Understanding the Current FHA Mortgage Guidelines and Requirements
What is an FHA Loan?
An FHA loan is simply a mortgage insured by the Federal Housing Administration. These loans are specifically designed to help low-to-moderate-income buyers who may struggle to obtain traditional conventional financing. The FHA doesn’t lend money directly; instead, it provides lenders with protection against losses, encouraging them to offer more favorable terms to borrowers. Here at FHArates.com we help you find the perfect FHA lender (shameless plug!).
The Key Benefits of an FHA Loan
Before diving into the specific guidelines, let’s briefly highlight some key benefits of FHA loans:
- Lower Down Payments: FHA loans require as little as 3.5% down payment, making it easier for first-time buyers to save for their new home.
- Flexible Credit Requirements: FHA loans are known for their more lenient credit score requirements, making them accessible to buyers with less-than-perfect credit (think as low as 500 with a 10% down payment).
- Competitive Interest Rates: Because of the FHA’s insurance, lenders can offer more competitive interest rates, making monthly payments more manageable.
Current (2024) FHA Mortgage Guidelines
1. Credit Score Requirements
One of the most significant advantages of FHA loans is their flexible credit score requirements:
- 580 and Above: Borrowers with a credit score of 580 or higher are eligible for the 3.5% down payment option.
- 500 to 579: Borrowers with credit scores between 500 and 579 can still qualify, but they will need to make a 10% down payment.
It’s important to note that individual lenders may have their own minimum credit score requirements, often referred to as “lender overlays.” Also, you’re going to want at least 3 tradelines (current accounts) or more. For example, that could be 2 credit cards and a car loan.
2. Down Payment Requirements
As mentioned, FHA loans require a minimum down payment of 3.5% for borrowers with a credit score of 580 or higher and 10% for those with scores between 500 and 579. These funds can come from various sources, including personal savings, gifts from family members, or grants.
3. Debt-to-Income Ratio (DTI)
The debt-to-income ratio measures your monthly debt payments against your gross monthly income. FHA guidelines typically allow for a DTI ratio of up to:
- 31% for Housing Costs: This includes mortgage payments, property taxes, homeowners insurance, and any other related housing expenses.
- 43% for Total Debt: This includes all monthly debt obligations, such as car loans, student loans, credit card payments, and housing costs. Think: all of your bills including the new mortgage added up divided by your total income BEFORE taxes.
In some cases, lenders may allow higher DTI ratios if the borrower has significant compensating factors, such as a large down payment or substantial cash reserves.
4. Employment History
Lenders will review your employment history to ensure a stable source of income. Generally, FHA guidelines require:
- Two-Year Employment History: A consistent work history over the past two years in the same field of work (see next), with gaps longer than one month generally requiring a good explanation.
- Continuity of Employment: Employment in the same field or industry is preferred, although exceptions can be made for recent graduates or individuals re-entering the workforce. For example, you’d likely qualify if you went to nursing school for 2 years and then you’ve been working for 1 year in nursing.
5. Property Requirements
FHA loans can only be used to purchase primary residences, and the property must meet a few specific standards:
- HUD-Approved Appraisal: The property must undergo an appraisal by an FHA-approved appraiser to ensure it meets minimum property standards and is valued appropriately.
- Safety and Soundness: The property must be safe, sound, and free of major defects. Think safety and security. They’re looking for things like roof leaks, all doors and windows must lock, fire detectors must work, no cracked windows, the oven/stove works, the place has hot water, there is no peeling paint, etc. Any necessary repairs must be completed before closing.
6. Mortgage Insurance Premium (MIP)
FHA loans require mortgage insurance to protect lenders against potential losses. There are two types of MIP:
- Upfront Mortgage Insurance Premium (UFMIP): This is 1.75% of the loan amount, paid at closing or financed into the loan.
- Annual Mortgage Insurance Premium (AMIP): This is paid monthly and varies based on the loan term, loan amount, and loan-to-value ratio.
7. Loan Limits
FHA loan limits vary by location and are based on the median home prices in each area. For 2024, the loan limits range from:
- Low-Cost Areas: $498,257 for single-family homes
- High-Cost Areas: $1,149,825 for single-family homes
You can check the specific loan limits for your area here
How to Apply for an FHA Loan
Applying for an FHA loan involves several steps:
- Determine Your Budget: Assess your financial situation and determine how much home you can afford.
- Find a Lender: Look for FHA-approved lenders and compare their terms and conditions. We can help with that! Just sayin’
- Get Pre-Approved: Obtain a pre-approval letter from your chosen lender to strengthen your offer when house hunting.
- Complete the Application: Submit your loan application along with necessary documentation, such as proof of income, tax returns, and bank statements. Seriously, take the time to do this right!
- Property Appraisal: The lender will order an FHA appraisal to ensure the property meets the required standards.
- Underwriting and Approval: The lender will review your application and probably ask for more documentation.
- Closing: Once approved, you’ll sign the necessary documents and complete the purchase. The loan usually funds on the day of closing.
You lender can absolutely help you with specific questions about your scenario. Any reputable lender will be very transparent and very specific on what they need and the fees they charge. If they don’t know, or simply are being ambiguous please take the time to shop around. If a lender gets offended that you’re shopping, they aren’t the lender for you!
