FHA Loan Requirements

Trying to buy a home?

Back in the day, banks were throwing mortgages at boomer home-buyers like hot potatoes. 🥔

Today, it’s as if younger generations have to sell their souls just to be considered for a mortgage. And even if we can get approved, we’re charged an arm and a leg in interest rates.

There must be another way. Right?

Thankfully, it’s not all doom and gloom: FHA’s flexible loan requirements, and record-low interest rates, could be your best solution to owning your own home. And more millennials are catching on. In 2020, 16% of all loans closed by millennials were FHA, secured with a low-interest rate of 2.99%. 

So what’s the catch? How can you get a hold of these rates? How does an FHA loan fair up against a conventional loan? And what should you know before applying?

We’re going to give you the scoop below.

FHA Loans 101 🏡

Before diving into FHA loan requirements, it’s important to understand the general functionality of FHA loans. These are a specific kind of loans insured by the Federal Housing Administration, an agency under the jurisdiction of the Department of Housing and Urban Development (HUD). This means that the lender is protected if your loan defaults. 

FHA loans can be received with a minimum down payment of just 3.5% for those with a score of 580 or more. For this reason, more new homeowners are looking to FHA loans.

FHA loans are pretty flexible and can be used in many ways, including buying or refinancing your family home, certain mobile homes, or condominiums. Better yet, there are FHA loans for more specific needs like helping you to renovate your home or for building a new home entirely. Might be just what you need, right? Let’s look at what exact FHA loan types there are.

Different Variations of FHA Loans ⚖️

Requirements largely depend on the type of FHA loan applied for. There is a huge selection of FHA loans available for those looking to buy a home, and for more specific buying needs. Here are some of the most common:

1. Fixed-Rate Loan

This mortgage offers a fixed rate throughout the loan term. A fixed interest rate means that your monthly payments won’t change—it also comes with 15- or 30-year terms. 

2. Adjustable Rate Mortgage (ARM)

ARM loans have an initial interest rate that is usually lower than most fixed-rate mortgages, but it won’t last forever. Once a fixed introductory period ends, your monthly payments will rise or fall depending on the interest rate that’s tied to an adjustment index. 

3. FHA Jumbo Loan

Fannie and Freddie Mac FHA mortgages are capped, however, when a loan exceeds this cap, it’s called a jumbo loan. These government-backed loans cost too much for Fannie and Freddie, so limits are placed. 

A disadvantage of jumbo loans is that while the application process is simpler than it once was, these loans are harder to get approval for. Borrowers will need to have an impeccable credit score, have a low debt-to-income ratio, and make a large down payment. 

4. FHA Condominium Loans

Mortgages for FHA condominiums are slightly more complex than some other types of new purchase real estate because of the FHA requirements that condo projects are subject to. While this shouldn’t throw you off from checking it out, we advise you to get to know the rules first to make a time-informed and knowledgeable decision.

5. Energy Efficient Mortgage (EEM)

The EEM mortgage helps homeowners to lower their monthly utility bill by enabling them to incorporate the amount of upgrading their new or existing home to a more energy-efficient one.

FHA Loan Requirements Explained 💡

FHA loan requirements include down payments and a minimum credit score. Not to mention some limits on loan amounts, and your total monthly debt amount. If the rising COVID-19 cases haven’t put you off, and you’re still looking to qualify for an FHA loan, the following explains what you’ll need.

The entire list of FHA loan requirements is available in a neat little handbook of over 1,000 pages. Staying awake through the first section would require endless amounts of coffee on hand. Here are the most important pieces of information to take in: 

Before we get into a bit more detail on these requirements, let’s address a common misconception about FHA loans.

Are FHA Loans Only Suitable for First-time Home Owners?

No, FHA loans are not just for first-time buyers, contrary to what you may have thought. Because FHA loans usually have more flexible qualification criteria than conventional mortgages, they are typically more popular with first-time homeowners. 

But that doesn’t mean these loans are for first-time homeowners alone, oh no. Anyone looking to buy a home, or refinance their mortgage can benefit from an FHA loan, once they meet the FHA loan requirements below.

FHA Loan Down Payments

Basically, FHA loan down payments are a percentage of the price you pay for the home, and it’s the amount you pay upfront for the home. When it comes to FHA loans, the minimum down payment depends on your credit score. To lower your down payment amount, you will need a high credit score. 

For scores of 580 or higher, you may be eligible for a down payment of just 3.5%. If you can afford a down payment of 10%, you will need a credit score of between 500 to 579. 

It’s worth noting that you can make a cash down payment with gift assistance. This gift may be from family, friends, or an employer, but the catch is that it must be well-documented to prove that the gift is actually a gift, as opposed to a loan. 

FHA Mortgage Insurance

A cost included in the FHA loan that isn’t included in conventional loans is the mortgage insurance premium (MIP). This exists to protect your lender against borrowers defaulting on their loans.

MIP is typically paid throughout the life of an FHA loan. The only exception being, if you made an original down payment of 10%—in this case, MIP would be paid for a total of 11 years. How is MIP assessed? Mortgage insurance is assessed in a few different ways: first of all, you’ll be asked to pay an upfront amount, which usually totals about 1.75% of your base loan amount.

