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If you’re considering using an FHA loan to make your home purchase, use this guide to understand what requirements you’ll need to meet to qualify:
- FHA loan requirements
- How to qualify for an FHA loan
- What you can do if you don’t meet FHA requirements
FHA loan requirements
FHA loans are insured by a federal agency called the Federal Housing Administration. In order for them to insure a loan, the transaction must meet various FHA eligibility requirements — both for the borrowers and the properties they’re looking to buy.
Here’s the standard underwriting criteria for FHA loans you’ll probably need to meet to qualify:
- Credit score: 500 or higher
- Down payment (or minimum investment): At least 3.5% of the appraised value or the sales price of the property (whichever is less)
- Debt-to-income ratio: 43%
- Mortgage insurance: 1.75% upfront premium; 0.45% to 1.05% fee annually
- Property: Must be your primary residence for at least one full year after closing the loan, be deemed “safe, sound, and secure,” meet minimum property standards, and be appraised by an FHA-approved appraiser
Check Out: First-Time Homebuyer Tips
How to qualify for an FHA loan
As with most mortgage loans, there are FHA guidelines regarding credit score, down payment, debt-to-income ratio (DTI), mortgage insurance, and the actual property being purchased. Here’s more detail on each:
FHA loan credit score requirements
The minimum credit score you can have for an FHA-insured loan is a 500, though you’ll need to make at least a 10% down payment if your score is that low.
If your credit score is at least 580, however, you can have a down payment as low as 3.5% of the appraised value or sale price of the home.
FHA loan down payment requirements
For an FHA loan, you’ll need a down payment of at least 3.5% of the home’s purchase price or appraised value, whichever is lower. To make this minimum payment, you’ll need at least a 580 credit score.
If your score is between 500 and 579, however, your required down payment will be 10%.
FHA debt-to-income requirements
To qualify for an FHA loan, your debt-to-income ratio should be less than 43% — meaning your total monthly debt payments add up to no more than 43% of your monthly income. Lenders will also look at your housing DTI or housing ratio, which can’t exceed 31%.
This compares all of your housing-related expenses after taking out the mortgage to your monthly income.
In some cases, the FHA might allow for higher DTIs if you have what the agency calls “compensating factors.” These factors include (but are not limited to):
- Having recently (and consistently) paid a higher housing payment than your expected mortgage payment
- Making a down payment of 10% or more
- A large amount of savings or cash reserves
- High potential for increased earnings
- Your new mortgage payment represents only a minimal increase in your monthly housing costs
FHA loan income requirements
FHA loans don’t have income limits — they’re available to any qualified borrower — but you must have two years of employment history. Lenders want to see that you’re bringing in a stable income, and they’ll verify that your income is likely to remain stable for the first few years of the loan.
- Recent pay stubs
- W-2 forms from the previous two years
- Verification of Employment (VOE) for the previous two years
- Individual federal income tax returns for the past two years
- Unemployment income (if applicable)
- Employer housing subsidy (if applicable)
For instance, the lender will use your current hourly rate if you’re an hourly employee or annual salary if you’re salaried to calculate your income. Overtime, tips, and commissions may also qualify if the income is consistent for the last two years.
You may need to show additional documentation — such as a business license or a profit and loss (P&L) statement — if you are self-employed.
FHA loan limits
FHA mortgage limits vary by county and the number of housing units. The FHA loan limit in 2021 for one-unit properties in low-cost areas is $356,562.
Single-unit homes in higher-cost areas can have a maximum limit as high as $822,375 for calendar year 2021.
FHA property requirements
To qualify for an FHA loan, the property must meet certain FHA requirements. Some of the property requirements include:
- Primary residence only: Vacation homes and investment properties are ineligible for FHA-insured loans. Multi-unit properties can qualify if you live in one of the units.
- Must occupy within 60 days: At least one borrower must occupy the home within 60 days of the closing date and plans on living in the house for at least one year.
- No home flipping: To be eligible for an FHA loan, the home you’re purchasing must have been sold at least 90 days prior.
- Qualifying property type: The residence can only hold up to four families. Single-family homes, townhouses, condominiums, and manufactured homes can qualify.
The property will also need to be appraised by an FHA-approved appraiser and meet specific durability requirements.
For example, a roof may need at least two years of physical life remaining to pass inspection. Or, the exterior may require new paint to correct an existing subsurface exposure.
FHA mortgage insurance requirements
FHA loans require a 1.75% of the loan amount upfront mortgage insurance premium at closing and a 0.45% to 1.05% of the loan amount premium you will pay each year for the life of the loan. The exact amounts depend on your loan size, loan term, and down payment.
| Loan amount | Annual premium for 15-year loan | Annual premium for 30-year loan |
|---|---|---|
| $625,000 or less |
|
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| Over $625,000 |
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FHA documentation requirements
You’ll need to verify your identity and funding sources. Be ready to provide the following to your lender:
- Government-issued photo ID
- Social Security number (SSN)
- Two most recent federal tax returns
- Proof of employment
- Sales contract
- A detailed letter for gift funds signed by you and the donor
Your lender will also obtain your personal credit report and property appraisal summary.
What you can do if you don’t meet FHA requirements
If you’re initially ineligible for an FHA loan, here are a few strategies that can help improve your chances:
- Increase your credit score. Pay down your balances, settle any collections or late payments, and report any errors on your credit report. These steps should increase your credit score (and maybe even qualify you for a lower interest rate, too).
- Make a larger down payment. Down payments of 10% or more count as one of those “compensating factors” that can help your case. The bigger, the better.
- Get a co-borrower. Bringing in a co-borrower, particularly one with a high credit score and additional income, can give your application a boost. A co-borrower won’t improve the credit score your lender uses for qualification, but can increase income (which may reduce the DTI for the application, if the co-borrower doesn’t have debts that outweigh their income).
- Reduce your debt. When you lower the balances on your debts, you improve your DTI ratio. This could put you under that 43% target and help you qualify.
- Extend your employment history. Having a stable income or remaining in the same career field for two years can make it easier to verify your income history.
- Buy a lower-priced home. Finally, consider buying a more affordable home. This reduces the amount of money you need to borrow and lowers your monthly payment (not to mention your estimated DTI).
Rates and terms vary greatly across lenders. So if you’re considering getting an FHA loan, make sure you shop around for mortgages first.
If you’re still not sure what loan is best suited for your home purchase, Credible Operations, Inc. can help you compare many mortgage options and get pre-approved. Even though we don’t offer FHA loans, you can compare other mortgage options from multiple lenders.
Josh Patoka contributed to the reporting of this article.
