credit counseling program in the previous year
• Being delinquent on federal debt or have a lien placed against your property for a debt owed to the U.S. government, including federal student loan debt

Debt-to-income ratio

FHA loan programs have no minimum or maximum income requirements. That said, you must be able to afford the monthly mortgage payments. Lenders will confirm you have consistent income by looking at pay stubs, tax returns, and bank statements.

One common benchmark used during underwriting to approve or deny a mortgage application is your debt-to-income (DTI) ratio. Essentially, this compares your monthly debt payments to your monthly income. It can be used in two ways.

The first is called a front-end DTI ratio. This compares only the mortgage payment to your income. In general, FHA loans require this ratio to stay at 31% or less. The second is a back-end DTI ratio. This includes all your debt payments (credit card minimums, car loans, student loans, etc.) and your potential mortgage payment. FHA loans require you to keep this ratio to 43% or less.

If you exceed these factors, it is still possible to get approved for a loan, but the loan must be manually underwritten. As part of this process, lenders must identify compensating factors that make approving a loan with a higher debt-to-income ratio an acceptable risk. These could include making a larger down payment or having a large amount of money in savings.

Property type

The FHA loan program can only be used to purchase owner-occupied primary residences. That means that you can’t use an FHA loan to purchase an investment property you plan to rent out. These primary residences could be single-family homes or one-to-four unit properties that currently exist, are proposed, or are under construction. Manufactured homes and condominiums also qualify for this program. People cannot have a secondary residence and take out an FHA loan except under rare circumstances.

Any property purchased under this program must pass HUD’s minimum property requirements. If the property doesn’t meet these requirements, you must either have the items repaired or put money in escrow to fix them after closing. These standards may exceed your local building codes, so it could cause headaches if sellers are not willing to deal with the repairs. Instead, the sellers may decide to sell the property to someone making a non-FHA loan-based offer.

Loan-to-value ratio

A loan-to-value (LTV) ratio is another important factor. To find it, your lender will establish the value of the home with an appraisal. Then the amount of the loan is compared to the value of the property. The maximum loan-to-value ratio is 96.5%, which requires a minimum down payment of 3.5%.

Citizenship

You don’t have to be a U.S. citizen to qualify for an FHA loan. Both permanent and non-permanent residents are also eligible to apply. Non-permanent residents must have a valid Social Security number in most circumstances and be eligible to work in the U.S.

Loan limits

FHA loan limits depend on where the home you’re purchasing is located. Each county or metropolitan statistical area may have different maximum loan amounts. That said, the FHA has specified three different loan limit groups for quick reference. Most people should expect their limit to be between the low-cost and high-cost area benchmarks below.

Loans for properties purchased in the lowest, highest, and special exception areas are as follows based on the number of units and the year:

Low-cost area
	2021	2022
One-unit	$356,362	$420,680
Two-unit	$456,275	$538,650
Three-unit	$551,500	$651,050
Four-unit	$685,400	$809,150
High-cost area
	2021	2022
One-unit	$822,375	$970,800
Two-unit	$1,053,000	$1,243,050
Three-unit	$1,272,750	$1,502,475
Four-unit	$1,581,750	$1,867,272
Alaska, Hawaii, Guam, and the Virgin Islands
	2021	2022
One-unit	$1,233,550	$1,456,200
Two-unit	$1,579,500	$1,864,575
Three-unit	$1,909,125	$2,253,700
Four-unit	$2,372,625	$2,800,900

Mortgage insurance

The low down payments this loan program offers leaves a higher risk of a borrower not fulfilling their obligations should something go wrong. To offset this risk, you have to pay for mortgage insurance when purchasing a home using an FHA mortgage. This insurance helps cover lenders should you default on the mortgage. It’s also one reason first-time homebuyers choose conventional mortgages rather than FHA home loans.

FHA loans require you to pay two types of mortgage insurance in most cases. The first is an upfront mortgage insurance premium, often called a UFMIP. This is 1.75% of the loan amount. The second is an annual mortgage insurance premium. This varies based on the loan amount, the length of your mortgage, and your loan-to-value ratio.

Here are the current MIP rates for mortgages over 15 years long with a base loan amount of $625,500 or less.

Loan-to-value ratio	MIP	Length of MIP required
90% or less	0.80%	11 years
Over 90% up to and including 95%	0.80%	Life of the loan
Over 95%	0.85%	Life of the loan

Here are the current MIP rates for mortgages over 15 years long with a base loan amount of over $625,500.

Loan-to-value ratio	MIP	Length of MIP required
90% or less	1.00%	11 years
Over 90% up to and including 95%	1.00%	Life of the loan
Over 95%	1.05%	Life of the loan

Here are the current MIP rates for mortgages 15 years long or shorter with a base loan amount of $625,500 or less.

Loan-to-value ratio	MIP	Length of MIP required
90% or less	0.45%	11 years
Over 90%	0.70%	Life of the loan

Here are the current MIP rates for mortgages 15 years long or shorter with a base loan amount of over $625,500.

Loan-to-value ratio	MIP	Length of MIP required
78% or less	0.45%	11 years
Over 78% up to and including 90%	0.70%	11 years
Over 90%	0.95%	Life of the loan

FHA vs. conventional vs. VA loan

While FHA offers loan with down payments as low as 3.5%, other loan programs exist that may be worth considering if you meet their requirements. In particular, conventional loans may be a choice worth looking into if you have a 20% or higher down payment or qualify for a conventional mortgage that has a lower down payment requirement.

VA purchase loans could be worth considering if you qualify for a VA loan through your military service or through a spouse.

	FHA purchase loan	Conventional conforming purchase loan	VA purchase loan
Minimum credit score	500	620 or higher, depends on the lender	None
Loan limits	$420,680 for single units in low-cost areas $970,800 for single units in high-cost areas	$484,350 in most counties $726,525 in high-cost counties	None
Mortgage insurance	1.75% upfront Annual fee of 0.45% to 0.95% for mortgage terms of 15 years or less Annual fee of 0.80% to 1.05% for mortgages over 15 years	Varies by down payment amounts and particular situation for down payments of less than 20%	None, but you may have to pay a VA funding fee
Down payment minimums	3.5%	20% to avoid mortgage insurance	None
Guaranteed by…	FHA	Fannie Mae or Freddie Mac	VA

FAQs

Bottom line

Now that you understand the FHA loan requirements and how the loan program works, you may wonder how to get a loan to make your homeownership dreams a reality.

Thankfully, the process isn’t difficult. Start by shopping for mortgage quotes with the best mortgage lenders. Then, compare the loan estimates to find the lender that’s the best fit for you before moving forward with your home purchase. Look at the interest rates, fees, and closing costs when deciding which option is best for you.