FHA Home Loan Requirements & Guidelines
The FHA loan is the second most common loan program in the country, made popular by its flexible guidelines and loan qualification requirements.
It’s the most common first time home buyer loan and is ideally suited for people looking to purchase a multi-unit home, for borrowers with lower credit scores (under 680) and for lower down payments.
Whether you’re looking to use the FHA mortgage for a home purchase or an FHA Cash out refinance, our article will highlight FHA’s loan requirements to qualify, guidelines that you’ll have to meet and loan income requirements.
FHA Mortgage Resources:
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FHA Loan Requirements
Eligible borrowers looking to purchase or refinance a home, may qualify for an FHA loan if they meet the below criteria. FHA loans are also NOT limited to first-time buyers as some borrowers believe.
FHA Property Requirements
- Property must be your primary residence, unless you already own the home and are doing a Streamline refinance.
- The property you’re purchasing or refinancing must meet FHA-required property requirements to be considered an FHA approved home.
- Single family, multi-family (2-4 unit), HUD-approved condos, and manufactured homes are all eligible for FHA financing.
FHA Loan Limits
- FHA guidelines set a cap on how much money can be borrowed on FHA loans. The amount borrowed must be below FHA County Loan Limits, which is $314,827 in most counties throughout the US. Multi-family homes have higher limits as do some high-cost counties.
FHA Credit Score and Credit History Requirements
- 580+ FICO scores require a 3.5% minimum down payment.
- 520-579 FICO scores require a 10%+ down payment.
- Most FHA lenders require you have a minimum credit score of 580, however a credit score required for an FHA mortgage can vary by lender. Here at United Fidelity Funding, we can lend to the FHA-minimum FICO of 520 but there are additional requirements for borrowers with under 580 credit such as a 10% down payment.
- Borrowers must be 2 years removed from a Bankruptcy and 3 years removed from any short sales, foreclosures or deed-in-lieu of foreclosures.
FHA Down Payment Requirements (or Loan-to-Value)
- FHA guidelines dictate you must have a 3.5% down payment if your credit is above 580, although more may be required to qualify or to keep you below the county loan limits.
- FHA does require that you put 10% down if your credit score is below 580.
- The down payment must come from the borrower’s personal funds in checking, savings, or retirement accounts. It can also come from a gift from a family member, employer, or government agency.
- On rate and term refinances (where you’re reducing your rate or lowering your term, but not getting any additional cash out), the LTV is capped at 97.75%
- On cash out refinances, the LTV is capped at 85%
Debt-to-Income Ratio Requirements
- FHA sets the maximum overall debt-to-income ratio at 57% of a borrower’s gross monthly income. Factored into that calculation are all your minimum debt payments reported on credit (credit cards, installment loans and auto loans), 1% of your student loan balances and the new mortgage payment. Child support, alimony, separation maintenance and IRS installment agreements may also be factored.
- FHA also requires that the new mortgage payment be no more than 47% of your gross monthly income.
FHA MIP (Mortgage Insurance Premium) Requirements
- FHA guidelines require the mortgage carry mortgage insurance in the amount of .85%/year of the loan amount if >95% LTV or .80%/year if <95% LTV.
- 1.75% upfront mortgage insurance is also required but can be financed into the loan at closing.
FHA Loan Income Requirements
Unlike the Rural Housing Loan Income Limits, the FHA loan does not have specific income limitations. However, FHA requirements and guidelines set forth several rules when it comes to income documentation and calculation.
W2 Income Borrowers
- Must document a 2-year work history with prior 2 years of W2’s
- Current paystubs will likely be used to calculate your income.
- Overtime, commission and bonus income cannot be used until you’ve had a 1-year history (but 2 years may be required in some instances)
1099 Income or Retired Borrowers
- Lenders likely will require copies of 1099’s for the prior 2 years of any retirement income being used.
- Pension awards letters and Social Security awards letters will also be required, if applicable
- If withdrawals or dividends from retirement assets are being used (IRA, 401k, etc.), then lenders will also have to confirm the account has enough assets for the income to continue for 3 years.
Self Employed Income
FHA Loan Requirement Summary
FHA loans have some of the most flexible guidelines and requirements of any new home loan option. The offer low down payment requirements, flexible credit scores, and higher debt-to-income ratios than Conventional mortgages.
Click on the link below to see if you qualify and get your free FHA Loan Comparison today! Or read more about applying for an FHA loan online.