An FHA loan is a mortgage issued by the Federal Housing Administration. The federally backed mortgage is designed for low- to moderate-income homebuyers who may not have perfect credit scores. To qualify, you need to meet a few simple requirements, and you may need additional private mortgage insurance. Read on to learn more about how to qualify and apply, get answers to frequently asked questions and discover if FHA loans are worth it.
Who qualifies for an FHA loan?
Qualifying for an FHA loan is often easier than qualifying for a conventional loan because the credit requirements aren't as strict. You need a FICO credit score of at least 580 to qualify for a 3.5% down payment. If your score is between 500 and 579, you can still qualify for an FHA loan with a 10% down payment from some lenders.
FHA loan qualifications are relatively straightforward, but lenders can impose their own minimums on credit scores. Borrowers pay private mortgage insurance (PMI) every month, which usually has an annual cost of around 0.85% of the loan amount. The PMI is rolled into your monthly payment and protects the lender if the borrower defaults on the loan.
Once you have paid off enough of the loan that you owe 80% or less of the home's value, you can refinance your FHA mortgage to a conventional mortgage and get rid of your PMI payment. For more information, read about how an FHA loan works.
What are the requirements for an FHA loan?
To qualify for an FHA mortgage loan, the FHA guidelines state that applicants must meet the following requirements.
- Minimum down payment of 3.5%: An FHA home loan requires a minimum down payment of 3.5% of the total home price if you have at least a 580 credit score. You'll need to make a down payment of 10% of the home price if your credit score is between 500 and 579.
- Minimum credit score of 500: The absolute lowest credit score required for an FHA loan to get approved is 500. Keep in mind that a higher credit score helps you get a lower interest payment, so it's a good idea to spend a few months fixing your credit score by paying down your debts and making payments on time before you apply for an FHA loan.
- Debt-to-income ratio under 43%: The debt-to-income ratio measures how much total debt you have compared to your total income. The lower your debt-to-income ratio, the more money you have to pay toward things besides debt every month. You want a low debt-to-income ratio to get approved for a low interest rate. Most lenders won't offer you an FHA loan if your debt-to-income ratio is more than 50%, and some will only accept your application if your debt-to-income ratio is 43% or lower.
- Meet FHA loan limits: The loan limits change every year and vary based on your specific location. Depending on where you live, the 2021 FHA loan limit is between $356,362 and $822,375.
- Home appraisal by an FHA-approved appraiser: Every home purchased through the FHA home loan program must go through an appraisal process. You'll need an FHA-approved appraiser to assess the home's value and ensure it meets all of FHA's minimum property requirements.
- Mortgage insurance premium: With FHA loans, borrowers must pay mortgage insurance premiums that can be rolled into the financed loan amount. These monthly installments protect the lender if the borrower defaults on the loan.
- Two years of employment at the same company: To be eligible for a mortgage, lenders must verify the borrower's employment for the most recent two years. Typically, a borrower's income is considered stable when they have been employed in a current job for six months or longer.
- Non-occupying co-borrowers allowed: FHA requires that at least one person obligated on the loan lives in the home as a primary residence. When there are two or more borrowers but one or more will not live in the property as a primary residence, the maximum mortgage is limited to 75% loan-to-value (LTV).
- Age requirements in the state of residence: To get an FHA loan, you must meet your state's legal age requirements to sign a mortgage. This is usually 18.
2021 FHA loan limits
FHA loan limits vary based on your specific location and are subject to change each year. In 2021, the FHA loan limit for a single-family home in most areas is $356,362. In high-cost areas, the cap is $822,375.
|Low-cost areas||High-cost areas|
FHA loan FAQs
- Can you use down payment assistance with an FHA loan?
- While the FHA itself does not provide down payment assistance, you may be able to qualify for down payment assistance from other state or local programs. A list of homebuying programs by state is available on the Department of Housing and Urban Development's website. The list is a great starting point if you're not sure where to look.
Down payment assistance and other monetary gifts made toward your down payment, closing costs or toward the purchase of a home do require verification and documentation by your lender. There are various state and federal regulations at play that must be met to use gift funds toward a down payment. You'll want to verify that any options you're pursuing are approved sources of help by verifying them with your loan officer to ensure they meet FHA loan requirements.
- What is an FHA funding fee?
- The FHA funding fee includes both the upfront fee and monthly premium that borrowers must pay. These fees are known as the upfront mortgage insurance premium (UFMIP) and the mortgage insurance premium (MIP). The upfront fee is equivalent to 2.25% of your mortgage amount. The MIP is a fee added to your monthly payment. This fee protects lenders from potential loss. Borrowers can finance the funding fee by including it in their mortgage. The fee is refundable if you refinance into another FHA loan.
