FHA Loan Guide and FHA Loan Requirements
- Important FHA Loan Considerations
- Ability to purchase home with low down payment
- Typically lower interest rate than conventional mortgage
- Potentially lower closing costs
- More lenient mortgage qualification requirements
- Greater borrower cost than a conventional mortgage due to required up-front and ongoing annual mortgage insurance premiums (MIP)
- Limits on mortgage amount
- FHA Loan Program Overview
- How an FHA Loan Works
- Click on lenders below orFHA MORTGAGE RATES to contact lenders about an FHA loan
- FHA Loan Requirements
- Use our FHA MORTGAGE QUALIFICATION CALCULATOR to understand what size FHA loan you can afford
The Federal Housing Administration (FHA) offers government-backed mortgage programs that are designed to help individuals with low-to-moderate incomes, challenging credit profiles or limited funds obtain mortgages. The FHA insures the mortgage which guarantees that the lender will recover the full amount of the mortgage in the event of foreclosure. The key benefit of an FHA loan is that it only requires the borrower to make a down payment of 3.5% of the home purchase price, as compared to the 10% - 20% down payment typically required by most conventional mortgage programs.
Because of the low down payment requirement, the FHA mortgage program can be an excellent alternative for first-time home buyers. Other benefits of the program include a lower interest rate and more flexible mortgage qualification requirements. The most common FHA program is available to all qualified borrowers but there are other programs specifically for Native Americans, disaster victims, law enforcement officers, teachers and firefighters.
Borrowers can combine an FHA loan with a personal gift, employer program, down payment grant, closing cost assistance program or qualified subordinated second mortgage to pay for a down payment, closing costs or property renovations, allowing the borrower to purchase a property with no personal financial contribution. Down payment and closing cost assistance grants as well as qualified subordinated second mortgages are provided through state or local housing agencies or commissions.
The main downside of an FHA loan is that it may cost borrowers more in total monthly housing expense as compared to a conventional loan because it requires the borrower to pay an upfront and ongoing annual FHA Mortgage Insurance Premium (MIP). FHA MIP is an additional one-time and recurring monthly cost borrowers should consider when evaluating if an FHA mortgage is right for them.
Although the Federal Housing Administration determines program guidelines and provides mortgage insurance, borrowers apply for FHA loans through approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. These approved lenders make sure that applicants meet FHA loan requirements and qualify for the mortgage according to program eligibility guidelines. Not all lenders offer FHA loans but many do.
You can also use the FREEANDCLEAR LENDER DIRECTORY to find lenders in your state that offer the FHA mortgage program
We review the key program qualification requirements below.
The FHA Loan Program requires that borrowers have a minimum credit score of 580 if you make a 3.5% down payment and a minimum score of only 500 if you make at least a 10% down payment. The credit score required for an FHA loan is lower than for most other no or low down payment mortgage programs, which means more credit-challenged borrowers are eligible for the program. We recommend that you review your credit score six months to a year before you start the mortgage process to address potential issues. Please note that some lenders may apply their own minimum credit score requirement that is higher than the FHA program requirement so be sure to check with your lender to determine their mortgage qualification requirements.
Some FHA lenders may also work with borrowers with no or non-traditional credit profiles although this is done on a lender-by-lender and borrower-by-borrower basis. For borrowers that do not have a traditional credit profile, lenders may use utility, cell phone or other recurring monthly bill payments to establish a borrower's credit history. This approach requires additional work by the lender and the borrower so you should check with the lender upfront to determine if they work with borrowers with non-traditional credit profiles.
Borrower Debt-to-Income Ratio
According to FHA loan requirements, a borrower's debt-to-income ratio cannot typically exceed 43%, although it is possible to qualify with a debt-to-income ratio of 50% or higher under certain circumstances . The debt-to-income ratio represents the maximum acceptable percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus payments for other monthly debts such as credit card, auto and student loans. Total monthly housing expense includes your monthly mortgage payment plus other housing-related expenses such as property tax, homeowners insurance and FHA mortgage insurance premium as well as other potentially applicable expenses such as homeowners association (HOA) fees.
The 43% maximum debt-to-income ratio is lower than the ratio typically used by lenders for conventional mortgage programs (50%) but higher than the debt-to-income ratio used for a VA mortgage or USDA home loan. Circumstances under which it is possible to get approved for an FHA loan with a higher debt-to-income ratio of 50% or as high as 55% include borrowers with excellent credit scores or job histories, borrowers making larger down payments (which is rare with the FHA program) and borrowers with supplemental sources of income that may not be reflected on their mortgage application, such as from a spouse or part-time work. Please note that being approved for an FHA mortgage with a higher debt-to-income ratio requires extra work by the lender to document the borrower's compensating circumstances and not all lenders permit higher debt-to-income ratios because they involve additional risk.
