An FHA loan is a government-backed mortgage that allows you to own a home while enjoying less stringent financial standards. If you have debt or a low credit score, you may be eligible for an FHA loan. Even if you have a bankruptcy or other financial issue on your record, you might be able to acquire an FHA loan.

The Federal Housing Administration, which is under the Department of Housing and Urban Development’s jurisdiction, backs FHA loans. The Federal Housing Administration insures FHA loans, which basically means that if you default on your loan, this agency protects your lender. FHA loans include low down payment requirements and lower credit score requirements, but you’ll have to pay mortgage insurance.

Albeit you don’t have to be a first-time home buyer to qualify for an FHA loan, the prospect of a low down payment and more relaxed credit standards might make FHA loans particularly appealing to first-time house buyers.

Benefits of FHA loans

• Lenders can accept a lower down payment
• FHA loans have lower credit score requirements than other loans
• Individuals who have a bankruptcy and other financial issues in their history also qualify for FHA loans
• Higher debt-to-income ratio
• Some closing costs can get financed
• Affordable mortgage insurance

FHA loan requirements

Here are some of the requirements borrowers must meet to qualify for FHA loans.

• The home you’re thinking about buying has to be evaluated by an FHA-approved appraiser.
• You can only acquire a new FHA loan if the home you want to buy is going to be your primary residence, not an investment property or a second home.
• Within 60 days of closing, you must move into the property.
• An inspection must be performed, and the results must indicate whether the property fulfills minimal property requirements.

Besides the aforementioned, borrowers need to meet a couple more conditions, including credit score, mortgage insurance, a down payment amount, income, and loan limit requirements. However, most of the requirements for this type of loan are similar to DACA recipients.

Here is an in-depth description of these requirements.

FHA loan down payments

Your down payment is a proportion of the home’s purchase price, and it’s the money you put down up front. Your credit score has a direct impact on the minimal down payment you can make on an FHA loan. Your credit score is a number between 300 and 850 that indicates how creditworthy you are.

For credit scores of 580 or higher, an FHA loan requires a 3.5 percent down payment. Your credit score can be in the 500–579 range if you can make a 10 percent down payment. For FHA loans, lenders require a minimum credit score of 580. You can rely on a mortgage calculator to estimate your monthly payments. Additionally, the calculator helps you establish how your down payment affects them.

FHA loans and credit score

If your credit score is higher, you might qualify for a loan with a greater debt-to-income ratio, or DTI. Your DTI is a percent of your monthly gross income that goes toward debt repayment. Your DTI is calculated by dividing your total monthly debt payments by your monthly gross income. This number is given as a percentage.

Divide your debts (school loans, auto loans, etc.) by your monthly gross income to get your DTI ratio. You’ll be better off if your DTI is lower. If your DTI is higher, you may still be eligible for an FHA loan if your credit is great.

If your loan is being manually underwritten, the FHA specifies that your monthly mortgage payment should not exceed 31 percent of your monthly gross income, and that your DTI should not exceed 43 percent of your monthly gross income in certain instances.

FHA mortgage insurance

For an FHA loan, you must pay a mortgage insurance premium (MIP). Mortgage insurance protects your FHA lender from financial losses if you fail to repay your loan.

Mortgage insurance is usually required for the life of an FHA loan – unless you made a down payment of at least 10 percent, in which case, MIP would be on the loan for 11 years. Mortgage insurance for FHA loans is calculated in a few different ways. First, you’ll be paid an upfront mortgage cost, which is typically 1.75 percent of your total loan amount.

FHA borrowers must additionally pay an annual mortgage insurance premium, which is calculated depending on the term (duration) of your loan, your loan-to-value (LTV) ratio, the total amount of your mortgage, and the size of your down payment. MIP payments range from 0.45 percent to 1.05 percent of the basic loan amount per year.

FHA loan limits

According to the Department of Housing and Urban Development, the maximum FHA lending amount for high-cost areas, including large metropolitan areas, is up to $970,800 in 2022. However, in lower-cost areas, the limit can be as low as $420,680. But the limits are based on county property values.

FHA interest rates

FHA interest rates are quite competitive because of government backing, thereby minimizing the risk and enabling the lenders to give you a lower rate. However, the rate depends on your down payment, DTI ratio, the amount you intend to borrow, credit score, income, and prevailing interest rates.

FHA income requirements

Your FHA loan eligibility isn’t based on a specific salary level, but you must show that you’ve had a consistent job history. Pay stubs, W-2s, federal tax returns, and bank statements must all be shared with your lender to verify your income.