FHA Loan Requirements for 2024

Buying a home can be challenging, especially when it comes to understanding mortgage products like the Federal Housing Administration (FHA) loan. However, with more relaxed qualification criteria than other mortgage products, FHA loans can be an excellent option for those with bad credit or a smaller down payment.

buying a home

To help you better understand if you qualify for an FHA loan, we’ve put together this comprehensive guide, covering everything from credit score requirements to property criteria.

FHA Loan Credit Score Requirements

The Importance of a Good Credit Score

The minimum credit score needed to qualify for an FHA loan is 500. However, many lenders require a higher score for underwriting, so that number might be somewhat higher in practice. Aiming for a credit score of 580 or higher is a good idea, as it can reduce your required down payment.

Keep in mind that the higher your credit score, the better your chances of getting approved. While you don’t need a 750 FICO score to secure an FHA loan, having at least a 620 will increase your chances of success with most lenders.

Strategies to Improve Your Credit Score

If your credit score isn’t quite where you’d like it to be, there are steps you can take to improve it:

  1. Review your credit report and dispute errors: Check for outdated negative information or inaccuracies and dispute them with the credit bureaus. You can hire a reputable credit repair agency to do the work for you, or take a do-it-yourself approach.
  2. Stay current on delinquent accounts: Bring any past-due accounts up-to-date, and continue making timely payments on all your other accounts.
  3. Request goodwill adjustments: Contact your creditors and ask them to remove late payments as a goodwill gesture. This can be done by writing them a goodwill adjustment letter.
  4. Negotiate pay-for-delete agreements: Work with collection agencies and creditors to remove collections and charge-offs from your report once you’ve paid them off. You can find a sample pay-for-delete letter here.
  5. Avoid new credit inquiries: Refrain from applying for new credit, as credit inquiries can negatively impact your credit score.

Remember that some lenders may deny your application if you have delinquent credit accounts. The same rule applies to collections and charge-offs, so be sure to address these issues before applying for an FHA loan.

Finding Lenders with Flexible Credit Score Requirements

If your credit score is lower than the recommended 580 or higher, you can still find FHA lenders willing to work with you. Keep in mind that this may require more legwork, and you might be asked to make a larger down payment.

Down Payment Requirements for an FHA Loan

The U.S. Department of Housing and Urban Development (HUD), which oversees the FHA loan program, has clear guidelines regarding down payments:

  • If your credit score is between 500 and 579, you’ll need to put down 10%.
  • If your credit score is 580 or higher, you’ll only need to put down 3.5%.

However, be aware that if you put down less than 20%, you’ll still need to pay FHA mortgage insurance. Additionally, if you’re receiving help with your down payment, lenders will require a signed and dated letter from the donor.

Income Requirements for FHA Loans

When it comes to income requirements for FHA loans, there are no specific minimum or maximum amounts. However, you will need at least two active credit accounts to be approved. Lenders will request your credit report to review your credit history and may ask for pay stubs, W-2 forms, and tax returns from the past two years to verify your income.

If you’re a first-time applicant for an FHA-insured property and have no outstanding judgments or federal government debt from previous FHA loans, you shouldn’t have any issues meeting this requirement.

FHA Debt-to-Income Ratio Requirements

To qualify for an FHA loan, you’ll want to aim for a debt-to-income (DTI) ratio at or below 50%, including your new mortgage payment. Here’s a quick example to illustrate how to calculate your DTI:

  • Auto loans: $850
  • Credit cards: $400
  • Student loans: $155
  • Personal loan: $255
  • New mortgage payment: $1,500

In this scenario, your total monthly debt payments would be $3,160. To qualify for an FHA loan, your gross monthly income would need to be at least $6,320 to maintain a 50% DTI ratio. Keep in mind that some lenders may require a lower DTI ratio, so it’s best to inquire about specific requirements before applying.

FHA Loan Limits and Property Criteria

Assuming you meet the income, debt, and down payment requirements, you can borrow up to $420,680 for a single-family home under the FHA loan program. In areas with a substantially higher cost of living, this limit increases to $970,800.

However, even if the property falls within the FHA loan limits, it may not necessarily qualify. The FHA will order its own appraisal to ensure the property meets its standards and is worth the listed price.

The FHA also imposes restrictions on borrowers to prevent property flipping or generating investment income. The purchase of investment properties is not allowed, and you cannot buy a home that was sold within the last 90 days. Additionally, you must certify that the home is for a primary residence and actually reside in it for the first 60 days.

The FHA Loan Application Process

Understanding the application process for an FHA loan will ensure a smooth experience. Here’s a step-by-step guide to guide you through the process:

Step 1: Assess Your Financial Situation

Before you apply for an FHA loan, it’s important to evaluate your financial situation. This includes reviewing your credit score, calculating your debt-to-income ratio, and determining the amount you can afford for a down payment. This will give you a clear understanding of where you stand and help you identify any areas that may need improvement.

