FHA Loan Requirements, Loan Limits And Interest Rates
An FHA loan is a mortgage insured by the Federal Housing Administration that can allow you to buy a home with looser financial requirements. FHA insurance protects mortgage lenders, allowing them to offer loans with below-average interest rates, easier credit requirements, and low down payments.
What Is An FHA Loan?
A FHA loan is backed by the Federal Housing Administration, an agency under the Department of Housing and Urban Development. FHA loans are insured by the FHA, which means this protects your lender against loss if you default on your loan.
FHA loans are available with low down payment options and lower minimum credit score limits, but have to pay mortgage insurance.
The option of a low down payment and more lenient credit requirements can make FHA loans particularly attractive for first-time home buyers, although you don’t have to be a first-time home buyer in order to qualify. Here are some benefits of FHA loans:
- Credit score requirements are lower compared to other loans.
- Your lender can accept a lower down payment.
- You could still qualify for an FHA loan if you have a bankruptcy or other financial issues in your history.
- FHA Closing costs can often be rolled into your loan.
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FHA Loan Requirements
There are certain requirements borrowers must meet to qualify for an FHA loan. You’ll need to meet these requirements:
- A 3.5 percent down payment if your credit score is 580 or higher
- A 10 percent down payment if your credit score is 500-579
- A debt-to-income ratio of 50% or less
- Documented, steady employment and income
- You’ll live in the home as your primary residence
- You have not had a foreclosure in the last three years
FHA Loan Down Payments
An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. A mortgage calculator can help you estimate your monthly payments, and you can see how your down payment amount affects them.
Note that cash down payments can be made with gift assistance for an FHA loan, but they must be well-documented to ensure that the gift assistance is in fact a gift and not a loan in disguise.
FHA Mortgage Insurance
You have to pay a mortgage insurance premium for an FHA loan. Mortgage insurance is to insure your FHA lender against losses if you default on your loan.
In most cases, you pay mortgage insurance for the life of an FHA loan (unless you made a down payment of at least 10%, in which case, MIP would be on the loan for 11 years). FHA loan mortgage insurance is assessed in a couple of different ways. First, an upfront mortgage premium is charged, which normally amounts to 1.75% of your base loan amount.
FHA borrowers also pay an annual mortgage insurance premium, which is based on the term (length) of your mortgage, your loan-to-value (LTV) ratio, your total mortgage amount and the size of your down payment. Annual MIP payments run approximately 0.45% – 1.05% of the base loan amount.
FHA Loans And Credit Score
There are a lot of factors that determine your credit score, including:
- The type of credit you have (credit cards, loans, etc.)
- Credit utilization, which is how much credit you use
- Paying your current bills on time
- The amount you owe on credit cards
- How much credit you’ve taken on recently
A higher score may be able to qualify with a higher debt-to-income ratio (DTI). DTI refers to the percentage of your monthly gross income that goes toward paying debts. Your DTI is your total monthly debt payments divided by your monthly gross income (your monthly income before taxes). This figure is expressed as a percentage.
The FHA states that your monthly mortgage payment should be no more than 31% of your monthly gross income, and that your DTI should not exceed 43% of monthly gross income in certain circumstances if your loan is being manually underwritten. As noted above, if you have a higher credit score, you may be able to qualify with a higher DTI.
FHA Loan Limits
There’s a maximum limit to what you can borrow for an FHA loan, and how much you can borrow depends on the county in which your potential home is located. According to the Department of Housing and Urban Development, the maximum FHA lending amount for high-cost areas (such as large metropolitan areas) is up to $970,800 for 2022. Loan limits are set based on county property values. These are the limits for one-unit properties. If you have multiple units, limits may be higher.
You can look up the FHA mortgage limits for one or more areas on the HUD’s FHA mortgage limits page.
FHA Interest Rates
FHA interest rates can be competitive compared to conventional mortgages. This is because the government backing decreases the risk you pose and allows lenders to offer you a lower rate in return.
The interest rate depends on several factors:
- The prevailing interest rates
- Your income
- Credit score
- Amount you plan to borrow
- Down payment amount,
- DTI ratio and more.
FHA Income Requirements
Your eligibility for an FHA loan doesn’t hinge on a particular income amount, but you must prove that you have a steady employment history. Your income must be verifiable by sharing pay stubs, W-2s, federal tax returns and bank statements. Your lender may ask for other examples of verification as well.
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FHA Vs. Conventional Loans
A conventional loan is a common alternative to an FHA loan. Though conventional mortgages require a stricter set of financial qualifications, they also typically come along with lower interest rates and mortgage insurance that comes off at 20% equity, which is why borrowers often consider refinancing their FHA loan to a conventional loan. Let’s take a closer look at some of the differences between conventional and FHA loans.
Is An FHA Loan Right For You?
If you’re still debating the pros and cons of an FHA loan compared to a conventional loan, you should know that a conventional loan is not government-backed. Conventional loans are offered through Fannie Mae or Freddie Mac, which are government-sponsored enterprises that provide mortgage funds to lenders.
They have more stringent requirements, so keep in mind that you’ll need a higher credit score and a lower DTI to qualify. FHA loans, on the other hand, are nonconforming loans, meaning they don’t satisfy Fannie Mae or Freddie Mac’s requirements for purchase.
Regardless of whether you choose a conventional or FHA loan, there are a few other costs of which you’ll need to be aware. You’ll have to pay closing costs, which are the fees associated with processing and securing your loan. These can vary depending on the price of the house and the type of mortgage, but you should budget 3% – 6% of your home’s value.
You should also budget 1% – 3% of your purchase price for maintenance. The exact percentage is going to depend on the age of the house. If your house is newer, odds are less things are likely to break right away. Meanwhile, if the house is on the older end, you may need to set aside more. Finally, if you live in an area with homeowners association fees, you’ll end up paying for those on a monthly or yearly basis.
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If you’re in the market for a loan with lenient credit, lower down payment and low-to-moderate income requirements, an FHA loan might be right for you. Start today with FHA lending.