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FHA Loan Requirements

Catherine Hiles • October 15, 2024

Homeownership has long been the ultimate dream for Americans, and Gen Z is no exception. In fact, a Chime study of how Gen Z views and builds wealth found that the top financial goal of this generation is buying a house — 41% of those surveyed, to be precise. But conventional mortgages often have strict eligibility rules that make it harder to get a loan if you have a low credit score or a smaller down payment.

An FHA loan could be the answer if you fall into this category. Learn more about FHA loans to see whether this type of mortgage is a good fit.

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What is an FHA loan?

An FHA loan is a government-backed mortgage designed for first-time homebuyers or those struggling to meet conventional loan requirements.

The Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD), insures these loans. This makes homeownership more accessible by reducing the risk for lenders and allowing borrowers with lower credit scores to qualify.

The first FHA loan was granted in 1934, and since then, the FHA has insured over 40 million mortgages.¹ This has helped millions of Americans who otherwise might have struggled to qualify for a mortgage to get on the property ladder.

FHA loan requirements

FHA loans have flexible qualification standards, making them ideal for buyers with a smaller down payment and a lower credit score. Here are the main requirements to qualify for an FHA loan.

Credit score of at least 500

FHA requires borrowers to have a credit score of at least 500.² If your score is over 580, you’ll qualify for a lower down payment. Conventional loan lenders often require a credit score of at least 620 to qualify.⁴

Down payment of 3.5% to 10%

Borrowers with a credit score between 500 and 579 must put down at least 10% at closing to qualify for an FHA loan.² That down payment requirement could be as little as 3.5% if your credit score is 580 or above.³

If you’re struggling to save up for a down payment, look into local and government down payment assistance programs to see if you qualify.

Debt-to-income ratio of 56.9% or lower

Your debt-to-income ratio (DTI) is the amount of debt payments you make each month divided by your monthly gross income. For example, if you make $5,000 each month and have $1,500 in monthly debt payments, your DTI ratio would be 30%.

FHA loans typically require a “back-end DTI” of 56.9% or less.⁵ Back-end DTI includes your current payments (like car loans, student loans, and credit card minimum payments) and future housing payments (including mortgage, taxes, homeowners insurance, and mortgage insurance). The exact requirements are set by the lender.

Steady employment history

The FHA itself doesn’t have any specific income or employment requirements for borrowers. But many of the lenders that offer FHA loans want to see borrowers have a steady employment history before they approve the loan. Check with your chosen lender about their specific requirements.

Property type requirements

FHA loans are designed to fund the purchase of single-family homes and multi-family housing with up to four units.⁶ Loans are also available for mobile or manufactured homes, covering the unit itself and potentially the land on which it sits.

Safety requirements

The FHA will not guarantee loans for properties deemed “unlivable.”

For example, a property with an unstable foundation is likely to require extensive repair work, and if left unaddressed, the property could fall into disrepair. The property would lose its value and may collapse entirely, resulting in a loss for the homeowner and the lender.

To ensure a home is livable, the FHA requires an appraisal by an approved home inspector. The loan will likely be denied if the appraiser finds that the property doesn’t meet the FHA’s minimum standards.⁷

FHA loan limits

Like any mortgage program, FHA loans limit how much you can borrow. These limits vary based on the region where you’re buying a home. The FHA sets limits based on the average home prices in different counties across the U.S., with yearly adjustments.

This year, the standard FHA loan limit for a one-family home is $498,257, but it can be as much as $1,149,825 in areas with high property values and a high cost of living.⁸

In Alaska, Guam, Hawaii, and the Virgin Islands, the maximum FHA loan amount is $1,724,737. In areas with more expensive real estate, borrowers can take advantage of these higher limits to buy homes that might be out of reach with a conventional loan.

FHA loans are designed to help people purchase primary residences, so you won’t be able to use an FHA loan for a vacation home or investment property. Additionally, your loan amount cannot exceed these limits, even if your income would support a larger mortgage.

FHA loan interest rates

Compared to a conventional loan, an FHA loan typically has a lower interest rate, which can be helpful for borrowers with fair credit. The FHA doesn’t set the interest rates; lenders determine them based on market conditions and the borrower’s financial profile.

