FHA loans are an attractive option for many first-time homebuyers. Backed by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (HUD), these home loans feature flexible eligibility criteria. As a result, you can get approved with a lower credit score and down payment than you’ll find with other home loan products. However, you should consider the additional costs before deciding if an FHA is best for your financial situation, like mortgage insurance and funding fees.
Types of FHA Loans
Many borrowers turn to FHA loans to buy their dream homes. However, these loan products can also be used to refinance or renovate qualifying properties.
Purchase
FHA loans can be used to purchase a primary residence that meets HUD guidelines.
FHA Rate/Term Refinances
An FHA rate/term refinance could be ideal if your credit score is low but you want a better interest rate or a different loan term.
FHA Streamline Refinance
If you already have an FHA loan, it’s possible to get a lower interest rate, save on mortgage insurance and reduce your monthly mortgage payment with an FHA Streamline Refinance. Plus, these loan products don’t require you to submit a mountain of paperwork when you apply.
Cash-Out Refinance
An FHA cash-out refinance lets you pull equity out of your home.
FHA 203(k) Loan
This loan product is ideal if you want to fund the purchase of a home and renovation costs with a single loan product.
What are the Requirements for an FHA Loan?
Before applying for an FHA loan, familiarize yourself with the eligibility requirements to ensure your financial and credit health are up to par. You should take into account that lenders set their own guidelines and can implement what’s referred to as overlays, like higher credit scores or debt-to-income requirements, that make it more challenging to get approved for a loan.
Property Requirements
You must use the home you purchase with an FHA loan as your primary residence. Eligible properties include single-family homes, condos, townhomes and multi-family homes with two- to four units (assuming you occupy at least one).
The FHA also requires that the home meet the minimum property standards, which can be confirmed through an FHA appraisal. Furthermore, at least one borrower must move into the house within 60 days of closing.
Credit Score
The minimum credit score per FHA guidelines is 500, but your down payment will be substantially lower if your score is at least 580. Be mindful that some lenders require much higher scores, given current market conditions.
Down Payment
You’ll need 3.5% down if your credit score is 580 or higher. A 10% down payment is required if your credit score is between 500 and 579.
Mortgage Insurance
There are two mortgage insurance requirements for FHA loans:
- Upfront mortgage insurance premium: 1.75% of the loan amount that’s payable at closing unless you opt to roll it into the loan amount
- Monthly mortgage insurance payments: payable for the life of the loan or 11 years if you make a down payment of at least 10%
Loan Limits
The FHA loan limits in 2024 are $498,257 for single-family homes or up to $1,149,825 for high-cost areas.
Income
Lenders will verify your earnings by examining pay stubs, bank statements, W-2s and federal tax returns to determine if you qualify for a loan.
You should also have an acceptable debt-to-income (DTI) ratio, which is the percentage of your monthly gross income used to cover debt payments. FHA guidelines recommend a DTI that doesn’t exceed 43%. It’s also best if the mortgage payment for the home you’re considering doesn’t exceed 31% of your gross income.
How Does an FHA Loan Differ from a Conventional Loan?
Conventional loans aren’t insured by the federal government. Furthermore, there’s no 1.75% funding fee, like you’ll find with an FHA loan. Here are some other ways conventional loans differ from FHA loans:
- Loan limit: Conventional mortgage loans are limited to $766,550 for a single-unit property. This figure increases to up to $1,149,825 for homes located in high-cost areas.
- Eligibility criteria: The credit score minimum is 620, and the down payment requirement ranges from 3% to 20% on conventional loans.
- Loan terms: Most lenders offer 8- to 30-year terms on conventional loans, but the loan term for FHA loans is limited to 15- or 30 years.
- Interest: Fixed-rate and adjustable-rate conventional loans are available. The same applies to FHA loans.
- Mortgage insurance: Private mortgage insurance is assessed on conventional loans if your down payment is less than 20%. The upside is that you can have it removed once you have 22% equity.
How to Get an FHA Loan
With so many lenders to choose from, it can be overwhelming to research lenders and find the best option to get an FHA loan. Be sure to compare and do your own research before applying for an FHA loan.
