FHA loans: Everything you need to know

What is an FHA loan?

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans.You can qualify for an FHA loan with a credit score as low as 500 with 10 percent down. To get FHA’s maximum financing, you need a credit score of 580 or higher and 3.5 percent down.FHA borrowers pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.


FHA loan requirements in 2019

To be eligible for an FHA loan, borrowers must meet the following lending guidelines:

  • Down payment of at least 3.5% of the purchase price. The down payment can come from a verified gift from a relative or government program.
  • FICO score of 500-579 with 10% down or a FICO score of 580 or higher with 3.5% down.
  • Steady employment history or 2 years work experience with the same employer.
  • Income is verifiable through pay stubs, federal tax returns, and bank statements.
  • Loan is used for a primary residence.
  • Property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
  • Your front-end debt ratio (monthly debt payments, excluding a mortgage) should not exceed 31% of your gross monthly income. Lenders may allow a ratio up to 40% in some cases.
  • Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43% of your gross monthly income. Lenders may allow a ratio up to 50% in some cases.
  • If you experienced a bankruptcy, you must wait 2 years to apply. If you experienced a foreclosure, you must wait 3 years to apply. In the interim, you must also have re-established a positive credit history. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.

Who is an FHA loan best for?

FHA loans are ideal for borrowers with little cash saved up for a down payment, and those who have less-than-ideal credit and cannot qualify for a conventional loan. FHA loans tend to be popular with first-time homebuyers, as well as those with low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as they use it to buy a primary residence.

Can I get an FHA loan with bad credit?

People with credit scores under 500 generally are ineligible for FHA loans. However, there may be some wiggle room there. The FHA does make allowances, under certain circumstances, for applicants with “nontraditional credit history or insufficient credit” if other criteria are met. Ask your FHA lender or an FHA loan specialist whether you qualify.

What is the minimum down payment for an FHA loan?

FHA requires a down payment of at least 3.5 percent of the home’s purchase price, but you need a credit score of at least 580 to be eligible. For example, if you bought a $200,000 home, the minimum down payment would be $7,000.

FHA borrowers can use their savings, a financial gift from a family member or a government grant for down-payment assistance. States, cities, counties, local housing authorities and nonprofits are all potential sources for down-payment help. The National Council of State Housing Agencies is a good resource for assistance programs.

Are there closing costs for an FHA loan?

HUD limits how much FHA lenders can charge in closing costs to no more than 3 percent to 5 percent of the loan amount. The total for closing costs will vary based on the state you live in, the size of your loan and whether you pay points to lower the interest rate.

The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as for an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home.

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