FHA Home Loan Requirements: What You Need to Know
The Federal Housing Administration (FHA) has been providing loans for home buyers since 1939 and is the largest insurer of mortgages in the world. FHA loans are a popular choice for many home buyers because they are typically easier to qualify for and offer less risk than other mortgages. They are also backed by the U.S. government so if a borrower defaults, the Federal Housing Administration will pay-off the remaining loan balance and assume ownership of the home.
FHA mortgages are a great option for many interested home buyers but there are certain requirements and limits involved. Learn what they are and how to navigate this borrower-friendly loan option.
FHA loan requirements
Primary residence only
Single-family homes, manufactured homes, townhouses, and condos
A minimum credit score of 560 or higher
Upfront mortgage insurance premium
Refinance up to 97.75% of your home’s value
Down payment amount
Most loans that are not backed by the federal government typically require a significantly higher down payment. For most borrowers, the Federal Housing Administration only requires 3.5% of the purchase price of the home as down payment as long as it’s your primary residence. Though, the program does allow for 100% of that down payment to come in gift form, as long as that money does not come from the seller, a real estate agent, or broker.
Keep in mind that gifted down payment money needs to be documented through financial records. So, be prepared to provide copies of your recent bank statements, your donor’s recent bank statements, and copies of cashier’s checks. Lenders want to be sure the down payment gift is in fact "a gift" and not another loan that needs to be repaid.
In some cases, there are down payment assistance programs that home buyers are simply unaware of. Check out county, state, and the federal government websites for these home buying programs. While the HUD lists these programs, a quick Google search can provide even more specific and updated information.
FHA Loan eligible properties
Detached or semi-detached homes, manufactured homes, townhouses, and condos are eligible properties for the FHA program, so long as they are safe, secure, and sound. An appraiser will determine if the property meets FHA conditions.
There are many areas where the FHA does require problems to be remedied in order for the sale to close. Common issues include electrical and heating, roofs, water heaters, and property access (among other things).
Credit score needed
Your credit score is one of the important variables that will determine if you’re ready to buy a home in the eyes of a lender. FHA loans have the lowest credit score requirements. All other loan types have at least a credit score condition of 600 or higher. The chart below provides a breakdown by loan type and gives you an idea of the credit score requirements to buy a home.
FHA Loan 560+ credit score
VA Loan 600+ credit score
USDA Loan 600+ credit score
Conventional Loan 620+ credit score
Jumbo 680+ credit score
(The chart above is intended to be a starting point only as there are many factors that go into being approved for a mortgage and credit scores may vary based lender. Contact an American Financing salary-based mortgage consultant to help you compare options and loan programs for your specific situation.)
It’s important to note that although FHA loans are backed by the federal agency, they do still require two types of mortgage insurance.
Upfront premium: 1.75% of the loan amount that is paid when borrowers receive the loan and it can be rolled into the financed loan amount.
Annual premium: .45% to .85% of the loan amount. Depends on the length of the loan, the loan amount and the initial loan-to-value ratio. This premium amount is divided by 12 and paid monthly.
Mortgage insurance isn't necessarily all that bad.
Let's consider you want to buy a $350,000 home* with a 4.125% interest rate over a 30-year term (these are all hypothetical numbers). If you choose and are approved for an FHA loan, you only have to put down $12,250 (again that can be gifted money). Your monthly mortgage payment would be $1,909 (not including property tax or homeowners insurance, but IS including FHA mortgage insurance of $243 a month).
If you choose a conventional loan instead, you'll have to put down 20% to avoid mortgage insurance (otherwise you are paying private mortgage insurance). That would result in a $70,000 down payment and a $1,357 monthly mortgage payment (not including property tax or homeowners insurance). It's about a $550 jump to avoid coming up with another $57,500 for down payment.
*Rates are for illustrative purposes only and are based the assumption of a $350,000 fixed rate mortgage. It does not consider credit score, DTI, or current market conditions. This example was designed to provide comparative information and should be used as a general guide only. For current market rates, please contact one of American Financing’s salary-based mortgage consultants at (800) 910-4055.
Remember the flexible down payment and credit score requirements of an FHA mortgage call for these insurance premiums to offset loan payment defaults and are common among other loan types. Depending on your future financial situation, you can refinance into a better loan program down the road.
(Contact an American Financing salary-based mortgage consultant to discuss mortgage insurance and how it is structured into your specific loan.)
FHA loan refinance options
Many homeowners look into refinancing their current loan to get a better interest rate, lower monthly payments, and get easy access to cash. While an FHA streamline refinance can help with the bulk of those needs, it can’t provide homeowners with cash back. An FHA streamline refinance can let you refinance up 97.75% of your primary home’s value, provide a better rate, lower monthly mortgage payments, and doesn’t require an appraisal or credit check if you already have an FHA loan to begin with.
FHA loan limits
The Federal Housing Administration has updated its new schedule of loan limits for 2018, increasing limit ceilings within most areas in the U.S. The new FHA limits for 2018 range from $294,515 up to $679,650. Check the U.S. Department of Housing and Urban Development (HUD) website to see what are the FHA limits for your specific area.
FHA loans are assumable
Since FHA loans are assumable, you're offering a great value to a future home buyer when it comes time to sell. That's because the buyer can "assume" your loan, including the interest rate, so long as they qualify for the mortgage with its existing terms. As interest rates rise in the future, this will be an attractive benefit!
What borrowers should know
FHA loans appeal to home buyers with a lower credit rating or for those that do not have as much in savings for a large down payment, but what really makes this loan option stand out is it’s versatility to first-time home buyers. The vast majority of first-time home buyers go FHA because of the painless requirements, high loan limits, and low down payments. Contact American Financing to learn more about FHA loans or your individual loan options.