On top of this, you will need to pay an annual mortgage insurance premium which is based on the length of your mortgage, your total mortgage amount, your loan-to-value (LTV) ratio, and the size of your down payment. For reference, you can take it that it will come to between 0.45% to 1.05% of the base loan amount.

Income Requirements for an FHA Loan 💰

The FHA is not stingy when it comes to how big your income is—there is no minimum or maximum amount you need to worry about. However, there are a few criteria you have to meet.

• You need at least two active credit accounts—if you have a credit card and are making car payments, that will do the trick.
• Delinquent federal debt and judgements in your credit report are not allowed. Also, the FHA will not give you a loan if you have unpaid FHA loan debts.
• To make the down payment, you need a cash gift account that must be signed and verified by the donor.

FHA’s Property Requirements 🏘

Naturally, the FHA won’t give you a loan for just any kind of property—they will check if the house you’re looking to buy is in line with their guidelines and goals. Here’s what to watch out for.

• The borrower (at least one) must settle in the bought property within 60 days of the purchase and this must be their principal residence.
• The residence cannot be a form of investment—you can only get an FHA loan for a home if you intend to live in it.
• The FHA’s inspection will pay your home a visit to see if it is up to their minimum standards. You can’t buy a run-down shack with this loan.
• You cannot buy a property if it has been previously sold within 90 days of your purchase. This is to avoid property flipping.
• The residence must either be in your name or the name of your living trust.

FHA Credit Requirements 💳

No matter which type of loan you’re applying for, a high credit score will significantly help your chances of being approved. For the FHA loan specifically, you should have a minimum FICO score of 580 to benefit from the loan down payment offer of around 3.5%.

If you simply haven’t managed to build your credit score to 580, don’t fret, there may still be a path for you to reach the glorious FHA loan. How can you qualify for an FHA loan with a lower credit score? Simply by paying a 10% down payment.

This flexibility is one reason why FHA loans are popular among millennials. Joe Tyrrell, President of ICE Mortgage says that FHA loans were particularly favorable with younger millennials. 

Tyrrell said, “FHA loans were especially popular among younger millennials under age 30… nearly a quarter of them chose this financing option, in part because of the more flexible qualification criteria.”. Alternatively, there are more suitable personal loans for fair-credit borrowers out there.

With this, FHA loans are ideal for younger millennials because they offer more protection. Most recently we saw this when the Department of Housing and Urban Development (HUD) extended a moratorium on evictions and foreclosures.

That said, if you prefer the option of building your credit score to access a lower down payment, there are some simple yet effective ways to do this. These include: 

• Make payments on time
• Do not close an unused credit card
• Clear debt and maintain a low balance on the credit card
• Report any inaccuracies in the credit report
• Ask for new credit when you need it

Worried About Meeting FHA Loan Requirements? 🔎

What if you’ve tried everything and you just can’t seem to meet FHA’s requirements? The FHA’s criteria take into account a multitude of factors around income and debt. 

In some cases, when a borrower doesn’t meet the criteria, manual underwriting is needed. This essentially means that if you don’t match all the guidelines that the FHA has set out, a lender could still qualify you after reviewing it a bit closer.

Conventional and FHA Loans Compared

By this stage, you know all about the benefits of FHA loans. Let’s see how they fair up against conventional loans. 

When comparing FHA loans vs conventional loans, the most suitable for you will depend on your needs and financial circumstance. Firstly, it has more flexible qualification criteria, and heightened loan limits.

Secondly, though conventional loans can offer a lower down payment option, FHA loans require lower credit scores, and a lower debt-to-income (DTI). If you can improve your credit enough, you will gain access to loans restricted to those with good credit, which are much more flexible than government loans. 

Thirdly, while you will need to pay a Mortgage Insurance Premium (MIP) for an FHA loan, conventional loans charge mortgage insurance. No matter from what angle you look, it seems that FHA’s are worth checking out if you have a bit of extra dough for the down payment.

Are There Limitations with FHA Loans?

When choosing which loan is best for you, it goes without saying that you should know what the FHA’s maximum and minimum loan amounts are. The maximum amount (and minimum) you may be entitled to is crucial. 

Depending on the county you reside in, your loan limit for 2021 could be anywhere between $356,362 to $822,375. This is an overall increase of $24,602 on 2020’s limits, largely a result of rising housing prices throughout the U.S.

To figure out exactly how much you are entitled to, visit the HUD website directly. Here you will gain a broad look at limits, before delving a bit deeper into limits per counties and cities. There is some disparity between high-cost and low-cost areas which we’ve displayed below.

Five Steps to Apply for an FHA Loan

To increase your chances of getting an FHA loan, there is a formula you’ll need to know. Below we’ve outlined the steps to take to get you the result you’re looking for.

1. Get Pre-Approved 👍

The very first step you need to make to get your FHA loan approved is to get it pre-approved. This step isn’t mandatory but if you get an FHA-approved lender to pre-approve your mortgage it will catapult you to your final destination. Everything here is quite straightforward but to increase your chances we advise you improve your credit 

To meet the guidelines simply apply for pre-approval with an FHA-approved mortgage lender, and once you get a letter letting you know you’ve just been pre-approved, you have the green light. The letter will let you know how much you’ve been approved for, which you can show to the owner of the property you’re looking to secure.