Borrowers with FHA loans can benefit from competitive rates because these loans are backed by the government, reducing the lender’s risk. However, lenders will still consider your credit score, loan term, and down payment size when deciding your interest rate.

Types of FHA loans

The FHA offers several loan types to suit different needs beyond just purchasing a home. Each loan type has specific requirements but provides similar flexible benefits. Here are the six main types of FHA loans:

FHA purchase loan

The most common type of FHA loan is a purchase loan that helps homebuyers obtain a primary residence. Traditional FHA loans are assumable, which means homeowners can transfer their existing mortgage to a buyer while keeping the same interest rate and loan term.

FHA streamline refinance

This loan is for homeowners who want to refinance their existing FHA-insured mortgage to take advantage of lower rates. To qualify, you must be current on your mortgage payments, and refinancing your loan must result in a tangible net benefit.⁹ Compare refinancing vs. a home equity loan to learn more.

Home Equity Conversion Mortgage (HECM)

An FHA Home Equity Conversion Mortgage (HECM) is a reverse mortgage that helps older adults supplement their income via home equity. To qualify for HECM, you must be at least 62 years old, own the property (or have most of your mortgage paid off), not be delinquent on any federal debt, and have the funds to keep up with property taxes and homeowners insurance premiums.

The FHA requires all applicants to speak with a HUD-approved HECM counselor before approving this loan.¹⁰

FHA 203(k) improvement loan

If you want to buy a home that requires extensive repairs, consider an FHA 203(k) rehabilitation mortgage. This type of loan can fund the purchase of the house as well as the repairs needed to rehabilitate it and make it livable. FHA 203(k) loan requirements include getting a work write-up and cost estimate to determine the approximate repair cost.¹¹

FHA Energy Efficient Mortgage

An FHA Energy Efficient Mortgage (EEM) gives a borrower the funds to purchase a home and make energy-efficient home improvements. A qualified home energy assessor determines the exact improvements, which could include installing energy-saving equipment or wind or solar technologies. The FHA requires the improvements to be cost-effective.¹²

FHA Graduated Equity Mortgage Program

The FHA offers a unique type of loan that keeps your initial mortgage payments lower and increases them over the life of the loan as your income increases. This helps borrowers who want to buy a home now but are still starting their career journeys and expect their income to rise significantly as they gain professional experience.¹³

FHA loan pros and cons

Every loan has advantages and drawbacks, and FHA loans are no exception. Here’s a quick breakdown of the pros and cons.

Pros

  • Low down payment: You can put down as little as 3.5%, which is lower than many conventional loans.³
  • Flexible credit requirements: You can qualify for an FHA loan with a credit score as low as 500, though your FHA down payment will be higher if your credit score is lower than 580.²
  • Better interest rates: FHA loans often come with competitive rates, saving you money over time. The exact interest rate will depend on the lender and your borrower profile.

Cons

  • Mortgage insurance requirements: FHA loan borrowers must pay a Mortgage Insurance Premium (MIP) for the loan’s life, increasing monthly payments. Conventional loans may also require borrowers to pay private mortgage insurance (PMI) premiums, but the requirement drops once you reach 20% equity in the home.¹⁴
  • Loan limits: Depending on your geographic location, you may not be able to borrow as much as you could if you took out a conventional loan.

An FHA loan can help you buy a home even with fair credit

FHA loans open the door to homeownership for those who might otherwise be unable to qualify for traditional financing. Knowing the exact FHA loan requirements helps you prepare for the loan application process to ensure a smoother experience.

Ready to explore more about the best mortgage options for you? Learn about the five types of mortgage loans to choose the right one.

FAQs

Is an FHA loan right for me? 

An FHA loan could be the best path to homeownership if you have a lower credit score or can’t afford a large down payment.

How do I apply for an FHA loan?

Start by contacting a lender who offers FHA loans. They will help you understand your eligibility and guide you through the application process.

Can you get preapproved for an FHA loan?

Yes, preapproval is often the first step. It gives you a clear picture of how much home you can afford.

Get paid when you say.™

Get up to $500 of your pay before payday.^
No mandatory fees, no credit check, and no interest.~

Learn More