FHA Loan Eligibility Requirements
FHA loans are a great alternative to a “conventional” mortgage for many reasons. There’s a reason why it’s our favorite type of loan! (we may be a little biased lol)
First, what is an FHA Loan?
An FHA loan is simply a government-backed mortgage insured by the Federal Housing Administration, designed to assist low-to-moderate-income borrowers who may have lower credit scores or minimal savings for a down payment. This type of loan has helped millions of Americans secure a piece of the dream of homeownership. In fact, FHA had helped over 700,000 families secure financing in 2023 alone!
FHA Loan Eligibility Requirements
Credit Score
One of the primary driving factors in determining if you’ll qualify for an FHA loan is your credit score. Generally, the FHA requires borrowers to have a minimum credit score of 580 to qualify for the low down payment advantage, which is currently at 3.5%. If your credit score falls between 500 and 579, you may still be eligible, but you’ll likely need to put down a 10% down payment. Keep in mind it is increasingly difficult to get financed if your credit score is below 580. Check our blog for many ways you can get your credit score above that 580 threshold quickly!
Down Payment
The down payment requirement for an FHA loan, as mentioned earlier, can be as low as 3.5% if you have a credit score of 580 or higher. This makes the FHA loan a great option for individuals who have not saved a substantial amount for a down payment. The guidelines also allow for that down payment to be gifted by family or even an organization that helps buyers with down payment assistance.
Employment History
To qualify for an FHA loan, lenders typically want to see proof of steady employment and income for at least the last two years. Consistency in your job history and income can show lenders that you’re a lower risk and capable of making your mortgage payments on time. You’ll want to be in the same industry or line of work for the last 2 years. For example, you can be a bookkeeper at a trucking company for a year and an accountant for a year at an insurance broker. That would work!!
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio (DTI) is another critical factor considered for an FHA loan. It’s a comparison of your gross (think BEFORE taxes) monthly income to your monthly debt payments, including the potential mortgage payment. The FHA requires a DTI ratio of 43% or less, though some exceptions may allow for higher ratios. That ratio generally includes anything you’re currently making payments on which can include cars, credit cards, student loans, and so on.
Property Requirements
The home you intend to purchase must meet certain safety, security, and soundness (structural integrity) standards as determined by an FHA-approved appraiser. The property must also be your primary residence. Generally this will include single family homes, FHA approved condominiums, Townhomes, and some manufactured homes. Manufactured homes must own the land and be attached to the land. There are some additional hoops you’ll have to jump through for those.
Mortgage Insurance
With an FHA loan, you’ll have to pay for mortgage insurance, which protects the lender in case of borrower default. There’s an upfront mortgage insurance premium (also known as MIP), typically 1.75% of the home loan, and an annual premium that’s usually spread out across monthly payments.
FHA Loan Limits
The FHA establishes loan limits annually, which vary by county and are based on the cost of living in that area. These loan limits represent the maximum amount that can be borrowed using an FHA loan. You can find the loan limits for your County in our Blog!
Additional Documentation
Expect to provide necessary documents such as identification, Social Security number, proof of U.S. citizenship or legal residency, and documentation of any assets and liabilities you have for your FHA loan application. The underwriters will also likely want to source the down payment from your personal bank account (not a business) as well as the earnest money deposit. Be prepared to show bank statements. Pro tip – when sending in bank statements to your lender be sure to send ALL pages of the statement – even the blank ones! It doesn’t make sense to me either…
Remember, knowledge is the key to making empowered decisions. Good luck on your homeownership journey!
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We hope this blog post has helped you understand FHA loan eligibility requirements. If you found this information useful, please consider sharing it with others who might benefit from it. For more tips and guidance on home buying and mortgages, follow our blog and stay up to date on all things related to home financing. We appreciate you!!!
