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An FHA loan is a popular choice for borrowers due to its lenient eligibility criteria and extensive benefits.

In most cases, FHA loans are easier to get approved for than conventional loans. However, there are still specific requirements homebuyers need to meet. Lenders need to know that you can repay the loan and that the property you wish to purchase is suitable.

Basic FHA Loan Requirements

To qualify for an FHA home loan, you'll need sufficient credit and income to show lenders you have the ability and willingness to repay the debt. FHA loan borrowers must also:

  • Have a valid Social Security number
  • Be a U.S. resident
  • Make a down payment of at least 3.5%
  • Intend to use the property as a primary residence
  • Have an appraisal performed on the property by an FHA-approved appraiser

Once you meet these basic FHA requirements, you’ll be well on your way to getting approved for an FHA home loan. Let's dive into the details a bit more.

FHA Loan Credit Requirements

While FHA credit requirements are more relaxed than conventional loans, to take advantage of the FHA loan's 3.5% down payment, you'll need a credit score of at least 580. Borrowers with credit scores below 580 may be able to qualify with a 10% down payment.

However, it's also important to understand that FHA lenders can have credit score minimums that exceed what the government requires. Most lenders won’t offer loans to borrowers with a score lower than 620, but guidelines and policies on credit can vary by lender.

If you've filed for bankruptcy, you'll need to be at least two years removed from the filing and have since established good credit. If you've experienced a foreclosure, you must be three years removed from the foreclosure.

FHA Debt-to-Income (DTI) Requirements

The relationship between your gross monthly income and your major monthly debts is called your debt-to-income (DTI) ratio. Lenders look at your DTI ratio when evaluating your application.

DTI guidelines and restrictions can vary by lender and other factors. Some lenders may have lower thresholds than others, and borrowers with more challenging loan files can encounter more restrictive DTI guidelines.

Unlike USDA loans, FHA loans do not restrict how much income borrowers can earn. However, they do have limitations on the amount of money that you can borrow.

FHA Loan Limits

FHA loan limits are the maximum amounts a borrower can take out under an FHA loan for a home purchase. These limits vary by location and are adjusted annually based on changes in the housing market and the cost of living.

FHA loan limits are determined by the county or metropolitan area where the property is located. Single-family homes have different limits compared to multi-unit properties (up to four units). Generally, the FHA loan limits are lower than the limits for conventional loans.

As you explore properties on the market, ensure the seller's asking price is within FHA loan limits. If it's higher, you won't be able to use an FHA loan, and making a significantly lower offer to conform to loan limits is unlikely to be accepted.

FHA Down Payment Requirements

A prominent selling point of an FHA loan is that it only requires a 3.5% down payment, especially for those who can't quickly amass the traditional 20% down needed for a conventional loan. However, borrowers with a credit score below 580 must put a minimum of 10% down. Depending on your credit score, your lender may require a higher down payment.

Either way, talking with your lender to see what you can afford is worth it. Additionally, you'll want to know what sources of funds are considered acceptable for your down payment. While many sources are accepted, it's important to document where your money is coming from to meet lender scrutiny.

FHA Loan Property Requirements

To protect homeowners and their financial investment, the FHA also sets requirements for the types of properties that can be financed with FHA funding. To determine if your home meets these minimum requirements, your lender will order an appraisal of the property.

The main goals of the FHA appraisal are to:

  1. Ensure the home is a healthy, safe and structurally sound building.
  2. Confirm the value of the home matches the purchase price.

The appraiser will evaluate the condition of the following:

  • Each area and room on the property, including any attics or basements
  • All mechanical systems
  • Appliances
  • Plumbing
  • Foundation
  • Roof
  • Gutters

The appraiser will specifically be looking for signs of damage, deferred maintenance or deterioration. Normal wear and tear will be noted, but if a property appears well-maintained, it should qualify for FHA financing.

If the home doesn't pass appraisal or repairs are required, the seller must make the repairs. If the house doesn't appraise for at least the purchase price, buyers can talk with the seller about renegotiating in light of the low valuation.

Note that FHA construction loans and condos have different property requirements than single-family homes.

FHA Loan Inspection

A home inspection is not a requirement to be approved for an FHA loan, but they are recommended. While the FHA appraisal ensures the home's condition and value are stable, a traditional home inspection can take a deeper dive into a house, giving you a more personal assessment. A home inspection can illuminate any issues, help you plan for future maintenance and ultimately provide leverage for price negotiations.

FHA Occupancy Requirements

FHA loans are designed for homeowners, not landlords, vacationers or investors. As such, FHA occupancy requirements state that properties purchased with an FHA loan must be used as a primary residence. A property is typically considered a primary residence if the buyer:

  • Occupies the property and uses it as their primary residence for at least one year
  • Occupies the property for the "majority" of the year
  • Moves into the property within 60 days of closing on their home

Simultaneously having two FHA loans is generally against the rules, but there are limited scenarios where it would be technically possible. Approval for a second FHA loan depends on the lender's discretion and the borrower's specific circumstances. Borrowers must meet specific requirements and provide documentation to support their case.

FHA Loan Mortgage Insurance

Like conventional loans, FHA loans also require mortgage insurance. FHA mortgage insurance includes both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) that is usually paid monthly. Depending on your down payment amount and loan term, the duration of an FHA loan MIP can last for the entire life of the loan or be canceled after 11 years.

FHA lenders calculate UFMIP and MIP values based on various factors, including the home's price, down payment and the loan term. Before agreeing to loan terms, you can consult your lender about options to lower your mortgage insurance payments.

The Bottom Line

With careful planning and preparation, meeting the previously mentioned requirements should be a breeze. Soon, you'll be ready to apply for an FHA loan and be well on your way to homeownership.