2. Complete Form 1003 📝

Once you’ve found a home you want to purchase, download and fill out the An important step to take is to fill out the Uniform Residential Loan Application (Fannie Mae form 1003). Within the application, you’ll be asked to fill out the amount you’re hoping to secure for the purchase of the home, and its address.

You’ll also be asked to fill out all the standard information that you would need for any long mortgage application. This includes your income requirements, debts and expenses, and employment history.

3. Get the Property Appraised 💰

Next things next. The FHA really pays attention to the market value of a property—it will play a part in their decision to grant or deny you the loan. To help the FHA make the right decision the agency sends a professional home appraiser to inspect the property and report an estimated value of the home to the lender.

If your loan amount request lines up with the estimated amount, your FHA application will be pushed onto the next stage. If, for some reason or another, the loan amount you requested is more than the appraisal, your lender may just cancel the whole thing.

4. Follow the Underwriting Process ✒️

At this stage, the mortgage lender will evaluate your FHA loan application. Finer details like your credit score and financial history will be taken into account. So long as your finances are in order, you should be on your way to a successful loan application. If you encounter an issue, raise your concern with the lender.

5. FHA Loan Approval ✔️

Once you clear the underwriting hurdle, your mortgage loan is approved and you’re good to go. You’ll get the financing you need to buy your home and can move on to the home closing process, where ownership is switched from the seller to the buyer.

FHA Loan Closing Costs 💸

Now for the final part of the equation: closing costs. If you succeed in qualifying for an FHA loan, you should be prepared for the following closing fees: lender and third-party fees, mortgage insurance, and a couple of items you’ll need to pre-pay too. Let’s get into it more below.

Lender Fees

First off, unfortunately, you probably won’t be able to escape some pesky lender fees. These fees may include but are not limited to: 

• Document preparation fee.
• Origination fee.
• Interest rate lock fee.
• Underwriting fee.
• Supplemental loan origination fee (only for FHA 203(k) renovation loans)

It’s worth mentioning here that you will have the choice to benefit from some discount points; this is the interest that you prepay to reduce the monthly interest on your loan. If the sound of low interest makes your ears pop up a little higher, take a look at what some top loans for low interest would look like.

Mortgage Insurance Premium

A typical mandatory fee is the FHA mortgage insurance premium (MIP). This comes to 1.75%, paid at closing. MIP can also be financed as part of your loan, and you’ll also be charged an additional ongoing MIP fee of between 0.45% to 1.05% in your monthly repayments. 

The rate won’t change throughout your repayments, but the premium will be adjusted annually, depending on the remaining principal loan balance. For your information, mortgage insurance premiums are not something you will need to worry about paying on conventional loans, but you will need to make a down payment of 20% or above.

Third-party Fees

These fees are for the services offered by third-party providers. Most of these are quite minor, but to be sure just ask your lender and calculate them into your overall costs to get an accurate depiction of your FHA loan.

• Title insurance policy premium (for the lender and an option for the buyer to purchase as well).
• Notary fee.
• Credit report fee—take heed of this in particular because the loans you get with good credit may give you far better rates.
• Appraisal fee.
• Recording fees.
• Courier fee.
• Attorney fees.
• Flood certification fee.

Prepaid Items

Lastly, there are a few fees that you will be expected to pay in advance—some of these will be the responsibility of both the buyer and seller. Prepaid fees include: 

• Flood and hazard insurance premiums.
• Tax and insurance escrow deposit.
• Per diem interest.
• Real estate taxes.

How to Reduce FHA Closing Costs ✅

FHA closing costs can be a real pain. We have a few tricks up our sleeve to help you reduce costs—and stress. 

✔️ Ask a seller to pay their share of closing costs 

✔️ Ask the seller to pay some settlement costs

✔️ Use a gift of cash from a family member or friend 

✔️ Check if you qualify for a grant for your down payment or closing costs 

✔️ Finance some closing costs

The closing costs mentioned can all put a steep hole in your pocket at the end of the day deal. Thankfully, we have some nifty tips for you to try and reduce some of those closing fees.

Start off by asking the seller to pay some of the closing costs. The seller does have a responsibility to pay some closing costs, including real estate commissions, which can come to more than you expect.

You could also ask the seller to pay some of the settlement costs. This may not happen though, and might depend on how active your real estate market is. If the demand outstrips supply, I wouldn’t expect too much.

Outside of asking your seller to foot some of the costs you could try using a gift of cash from a friend or family member. FHA loans give you the option of using a gift from family, friends, employer, or charity—the FHA will look at this to make sure it is legitimate, so there is no funny business to be had. Some borrowers may also qualify for a grant for down payment or closing costs from state housing assistance programs. 

Lastly, think about financing some closing costs. All closing costs can be pushed onto your loan balance which will lower the load of upfront costs you’ll need to pay. The catch here is that it will make your monthly repayments higher—and may raise your interest rate too.