Debt-to-Income Ratio Example
The example below demonstrates what size FHA loan you can afford based on applying the 43% debt-to-income ratio guideline. In this example, the borrower earns $60,000 in annual gross income (your income before any deductions) which means the borrower earns $5,000 in monthly gross income. Applying the 43% debt-to-income ratio to the borrower's monthly gross income means the borrower can spend $2,150 ($5,000 * 43% = $2,150) on total monthly housing expense plus other debt such as credit card, auto and student loan payments.
The borrower in this example has $275 in other monthly debt which means he or she can spend $1,875 ($2,150 - $275 (other monthly debt) = $1,875) on total monthly housing expense which includes the mortgage payment, property taxes and insurance ($245) and the FHA mortgage insurance premium ($205). After these housing expenses the borrower can afford a monthly mortgage payment of $1,425 ($1,875 - $450= $1,425). Based on this monthly mortgage payment and a 30 year fixed rate mortgage with an interest rate of 4.250%, the borrower can afford a mortgage of $289,700. If mortgage rates are lower, the borrower could afford a higher mortgage amount and if interest rates are higher, the borrower could afford a lower loan amount. The example also assumes the borrower makes a 3.5% down payment. If the buyer makes a larger down payment, the ongoing mortgage insurance premium may be lower.
- Annual Gross Income
- Monthly Gross Income
- $5,000 ($60,000 ÷ 12 = $5,000)
- Max Monthly Housing Expense (MHE) Plus Other Debt Expense Based
on 43% Debt-to-Income Ratio
- $2,150 ($5,000 * 43% = $2,150)
- Other Monthly Debt Payments
- Estimated Maximum Monthly Housing Expense (Principal, Interest,
Property Taxes, Property Insurance, Mortgage Insurance Premium)
- $1,875 ($2,150 - $275 (other monthly debt) = $1,875)
- Estimated Monthly Property Taxes and Insurance
- Estimated Ongoing Monthly FHA Mortgage Insurance Premium
- Estimated Monthly Mortgage Payment
- $1,425 ($1,875 - $450 (property tax, insurance and FHA MIP) = $1,425)
Estimated Mortgage Amount for which the Borrower Qualifies
(based on a 30 year fixed rate mortgage with an interest rate of 4.250%)
- FHA Mortgage Insurance Premium (MIP)
- Use our FHA MORTGAGE QUALIFICATION CALCULATOR to calculate the upfront and ongoing MIP fee for an FHA loan
- Loan term of greater than 15 years
Borrower Income Limit
Unlike many other no or low down payment mortgage programs, the FHA Program does not apply borrower income limits.
First-Time and Repeat Home Buyers
The program is available to both first-time and repeat home buyers as compared to other no or low down payment programs that are only available to first-time buyers.
FHA Loan Reserve Requirement
The FHA Mortgage Program does not require borrowers to hold savings in reserve at mortgage closing for purchases of one or two unit properties, although FREEandCLEAR recommends that you hold enough savings in reserve to cover three-to-six months of total monthly housing expense. For purchases of three or four unit properties borrowers are required to hold three months of total monthly housing expense -- mortgage payment plus property tax, homeowners insurance and MIP -- as savings in reserve at mortgage closing. So if your total monthly housing expense is $2,000, you would be required to keep at least $6,000 in reserves at the time your loan closes.
FHA loans require that borrowers pay an upfront and ongoing annual Mortgage Insurance Premium (MIP). The MIP protects lenders against losses that result from defaults if borrowers do not repay their loans in full. The upfront MIP for most FHA mortgages is 1.75% of the loan amount and is usually financed, which means it is added to your loan. You can also choose to pay the upfront fee out-of-pocket from a bank account or other personal source, in which case the fee is not added to your mortgage and you are required to contribute more of your own money at closing to pay the fee. You should tell your lender at the beginning of the mortgage process if you want to pay for the upfront MIP using out-of-pocket funds. Either way, you are required to pay the fee when your mortgage closes and the money either comes from your personal funds or from the mortgage proceeds.
The ongoing MIP is similar to private mortgage insurance (PMI) and is an additional monthly cost to the borrower on top of your mortgage payment. The ongoing monthly MIP fee depends on mortgage amount, loan-to-value (LTV) ratio and mortgage term.
