Best FHA Loan Lenders

One of the most significant requirements for an FHA mortgage is the minimum credit score. A borrower with a credit score of at least 580 can make a down payment as low as 3.5% of the home’s purchase price. A borrower with a credit score between 500 and 579 must put at least 10% down. You will need to provide proof of income for the past two years, and you’ll typically need to have a debt-to-income ratio of 43% or less.

Buyers will also be required to pay a one-time upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount. Additionally, there is a monthly MIP that varies depending on the loan’s size, term and other factors. Buyers are typically required to pay it for the life of the loan if they make a down payment of less than 10%.

Finally, the home being purchased must meet the following requirements:

• It must pass an inspection to ensure it is safe and inhabitable.
• It must be your primary residence.
• It must be appraised by an FHA-approved appraiser.

» MORE: What credit score is needed to buy a house?

While FHA loans allow a wider range of buyers to qualify for a mortgage, they aren’t the best choice for everyone. “If you have a higher credit score or a larger down payment, you may be able to qualify for a conventional loan with better terms and lower costs,” said Michael Winkler, a 30-year real estate veteran and the co-founder of Sell Home Today. “FHA loans come with higher mortgage insurance premiums, which can add to the overall cost of the loan.”

Consider the pros and cons of an FHA loan before choosing this type of mortgage.

There are two main steps to applying for an FHA mortgage. First, you need to qualify as a buyer with an FHA lender; not every lender offers FHA loans. Once you are preapproved to buy a home, you will need to find a property that meets all of your lender’s requirements. Charming fixer-uppers typically don’t make the list.

In order to get preapproved for an FHA loan, you will likely need to prepare the following:

• Identification: Provide your Social Security number, driver’s license or passport and current mailing address.
• Income and employment verification: Lenders want to see recent pay stubs and the past two years’ tax returns.
• Savings verification: Recent statements from all of your bank and investment accounts will show the down payment amount you’re capable of making.
• Debt verification: Outstanding balances — such as car loans, student loans, and credit card debts — affect your candidacy for a mortgage.
• Gift letter: Anyone who has given you funds for a down payment without the expectation that those funds will be repaid needs to sign a letter indicating as much.

Expect to resubmit the most updated versions of these documents several times later on as you go through the application and underwriting process. You might also have to provide further documentation to help your lender get the complete picture of your financial history and situation.

» MORE: How to apply for a mortgage

An FHA mortgage is not for every buyer. Some buyers would be better off choosing one of these FHA mortgage alternatives instead:

• Conventional loan: If you have a credit score of at least 620 and some money to put down, you might be able to score a lower interest rate with a conventional loan versus an FHA loan.
• VA loan: VA loans are backed by the U.S. Department of Veterans Affairs and are available to eligible veterans, active-duty military personnel and surviving spouses. For those who qualify, VA loans require 0% down and can have low closing costs.
• USDA loan: USDA loans are backed by the U.S. Department of Agriculture. They have strict requirements for where you can buy your home, but if you qualify, you won’t be required to make a down payment, and you may get a competitive interest rate.

When you find a lender you want to work with, you can ask for a rate and cost comparison of the loan types you qualify for. Government-backed loans tend to have more flexible down payment and credit score requirements than conventional loans, but they may also come with additional fees. For example, USDA loans come with a 1% fee on your initial loan amount and an annual 0.35% fee on your remaining loan balance for the life of your loan.