6 FHA Loan Requirements Home Buyers Should Know About in 2024

The FHA mortgage program is the second most popular type of home loan in America, and is especially popular among first-time buyers due to the low down payment option.

But like all government-backed mortgage programs, FHA loans have specific requirements for home buyers and also for the property being purchased. If you’re considering this option, you need to know what those requirements are and how they can affect your mortgage approval.

This guide explains six important requirements for an FHA-insured home loan: (1) down payments, (2) credit scores, (3) debt ratios, (4) stable income, (5) home appraisals, and (6) mortgage insurance premiums.

Minimum FHA Loan Requirements for Borrowers

The Federal Housing Administration (FHA) home loan program is a government-backed mortgage program. The funding comes from a bank or lender in the private sector, the same as other types of home loans. But FHA loans receive insurance backing from the government. That’s what makes them unique.

This insurance protects the lender, not the borrower. But it also allows lenders to be a bit more flexible when approving loan applications, and that directly benefits borrowers.

So, FHA loan requirements can actually come from two different sources: (1) the federal government and (2) the lenders that actually provide the funding.

The Department of Housing and Urban Development (HUD) oversees the FHA loan program. They publish a handbook for lenders called the Single Family Housing Policy Handbook (HUD Handbook 4000.1). It outlines the minimum requirements for FHA loans, along with mortgage processing procedures.

Individual mortgage lenders can also establish their own internal guidelines and requirements, and these can also affect you when applying for an FHA loan. For instance, some lenders might require a credit score that’s higher than the minimum requirement issued by HUD. (These are known as overlays in mortgage lingo.)

Here are the most important requirements you need to know about as a home buyer, fully updated for 2024:

1. A Minimum Down Payment of at Least 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 purchase price or appraised home value, whichever is less.

In contrast, many conventional loan products (that are not insured by the government) require a larger down payment anywhere from 5% to 20%. This is what attracts some borrowers to the FHA program in the first place, the ability to make a smaller upfront investment.

There is no getting around this 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.

The down payment money can come from a variety of sources, including checking and savings accounts, cash saved at home, stock and bonds, retirement accounts, and the gift money mentioned above.

2. A Credit Score of 580 for the Low Down Payment

HUD requires a minimum credit score of 500 for FHA loans, and a score of 580 or higher for the low down payment option mentioned above.

Most borrowers who use this program do so to take advantage of the low 3.5% down payment. This means that borrowers who use FHA loans to buy a house typically have credit scores of 580 or higher.

In fact, most mortgage lenders won’t even offer home loans to borrowers with scores in the low-500 range. So the 500 number allowed by HUD doesn’t mean much in the marketplace.

The bottom line here is that you’ll need a credit score of at least 580 to qualify for an FHA loan with the minimum down payment. A higher score could make it even easier to get approved and might help you qualify for a lower interest rate as well.

HUD imposes a credit score requirement for FHA loans because these scores show how a person has borrowed and repaid money in the past.

Think of it as a kind of risk indicator. People who pay their bills on time end up with higher credit score and are therefore considered to be a lower risk for lenders. On the other hand, borrowers with a pattern of missed payment and delinquencies typically have lower scores and present a bigger risk.

Learn more about credit score requirements

3. A Manageable Level of Debt in Relation to Income

FHA loans also have specific requirements for the borrower’s debt-to-income ratio. Ideally, this ratio should not exceed 43%. But it can be higher if there are compensating factors.

A debt-to-income (DTI) ratio is a percentage that compares a borrower’s total monthly debt payments to their gross monthly income. For example, if a borrower has $2,000 in monthly debt payments and a gross monthly income of $6,000, their DTI ratio would be 33% ($2,000 / $6,000).

Debt ratios help mortgage lenders assess a borrower’s ability to take on additional debt, like a mortgage payment. This is true for conventional and FHA loans alike. But the FHA program has specific requirements and guidelines when it comes to DTI ratios.

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, which could allow for a DTI ratio as high as 50%. In FHA lingo, these exceptions are known as “compensating factors.”

Example: If a borrower has cash reserves in the bank, plus extra money left over each month after paying the bills, they could have a debt ratio up to 50%. But without those compensating factors, the DTI would probably be capped at 43%.

4. Stable Income That Is Likely to Continue

It should come as no surprise that FHA loans have income requirements as well. After all, borrowers need some form of income to manage their monthly payments and repay the loan over time.

While the FHA does not require a specific minimum income, they do have debt-to-income ratio limits as discussed previously. They also require mortgage lenders to assess the borrower’s income situation, to determine whether or not it’s likely to continue going forward.

The phrase “likely to continue” appears several times throughout HUD Handbook 4000.1. For example, a chapter relating to FHA mortgage underwriting requirements states the following:

“Effective Income must be reasonably likely to continue through at least the first three years of the Mortgage, and meet the specific requirements described below.”

Mortgage lenders make this determination by reviewing a variety of financial documents, such as bank statements and IRS tax returns.

5. A Home That’s Considered Safe and Habitable

Home appraisals are another important requirement for FHA loans, and this is a subject that causes confusion among home buyers and seller alike.

Before the Federal Housing Administration will insure a home loan, they need to ensure that the property is safe and habitable for the new occupant. They also want to make sure the property is worth the amount that the buyer has agreed to pay for it. The home appraisal can determine both of these things.

There’s an important distinction between FHA and conventional loans:

• Conventional financing: The home appraiser estimates the market value of the home based on recent sales data and other factors. But the appraiser will only evaluate the condition of the home as needed to determine the value.
• FHA financing: The home appraisal determines the market value, just like with the conventional loan process mentioned above. But it also goes a step further. The appraiser must also evaluate the home to see if it meets the FHA’s minimum property requirements, or MPRs.

If the property has minor issues that are correctable, the seller could fix them to allow the transaction to move forward. But if the home has serious problems that pose structural or safety issues, it probably won’t qualify for FHA financing.

Home buyers should keep these requirements in mind during the house hunting stage. With a standard FHA purchase loan, buyers should generally focus on well-maintained properties and avoid “fixer-uppers” that aren’t move-in ready.

On a side note: There’s a separate loan product called the FHA 203(k) rehab loan that allows borrowers to purchase and renovate a home all in one package. The information above applies to the basic FHA home mortgage loan, also known as the 203(b) program. Note the different letters.

6. 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 requirement borrowers need to 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, the annual MIP equals 0.55% of the loan amount (divided into 12 monthly installments).

FYI: Conventional home loans sometimes require mortgage insurance as well, in situations where the borrower makes a small down payment.

Borrowers Should Explore All of Their Options

Overall, FHA loans are easier to qualify for than conventional mortgage loans. That’s because lenders have an added layer of protection against default, in the form of government insurance.

But FHA loans also have specific requirements that conventional financing does not. One example is the required home appraisal and the government-imposed property requirements mentioned above.

The truth is that all mortgage loans come with pros and cons. As a borrower, you need to explore all of your financing options and choose the one that meets your specific needs.

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Disclaimer: This article explains the minimum requirements for an FHA loan and was last updated in spring 2024. Many of these rules have exceptions that allow for flexibility. If you have questions about these requirements, you can contact an approved lender or refer to HUD Handbook 4000.1. You could also contact the FHA Resource Center at 800-CALL-FHA (225-5342), or by email: answers@hud.gov.