-
FHA Loans Explained: Find Out If You Qualify
Are you considering your mortgage options and wondering if an FHA loan might be right for you? I’ve put together a short video that breaks down the essentials for qualifying for an FHA loan: Here’s a quick summary of the main points from the video. And check out the video link to learn more.
• Low Down Payment & Credit Score Minimums:
Understand how a credit score of 580 can get you in with a 3.5% down payment, while scores down to 500 may qualify with a 10% down payment.• Debt-to-Income Ratios:
Learn how the front-end (31% for housing costs) and back-end (43% for total debt) ratios impact your mortgage eligibility.• Property Types & Loan Limits:
See how FHA loans apply to various property types—from single-family homes and FHA-approved condos to multi-unit dwellings (up to four units, with one occupied by the owner). Keep in mind that loan limits differ by county.• Employment Requirements:
Discover why a consistent work history (around two years) is important for FHA loan qualification. -
2 Replies
-
Great informative info, Chad. FHA loans are hands down the most popular loan program in the United States.
FHA Loans: A Complete Guide to Requirements, Benefits, and Considerations
Are you wondering if an FHA loan is the right option for you? Walking through the requirements for FHA loans, their advantages and disadvantages, lender overlays, and HUD’s (the Department of Housing and Urban Development) involvement with FHA financing will help clarify things for you. The Federal Housing Administration insures these loans aimed at helping people with lower credit scores or smaller down payments.
What Is an FHA Loan?
As mentioned earlier, an FHA loan is a type of government-backed mortgage, this time insured by the Federal Housing Administration. The FHA does not directly grant loans. Instead, it insures mortgages offered by private lenders such as banks and credit unions. These private entities also provide the bulk of the financing. Getting insured loans through FHA means less stringent documentation if a borrower has a steady income.
Key FHA Loan GuidelinesMinimum Credit Score & Down Payment Requirements
Here, you can see the various credit score categories and their respective down payment requirements:
- Credit Score of 580+ → Eligible for a 3.5% down payment.
- Credit Score between 500-579 → Requires a 10% down payment.
- Credit Score below 500 → Generally not eligible for FHA loans.
Debt-to-Income (DTI) Ratio Limits
FHA loans determine how much a borrower can take on by looking at their DTI or Debt-to-Income Ratio. This refers to the percentage of your monthly gross income that goes toward housing and any other debts.
On manual underwrites with no compensating factors to two compensating factors:
- Front-end DTI (housing costs only) → 31% of gross income with zero compensating factors, 37% with one compensating factor, and 40% with two compensating factors.
- Back-end DTI (total debt obligations) → 43% of gross income with no compensating factor, 47% with one compensating factor, and 50% with two compensating factors.
Some lenders will allow higher DTI ratios up to 46.9% front-end and 56.9% back-end if other risk-mitigating compensating factors exist, such as high credit scores, large cash reserves, and an approved/eligible per automated underwriting system (AUS).
Property Requirements for FHA Loans
You can use FHA loans to buy various residential properties, but they must be owner-occupied.
Eligible Property Types:
- Single Family Homes.
- Condominiums (Approved by FHA).
- Multi-Family Dwellings (up to four units; one has to be occupied by the borrower).
- Manufactured homes that conform to the HUD guidelines.
Loan Limits:
- FHA loan limits are different for each county and are revised every year.
- The limit for some borrowers in high-cost areas is much higher than the standard regions.
- FHA loan limits can be viewed on the HUD website or with the borrower’s lender.
Employment & Income Verification
- A stable work history of two years is generally needed.
- Income needs to be consistent and easily verified (e.g., tax returns, W-2s, or pay stubs).
- Self-employed borrowers need to submit at least two years of filed tax returns.
Pros and Cons of FHA Loans
Advantages of FHA Loans
- ✔ With lower credit score requirements, it’s more accessible for borrowers with past financial difficulties.
- ✔ Small Partial Payments—Lenders only require 3.5% down for people with a credit score of 580 or higher.
- ✔ DTI Ratio Flexibility—Certain lenders permit above-standard debt-to-income ratios.
Easy Mortgage Refinancing
- FHA Streamline Refinance enables borrowers to lower their mortgage rates with little documentation.
Loans that Can Be Passed On
- A future buyer can take over the FHA loan, which prevents interest costs from rising.
FHA Loan Drawbacks
- MIP: Borrowers must pay a lump sum of mortgage insurance premiums (MIP) with an annual fee.
- Other Limitations: FHA loans have regionally determined maximum borrowing limits.
- Restrictions on Owned Property: Homes are not eligible unless they meet FHA’s established safety and quality standards.
- Occupancy Restrictions: Non-owner-occupied properties cannot be financed with an FHA loan.
Understanding Lender Overlays on FHA Loans
FHA loans come with minimum requirements, but lenders can also set more strict rules called lender overlays. Examples of lender overlays include:
- Higher minimum credit score (e.g., requires 620+ rather than 580).
- Stricter debt-to-income ratio (e.g., back-end DTI cap of 45% instead of 50%).
- More stringent employment verification requirements beyond those of the FHA standard.
To avoid unaffordable lenders, borrowers must look for lenders offering minimum allowances per the FHA standard.
- Understanding the HUD and FHA’s Role Within Mortgage Lending.
- HUD’s (Housing and Urban Development Department) function oversees FHA loans and develops housing policies promoting homeownership.
- FHA (Federal Housing Administration) insures loans, reducing lenders’ risk and making it easier for borrowers to qualify.
As with all government programs, HUD ensures that FHA-endorsed lenders follow the federal guidelines and non-discrimination policies.
Is An FHA Loan The Perfect Fit For You?
FHA loans are great for a few reasons, such as:
- Difficulties in obtaining a favorable credit score are viable for approval.
- Struggles with saving for a down payment (conventional loans need around 3.5%).
- Have a higher rank of debt in comparison to the average income ratio than most liberal lenders will accept.
- Receive an opportunity to refinance through other means.
However, having good credit and a sizable down payment might lead to lower mortgage insurance costs under a conventional loan.
Concluding Remarks
FHA loans offer flexibility and affordability, which is a good consideration, especially for first-time buyers and those with less-than-perfect credit. However, the benefits and limitations must always be compared with different lenders to permit the best conditions to present themselves.
They can check the link at the top, where the short video describes all the important details regarding funding an FHA loan.
Do you have any questions or inquiries? Please submit them in the comments section, and Chad Burns of the GCA FORUMS Mortgage Group team will gladly assist you. You can also email Chad Burns at chad@gustancho.com. Here is the FHA loan limits for your convenience:
https://gustancho.com/fha-loan-limits/
gustancho.com
HUD, the parent of FHA, sets the standard and high-balance FHA loan limits for every county in the United States based on median home prices.
-
FHA LOANS have lower rates than conventional loans. Excellent loan program for owner occupied one to four unit homes. Highly recommend FHA LOANS.