Step 2: Gather Necessary Documentation

Lenders will require various documents to process your FHA loan application. To expedite the process, gather the following documentation beforehand:

  • Proof of employment and income (pay stubs, W-2 forms, and tax returns)
  • Bank statements and other financial account statements
  • Social Security number and government-issued identification
  • Rental history or mortgage payment history (if applicable)
  • Documentation for any other debts (e.g., auto loans, student loans, credit cards)
  • Gift letter (if using gifted funds for down payment)

Having these documents ready can help streamline the application process and prevent delays.

Step 3: Find an FHA-Approved Lender

Not all lenders offer FHA loans, so it’s essential to find one that does. You can use the HUD Lender List Search tool to find FHA-approved lenders in your area. When choosing a lender, be sure to compare interest rates, fees, and customer service to find the best fit for your needs.

Step 4: Get Pre-Approved

Getting pre-approved for an FHA loan involves submitting a preliminary application to a lender, who will review your financial situation and determine how much you can borrow. Pre-approval can give you an idea of your budget and make the home shopping process more manageable. It also signals to sellers that you’re a serious buyer, which can be advantageous in competitive housing markets.

Step 5: Shop for Your Home

With your pre-approval in hand, you can begin searching for your new home. Work with a real estate agent experienced in FHA transactions to help you find properties that meet FHA requirements and fit your budget. Keep in mind that the property must be a primary residence and meet specific safety, security, and soundness standards.

Step 6: Make an Offer and Get an Appraisal

Once you’ve found a suitable property, make an offer and negotiate with the seller. If your offer is accepted, your lender will order an FHA appraisal to ensure the property meets FHA standards and is worth the agreed-upon price. The appraiser will assess the property’s condition and provide an estimate of its market value.

Step 7: Underwriting and Loan Approval

After the appraisal, your lender will review all the information and documentation you’ve provided, including your credit history, employment, income, and the property’s appraisal report. The underwriter will verify your eligibility for an FHA loan and determine whether to approve or deny your application.

Step 8: Closing the Loan

If your loan is approved, you’ll move on to the closing process. This involves signing the final loan documents, paying closing costs, and finalizing the transaction. Once the loan has closed, you’ll officially be a homeowner.

FHA Loan Benefits

There are several advantages to using an FHA loan for your home purchase, including:

Lower Down Payment Requirements

FHA loans require a down payment as low as 3.5%, making homeownership more accessible to those who may struggle to save a larger amount for a conventional loan. This can be especially helpful for first-time homebuyers or those with limited savings.

More Lenient Credit Requirements

FHA loans are designed to help individuals with less-than-perfect credit secure financing for a home purchase. While conventional loans typically require a credit score of at least 620, FHA loans can be obtained with a score as low as 500, albeit with a higher down payment requirement.

Ability to Use Gift Funds

FHA loans allow borrowers to use gift funds from family members or other approved sources to cover the down payment or closing costs. This can make homeownership more attainable for those who may not have the means to save for these expenses on their own.

Lower Interest Rates

FHA loans often come with lower interest rates than conventional loans, which can result in significant savings over the life of the loan. However, it’s essential to shop around and compare rates from multiple lenders to ensure you’re getting the best deal possible.

Streamlined Refinancing Options

FHA loans offer streamlined refinancing options for borrowers who wish to take advantage of lower interest rates or reduce their mortgage term. This can result in lower monthly payments or help build home equity more quickly.

Potential Drawbacks of FHA Loans

While FHA loans offer several benefits, there are also some potential drawbacks to consider:

Mortgage Insurance Premiums

FHA loans require both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). These additional costs can increase your monthly payment and the overall cost of your loan. It’s essential to factor in these expenses when determining whether an FHA loan is the right choice for you.

Loan Limits

FHA loans have maximum loan limits, which can vary depending on the area’s cost of living. If you’re looking to purchase a higher-priced property, you may need to explore other financing options, such as a conventional loan or jumbo loan.

Property Requirements

As previously mentioned, FHA loans have specific property requirements that must be met for a home to qualify. These requirements include safety, security, and soundness standards, which may limit your options when searching for a property.

Limited Options for Investment Properties

FHA loans are designed for primary residences and do not allow borrowers to use the program for investment properties or vacation homes. If you’re looking to finance an investment property, you’ll need to explore other mortgage options.

Tips for a Successful FHA Loan Experience

To maximize your chances of success when applying for an FHA loan, consider the following tips:

Monitor Your Credit

Regularly reviewing your credit report and working to improve your credit score can increase your chances of qualifying for an FHA loan and securing a competitive interest rate. Be diligent about making on-time payments, reducing your overall debt, and addressing any inaccuracies on your credit report.

Save for a Larger Down Payment

While FHA loans require a lower down payment than conventional loans, saving for a larger down payment can help reduce your monthly mortgage payment and potentially eliminate the need for FHA mortgage insurance. Additionally, a larger down payment can demonstrate to lenders that you’re financially responsible and a lower-risk borrower.

