Vault’s Viewpoint on FHA Loan Requirements
- FHA loans are government-backed mortgages insured by the FHA to make homeownership more accessible to average Americans.
- FHA loans impose less stringent eligibility criteria, especially surrounding credit scores and debt-to-income ratios, compared with conventional loans.
- Even though FHA loans are typically easier to qualify for than conventional loans, you must pay mortgage insurance premiums regardless of the amount of your down payment.
What is an FHA Loan?
A Federal Housing Administration (FHA) loan is a mortgage insured by the federal government, specifically the FHA, an agency that’s part of the U.S. Department of Housing and Urban Development (HUD). This type of government-backed mortgage is aimed at making homeownership more accessible to a wider range of borrowers by protecting mortgage lenders against losses triggered by loan defaults.
Due to their more lenient eligibility requirements compared with conventional loans, FHA loans are particularly attractive to first-time homebuyers and those with less-than-perfect credit.
How Do FHA Loans Work?
Depending on your credit score, FHA loans let you borrow a certain percentage of a property’s value.
For example, if you have a credit score at or above 580, you can borrow up to 96.5% of a home’s value by making a down payment of just 3.5%. If your credit score falls between 500 and 579, you could still qualify for an FHA loan as long as you can come up with a 10% down payment. In this case, you can borrow up to 90% of a home’s value.
While FHA loans carry less stringent requirements for down payments and credit scores than conventional loans, they do come with mortgage insurance premiums (MIPs) that can be difficult to get rid of and could make your loan more expensive in the long run. One MIP must be paid upfront, and other MIPs are paid throughout each year.
FHA Loan Requirements
FHA loans, which are issued by private lenders, are not available to all borrowers. Below are the requirements you must meet to qualify for this government-backed mortgage.
FHA Loan Income Requirements
Although your eligibility for an FHA loan doesn’t depend on your income level, you must prove you have a steady employment history and demonstrate that you’re financially stable enough to pay your mortgage for at least the first three years. To verify your financial situation, your lender may ask to see pay stubs, W-2s, federal tax returns and bank statements.
FHA Debt-to-Income Ratio Requirements
Your debt-to-income ratio measures the percentage of your gross (pretax) monthly income that you spend on monthly debt payments, including mortgage, rent, student loans and other obligations.
The FHA standard for a debt-to-income ratio (DTI) is 43% or less, but lenders set their own requirements. And depending on your credit score, a lender may allow a DTI of 50%. Most mortgage lenders will also look at your “front-end DTI,” which is calculated by dividing your monthly housing expenses by your gross monthly income. Ideally, this ratio should be below 31%.
FHA Minimum Down Payment
If you have a credit score of at least 580, you can finance up to 96.5% of the value of the home by putting down as little as 3.5%. If your credit score is lower than 580 but at least 500, your down payment amount may need to be around 10%. These requirements make homeownership accessible when you don’t have a big chunk of money saved for a down payment.
FHA Minimum Credit Score
Although FHA loans feature more lenient credit score requirements compared with conventional loans, there’s still a minimum threshold of 500. Typically, a credit score of 580 or higher can qualify you for a 3.5% down payment. If your credit score falls between 500 and 580, you may still qualify for an FHA, but you may need to make a larger down payment, usually around 10%.
FHA Inspection and Property Requirements
FHA loans require that a property meets certain standards set by HUD, such as durability and safety. Common requirements include having adequate heating, plumbing and electrical systems.
Before applying for an FHA loan, work with a HUD-approved appraiser to assess the market value of the home you’d like to buy and review its condition to ensure it meets FHA requirements.
FHA Mortgage Insurance Requirements
One downside of getting an FHA loan is that it comes with a mortgage insurance premium, which protects the lender in case you default on the loan.
MIP consists of two parts: upfront and annual payments.
The upfront MIP is typically 1.75% of the loan amount and can be financed into the loan. The annual MIP, divided into monthly installments, is based on your total loan amount, loan-to-value ratio and loan term. For example, for a 30-year mortgage with greater than 95% LTV and loan amount of $625,500 less, the annual premium would be 0.85% of the loan amount.
FHA Loan Limits
Aside from the previously mentioned borrower requirements, the property that you’d like to purchase must also meet FHA’s loan limits, which vary by county. In 2024, it’s typically up to $498,257 for single-family homes in lower-cost areas and up to $1,149,825 in high-cost areas.
Visit HUD’s website to look up the FHA loan limit for your county.
FHA Primary Residence Requirements
You generally can’t use the money from an FHA loan to finance investment properties or vacation homes. FHA loans are intended for owner-occupied primary residences, meaning you must use the property as your primary residence to qualify for the mortgage.
Aside from single-family homes, FHA loans can be used to finance multi-unit properties (up to four units), as long as you live in one of the units.
FHA vs. Conventional Loans
Conventional loans are not backed by the government the way FHA loans are, so they typically come with stricter eligibility requirements. Here are some other differences between the two.
| FHA Loan | Conventional Loan | |
| Minimum Credit Score | Between 500 and 580 with a 10% down payment. 580 or above with a 3.5% down payment. | Most lenders require a FICO score of at least 620 |
| Down Payment | As little as 3.5% | Generally 5% to 20% |
| Mortgage Insurance | Mortgage insurance premium (MIP) regardless of how much you put down | Private mortgage insurance (PMI) if your down payment is less than 20% |
| Property Standards | Must meet FHA property standards | Must meet the lender’s property standards |
| Debt-to-Income Ratio | Typically a maximum DTI of 50% | Typically a maximum DTI of 43% |
| Loan Limits | $498,257 (low-cost area) and $1,149,825 (high-cost area) for a single-family home, depending on the location | $766,550 in most areas, up to $1,149,825 in high-cost areas |
| Types of Properties | Primarily for primary residences | Primary residences, second homes and investment properties |
Frequently Asked Questions
Is an FHA Loan Right for Me?
An FHA loan may be right for you if you’re a first-time homebuyer or your finances are standing in the way of approval for a conventional loan. Even if you have good credit, an FHA loan still may be worth considering if you don’t have enough money stashed for a large down payment.
Is It Hard to Qualify for FHA?
FHA loans are easier to qualify for than conventional loans due to their lenient minimum credit score and lower down payment requirement. However, while FHA loans are more accessible, you still must meet criteria regarding income, employment and debt-to-income ratios.
Who Qualifies for an FHA Loan?
To qualify for an FHA loan, you must prove that you have a steady employment history, and must meet down payment, debt-to-income ratio and credit score criteria, among other requirements. Also, the property must be your primary residence and be appraised by an FHA-approved appraiser.