- What is the interest rate on an FHA loan?
- FHA mortgage rates remain near historic lows. As of early 2021, interest on a 30-year fixed-rate FHA loan is between 2.620% and 3.490%. Interest rates on a 15-year fixed-rate FHA loan start around 1.75%. However, rates can vary by location.
- Are there any FHA income requirements?
- No. There are no minimum or maximum salary requirements to qualify for an FHA loan.
- How much are FHA closing costs?
- FHA closing costs average around 2% to 5% of the overall mortgage amount. Homebuyers purchasing a property for $200,000 can expect to pay $3,000 to $5,000 for closing costs. However, homebuyers should note that costs vary depending on the lender. Lenders charge several different fees that make up the closing costs.
- How many times can you get an FHA loan?
- Borrowers can technically use FHA loans as many times as they like. It’s a common misconception that only first-time homebuyers can access FHA loans. However, you can usually only have one FHA loan at a time — this is partially to prevent the program from being used to purchase investment properties. Exemptions apply with extenuating circumstances such as changes in family size, job relocation and scenarios where a co-borrower vacates the property with an existing FHA loan to purchase a home of their own.
- What is the difference between PMI vs. MIP?
- PMI stands for private mortgage insurance and relates most frequently to conventional loans. MIP stands for mortgage insurance premium and is an insurance policy applied to FHA loans when a down payment of less than 20% is used. MIP protects the lender in the event the FHA borrower cannot pay back their loan.
PMIs are also put in place to protect a lender, but there are some key differences. PMIs have more flexible terms, can be paid up front or financed with your monthly mortgage and can be removed from your payment once you reach a certain equity level in your home. MIPs may have both an upfront premium and an annual premium, but these fees can also be rolled into your monthly mortgage payment.
If you want to remove your MIP from your mortgage once you reach a certain equity level in your home, you'll generally need to go through a complete refinancing. If you put 20% or more down on your home, you do not need to have either PMI or MIP.
- How much is FHA mortgage insurance?
- At the time of publishing, the upfront mortgage insurance premium cost is 1.75% of your loan amount. The annual mortgage insurance premium ranges between 0.45% to 1.05% and is split equally among your monthly mortgage payments.
- How hard is it to get an FHA loan?
- FHA loans are typically easier to get than conventional mortgages. You only need a credit score of 500 to begin the qualification process.
- How long do FHA loans take to close?
- The closing time on an FHA loan shouldn't vary too much from any other home loan. FHA loans do require in-depth appraisals by an FHA-approved appraiser, and any issues they identify must be fixed prior to closing on the loan. On average, you can expect an FHA home loan closing to take between four and six weeks.
- Why do underwriters deny FHA loans?
- Failure to meet any of the qualifications outlined above may result in your FHA loan being denied. The most common reasons for being denied an FHA loan are bad credit and/or high debt.
- Why do sellers not like FHA loans?
- One reason FHA loans may be less appealing to a seller is the appraisal guidelines. For the loan to close, an FHA-approved appraiser must evaluate the property in question. If the appraiser determines the home's value to be below the seller’s listed price, the seller must lower the price to match the appraisal or lose the offer from the FHA borrower.
- Can you pay off an FHA loan early?
- Yes. According to the HUD Lender's Guide to the Single Family Mortgage Insurance Process, a borrower may prepay a mortgage in whole or in part.
- Can I rent out my house with an FHA loan?
- FHA loans are designed for residences the owner will occupy. You must agree to live in the home for at least one year as your primary residence before renting the home to another tenant.
Bottom line: Are FHA loans good?
An FHA loan is a good idea for homebuyers who have a low to moderate income and may not have funds available for a large down payment. Homebuyers with good credit only have to put down 3.5% with an FHA loan. Conventional loans often require a much larger down payment.
This type of loan is also a good idea for homebuyers with less-than-perfect credit because FHA loans have lenient credit score requirements. If you are looking to move into your home fast, an FHA loan is a good option.
If you prefer the benefits of a conventional loan but don’t quite qualify for one yet, we recommend you work on improving your credit score and getting out of debt. Even waiting a year or two can make all the difference in your credit score and other qualifying criteria.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- US. Department of Housing and Urban Development (HUD). “FHA Mortgage Limits,”. Accessed January 28, 2021.
- US. Department of Housing and Urban Development (HUD). “Local Homebuying Programs,”. Accessed January 28, 2021.
- US. Department of Housing and Urban Development (HUD). “Lender’s Guide to the Single Family Mortgage Insurance Process,”. Accessed January 28, 2021.
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