Be Prepared to Provide Documentation

As with any mortgage application, you’ll need to provide documentation to verify your income, employment, and financial history. Be prepared to submit these documents promptly to avoid delays in the application process.

Work with an Experienced Real Estate Agent

A knowledgeable real estate agent familiar with FHA loans can help guide you through the home buying process and identify properties that meet FHA requirements. Their expertise can be invaluable in ensuring a smooth transaction.

Consider All Your Mortgage Options

While FHA loans offer several benefits, it’s essential to explore all your mortgage options and weigh the pros and cons before making a decision. Depending on your financial situation and the property you’re interested in, other mortgage products, such as conventional loans, VA loans, or USDA loans, may be a better fit for your needs.

FHA Loan Alternatives

Before committing to an FHA loan, it’s important to consider the alternatives and determine which mortgage product is the best fit for your financial situation and homebuying goals. Here are some common alternatives to FHA loans:

Conventional Loans

Conventional loans are not backed by the government and are offered by private lenders. They typically require a higher credit score and larger down payment than FHA loans, but they may have lower mortgage insurance costs and more flexible terms. Conventional loans can be a suitable option for borrowers with strong credit and a sizeable down payment, or those looking to finance an investment property or vacation home.

VA Loans

VA loans are available to eligible veterans, active-duty service members, and some surviving spouses. These loans are backed by the U.S. Department of Veterans Affairs and offer several benefits, including no down payment requirement, no mortgage insurance, and competitive interest rates. If you’re eligible for a VA loan, it’s worth considering as an alternative to an FHA loan.

USDA Loans

USDA loans are backed by the U.S. Department of Agriculture and are designed to help low- and moderate-income borrowers purchase homes in eligible rural areas. These loans offer no down payment requirement, low mortgage insurance costs, and competitive interest rates. If you’re interested in purchasing a home in a qualifying rural area and meet income eligibility requirements, a USDA loan could be a viable alternative to an FHA loan.

State and Local Homebuyer Programs

Many states and local governments offer homebuyer assistance programs, which can include low-interest loans, down payment assistance, or grants. These programs often have income limits and other eligibility requirements, but they can help make homeownership more accessible for those who qualify. It’s worth exploring your local options when considering an FHA loan.

Deciding If an FHA Loan Is Right for You

Determining whether an FHA loan is the best option for you depends on your unique financial situation. You might consider an FHA loan if:

However, you may want to explore other options if:

  • You’re concerned about meeting the qualification criteria in time (although manual underwriting may be a viable alternative).
  • Your credit score is high enough to qualify for a conventional loan, which could offer lower interest rates.
  • You can afford a higher down payment, helping you avoid the mortgage insurance premium that applies for the duration of the loan.
  • You qualify for a VA loan.

Bottom Line

When considering an FHA loan, don’t rush the process. Take the time to save up enough money for the down payment and have a financial safety net in case of emergencies. Additionally, work on addressing any credit issues to improve your chances of qualifying for competitive interest rates, which can save you money in the long run.

Remember that understanding the various requirements and criteria for FHA loans is necessary to make an informed decision. By thoroughly researching and preparing, you can increase your chances of successfully obtaining an FHA loan and becoming a proud homeowner.

Frequently Asked Questions About FHA Loans

To further clarify some common FHA loan-related questions, we’ve compiled a list of frequently asked questions:

Can I refinance my FHA loan?

Yes, you can refinance your FHA loan to either reduce your interest rate or change your loan term. There are two primary refinance options for FHA borrowers: the FHA Streamline Refinance and the FHA Cash-Out Refinance.

The Streamline Refinance is designed for borrowers who want to lower their interest rate or shorten their loan term, while the Cash-Out Refinance allows borrowers to tap into their home equity to pay off other debts or cover large expenses.

Can I get an FHA loan if I have a foreclosure or bankruptcy on my credit report?

FHA loans have more lenient credit requirements than conventional loans, but there are still some restrictions. Borrowers with a foreclosure on their credit report must wait at least three years after the foreclosure date before they’re eligible for an FHA loan. For bankruptcies, the waiting period is two years for a Chapter 7 bankruptcy and one year for a Chapter 13 bankruptcy, with court approval.

Can I get an FHA loan for a multi-unit property?

Yes, FHA loans can be used to purchase multi-unit properties with up to four units, as long as the borrower occupies one of the units as their primary residence. This can be an attractive option for borrowers who want to generate rental income from their property to help offset their mortgage costs.

Can I get rid of mortgage insurance on my FHA loan?

FHA loans require mortgage insurance for the life of the loan if the down payment is less than 10%. If you made a down payment of 10% or more, the mortgage insurance premium can be removed after 11 years. To eliminate mortgage insurance on an FHA loan, borrowers may need to refinance into a conventional loan once they’ve built sufficient equity in their home.

Allison Martin
Meet the author

Allison Martin is a syndicated financial writer, author, and Certified Financial Education Instructor (CFEI). She has written about personal finance for almost ten years and holds a master's degree in Accounting from the University of South Florida.