The FHA mortgage program has surged in popularity over the last couple of years. Today, it’s one of the most popular financing programs used by home buyers. It’s especially popular among first-time buyers with limited funds for a down payment.
There are certain FHA loan requirements you should know about, in order to decide if this program is right for you. In this article, we will examine five key requirements — (1) down payments, (2) mortgage insurance premiums, (3) credit scores, (4) debt ratios, and (5) home appraisals.
5 Important FHA Loan Requirements in 2016
There are hundreds of FHA loan requirements contained within HUD Handbook 4000.1. So there’s no way we can touch on everything in this article. Instead, I’ve chosen what I feel are five of the most important FHA loan requirements a home buyer or borrower should know about.
Requirement #1: A Down Payment of 3.5%
If you plan to use an FHA loan to buy a house, you will have to make a down payment of at least 3.5%. Specifically, that’s 3.5% of the sales price or appraised value, whichever is less.
There is no getting around this FHA loan requirement. It’s a hard and fast rule. But the Department of Housing and Urban Development (HUD) does allow down payment funds to be gifted from an approved donor, such as a family member. So you don’t necessarily have to come up with all of the money on your own.
Also be aware that the down payment requirement used to be lower, so you might encounter some outdated articles online that mention a 3% down payment. Under the current FHA loan requirements, for 2016, the minimum investment is 3.5%.
Requirements #2: Mortgage Insurance Premiums
The Federal Housing Administration is a self-sustaining agency. Despite what many people think, the FHA does not (normally) use taxpayer-derived funds to insure home loans. They generate their own revenue in the form of mortgage insurance premiums, and they use that capital to pay insurance claims to lenders.
This is another important FHA loan requirement borrowers should understand. When using an FHA-insured mortgage loan to buy a house, you will be required to pay two different mortgage insurance premiums.
- There’s an upfront premium for 1.75% of the base loan amount.
- There’s also an annual mortgage insurance premium that varies based on the length of the term and the loan-to-value ratio. For borrowers who use a 30-year loan and put down 3.5%, the annual MIP is 0.85%.
Home buyers view this FHA loan requirement as a downside, and it is. But mortgage insurance occurs on conventional loans as well. If you cannot afford a large down payment, you’ll probably end up paying mortgage insurance in some form (as explained here). Generally speaking, any time the loan-to-value ratio exceeds 80%, the borrower has to pay mortgage insurance. This is true for both FHA and conventional loan products.
Requirements #3: A Good Credit Score
Perhaps you’ve heard that the FHA loan program is often used as a last resort for borrowers with bad credit. This is a half truth. While this program is generally more lenient than conventional home loan products, you still need to have a good credit to qualify.
Mortgage lenders will review your credit history to see how you have borrowed money in the past. A high score will increase your chances of qualifying for a loan. A lower score generally has the opposite effect.
So what are the FHA loan requirements for credit scores? Well, it varies from one lender to the next. The official minimum score (i.e., the one established by HUD) is 500. In order to take advantage of the 3.5% down payment option, borrowers need a score of 580 or higher.
But that’s just HUD’s minimum requirement for credit scores. Mortgage lenders can impose their own criteria as well, and they are generally more strict than the government. These days, many lenders require a score of 600 or higher for this particular program. But that number is not set in stone. Credit-related FHA loan requirements can vary from one mortgage provider to the next.
Requirement #4: A Manageable Level of Debt
The Department of Housing and Urban Development also has FHA loan requirements regarding a borrower’s debt level. Generally speaking, they limit the borrower’s total debt to no more than 43% of gross monthly income. But there are exceptions to this rule as well, and you can learn all about them in this article.
Just know that if your total recurring monthly debt exceeds 43% to 45% of your monthly income, you might fall short of this FHA loan requirement.
If a mortgage lender feels you are taking on too much debt with a home loan (in addition to the debt you already have), they might decline your application. This is another key requirement you should be aware of when applying for an FHA loan.
Requirement #5: A Successful Home Appraisal
Before the Federal Housing Administration will insure a home loan, they’ll have the property appraised to make sure it meets their standards. HUD and FHA are mainly concerned with the health and safety of the home buyer / future occupant. So if the house has certain discrepancies that might negatively affect the health or safety of the homeowner, it might not get approved for financing.
Of all the FHA loan requirements mentioned above, this one tends to generate the most questions from home buyers and mortgage shoppers. So we have written extensively on this subject in the past. Here’s a related article that explains the FHA appraisal process.
These are by no means the only FHA loan requirements that will come into play when you use this program. There are other guidelines, criteria and requirements as well. Most of them are consolidated into HUD Handbook 4000.1, also known as the Single-Family Housing Policy Handbook. If you have questions about these or other FHA mortgage requirements, you can refer to the aforementioned handbook for answers. You can also contact the FHA Resource Center directly by calling 800-CALL-FHA (225-5342), or by sending an email to answers@hud.gov.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author