The tables below show FHA mortgage insurance premium rates for home purchase loans as well as the duration of the ongoing MIP. As the tables indicate, the shorter the mortgage term and lower the LTV ratio, the lower the fee. The duration (how many years you have to pay) of the ongoing MIP varries by the LTV ratio at the time you obtain your loan.
|Base Loan Amount||LTV Ratio||Up-Front MIP||Annual Ongoing MIP|
|Less than or equal to $625,000||Less than or equal to 95.00%||1.75% of loan amount||.80% of loan amount|
|Less than or equal to $625,000||Greater than 95.00%||1.75% of loan amount||.85% of loan amount|
|Greater than $625,000||Less than or equal to 95.00%||1.75% of loan amount||1.0% of loan amount|
|Greater than $625,000||Greater than 95.00%||1.75% of loan amount||1.05% of loan amount|
|Base Loan Amount||LTV Ratio||Up-Front MIP||Annual Ongoing MIP|
|Any loan amount||Less than or equal to 78%||1.75% of loan amount||.45% of loan amount|
|Less than or equal to $625,000||Less than or equal to 90.00%||1.75% of loan amount||.45% of loan amount|
|Less than or equal to $625,000||Greater than 90.00%||1.75% of loan amount||.70% of loan amount|
|Greater than $625,000||Less than or equal to 90.00% and
greater than or equal to 78.00%
|1.75% of loan amount||.70% of loan amount|
|Greater than $625,000||Greater than 90.00%||1.75% of loan amount||.95% of loan amount|
|LTV Ratio||Mortgage Term||Duration of Annual Ongoing MIP|
|Less than or equal to 90.00%||Any term||11 years|
|Greater than 90.00%||Any term||Mortgage term|
- Broadly Affordable: properties with at least 90% of the units under Section 8 contract and/or covered by Low Income Housing Tax Credit (LIHTC) affordability requirements
- Mixed-Income: properties that set-aside units based on affordability including partial LIHTC, partial section 8, inclusionary zoning or other local affordability requirement
- Energy-Efficient: properties committed to industry-recognized green building standards and committed to energy performance in the top 25% of multi-family buildings nationwide. Qualification for the top 25% is determined using the Environmental Protection Agency's (EPA’s) portfolio manager 1-100 score
- Program Costs and Fees
- Mortgage Program and Type
- FHA Loan Limits
- Use our FHA LOAN LIMIT CALCULATOR to determine the loan limit in your county
Please note that the upfront and ongoing FHA MIP for multi-family properties (two-four units) designated as broadly affordable, mixed-income or energy-efficient is lower than the standard fees outlined in the above tables. Both the upfront and ongoing fee for broadly affordable and energy-efficient multi-family properties is .25% of the loan amount and .35% of the loan amount for mixed-income multi-family properties. The FHA uses the following definitions for broadly affordable, mixed-income and energy-efficient:
The interest rate you pay on an FHA mortgage depends on several factors including your credit score and loan-to-value (LTV) ratio. Borrowers with a credit score of 720 and above receive the program’s best interest rate while borrowers with lower credit scores and higher LTV ratios pay higher rates. For borrowers with good credit scores, the mortgage rate for an FHA loan is typically .125% - .500% lower than the rate for other conventional low down payment programs and comparable to the interest rate for other government-backed programs such as the VA and USDA mortgage programs. The interest rate for an FHA loan is lower because the program is backed by the government and borrowers are required to pay mortgage insurance. Borrowers should shop lenders to find the FHA loan with the lowest mortgage rate and fees.
Borrowers are required to pay standard lender fees and closing costs with the Program. Aside from the upfront mortgage insurance premium, borrowers are not required to pay additional fees to apply for the program. Borrowers using a down payment or closing cost assistance program may be required to pay a separate fee to the housing agency or commission to apply for that program.
Along with their mortgage payment, the program requires borrowers to pay property tax, homeowners insurance and MIP into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which expenses such as taxes and insurance are paid when due. The account does not affect the amount of fees the borrower is required to pay for the mortgage.
Only selected programs are eligible for the FHA Program. 15 and 30 year fixed rate mortgages plus 1 year, 3/1, 5/1, 7/1 and 10/1 adjustable rate mortgages (ARMs) are eligible for the program while interest only mortgages are not eligible.
The program applies to both home purchase mortgages as well as refinances. Homeowners with existing FHA loans can use the FHA Streamline Refinance Program to refinance their mortgage with less documentation and borrower qualification requirements including no income, assets or credit score verification and no appraisal report.
There are limits to the size of mortgage you can obtain through the program. FHA loan limits vary by number of units in the property with a single-unit property having the lowest limits. There is one set of loan limits for the 48 contiguous states, the District of Columbia and Puerto Rico and a higher set of loan limits for Alaska, Hawaii, Guam and the U.S. Virgin Islands. For the 48 contiguous states, the District of Columbia and Puerto Rico there is a basic standard mortgage limit and a higher limit for high cost areas with higher home prices.
|Contiguous States, District of Columbia,
and Puerto Rico
|Alaska, Guam, Hawaii, and the U.S. Virgin Islands|
|Number of Units||Basic Standard||High Cost||General|
- Property Eligibility
- Related FREEandCLEAR Resources
The program only applies to owner occupied properties. You can use an FHA loan to purchase properties with up to four units (for example, an apartment building with four units), but at least one of the units needs to be owner occupied (lived in by the individual(s) who obtained the mortgage to purchase the property). Investment properties as well as second and vacation homes are not eligible for the program.