Learn about FHA loan requirements and how to qualify with just 3.5% down.
What are the FHA loan requirements in 2023?
Federal Housing Administration (FHA) mortgage loans are popular for two reasons: low credit score and low down payment requirements.
FHA mortgage loans are especially popular among newer buyers. First-time homebuyers made up more than 83% of FHA purchases in 2020.
FHA loans have their downsides, too, like permanent mortgage insurance.
But if your homebuying dreams are on hold because of low credit or limited savings, FHA could be the proverbial key to your new home.
What is an FHA loan?
FHA loans are mortgages insured by the Federal Housing Administration (hence, FHA), which is run by the Department of Housing and Urban Development (HUD).
The government created these loans to make homeownership accessible to those with low-to-average credit and who struggle to save up large down payments.
Before FHA’s invention in 1934, lenders would deny mortgages to borrowers with less-than-stellar finances. But the FHA insures the loans, alleviating some of the risk.
When we refer to FHA loans in this article, you can assume we mean FHA 203b loans, which are used for home purchases. But the FHA also insures other loan types, including:
- Manufactured home loans
- Renovation loans known as FHA 203k
- 0% down FHA 203h loan specifically for victims of presidentially declared natural disasters
And most recently, the HUD clarified rules that Deferred Action for Childhood Arrivals (DACA) recipients to be eligible for FHA loans.
Are there FHA loan income limits?
Good news: there are no FHA loan income limits.
That doesn’t mean income doesn’t matter. Lenders need to make sure you can afford your monthly mortgage payments, and they’ll need documentation to prove it.
Fortunately, plenty of income types count:
- W2 wages
- Freelance or gig work income
- Investment income
- Social Security income
- Supplemental Security Income
- Social Security Disability Insurance
A loan officer may ask you for pay stubs, tax returns, and other verification of income before your loan can move on to underwriting (a key stage in the process).
Mortgage lenders also use your income to calculate your debt-to-income ratio (DTI), which we’ll talk more about in just a minute.
FHA employment requirements
When you apply for an FHA mortgage, lenders will ask for two years of employment history.
If you’ve been an employee of the same company for at least two years, the lender may ask to see your most recent pay stubs to verify your income.
But what if you’re self-employed? You can still buy a house; you’ll just need two years of personal and business tax returns to prove your income. Lenders may also require profit and loss (P&L) statements and other business documents.
Maybe your circumstances aren’t straightforward. You started freelancing and don’t have two years of tax returns. That’s OK, as long as you have been self-employed at least a year and have two years’ experience in the same line of work prior to that.
Perhaps you recently graduated college and started a new job. The good news is, your degree program may count toward your work history. As long as your income is stable and your job is secure, you can still qualify for a mortgage.
The lender’s goal is to make sure you can afford your mortgage payments. The more prepared you are to demonstrate that, the better your chances of approval.
FHA loan credit score and down payment requirements
Here are a two key features to know about FHA loans:
- Minimum credit score: 580
- Minimum down payment: 3.5%
FHA guidelines actually allow borrowers with credit scores as low as 500 to qualify. However, if your score is 500-579, you’ll need a 10% down payment. Not all lenders will go that low on credit score. A lender will pull your credit report when you apply for prequalification or preapproval, and they may charge you a small fee — about $30 or less — to cover that cost.
Wait. I don’t have a credit score
Not to worry. FHA loans don’t require borrowers to have a traditional credit score. Your lender will likely want to see history of on-time payment of rent, utilities, and other monthly costs.
If you don’t have a credit history, it’ll be all the more important to show that you have steady income and/or employment.
If you’re unable to save up for a 3.5% down payment, FHA lets you use gift funds to cover the cost. Gifts can come from a number of sources, including:
- Friends and family
- Your employer
- Approved down payment assistance programs
Lenders need to source all of the money you use to buy your home, so you can’t use cash on hand (mattress money) for a down payment. Make sure there’s a paper trail for all funds, whether they are from a gift or personal savings. Gather deposit and transfer records.
You’ll also need a gift letter signed by the person giving you the money stating that it was a gift and you do not have to repay it.
Who is eligible for an FHA loan?
U.S. citizens and permanent and non-permanent resident aliens are eligible for FHA loans, as well as Deferred Action for Childhood Arrivals (DACA) recipients.
Eligibility requirements to know:
- The home must be your primary residence
- You are eligible to work in the U.S.
- You have a Social Security Number
- You meet all other FHA loan requirements
Keep in mind that eligibility isn’t the same as qualification. You’ll still need to meet a lender’s approval standards, even if you’re technically eligible for an FHA loan.
FHA property requirements
Part of the FHA loan application process is getting an appraisal from an FHA-approved appraiser. The appraiser will ensure that the house you want meets the minimum property standards.
Once you find a home to buy, the lender takes care of hiring a qualified appraiser.
Here’s what the appraiser will look for n terms of FHA property requirements:
- Access to drinkable water and sufficient electricity
- Safe pedestrian and vehicle access to the property
- Adequate heat, hot water, living space, and sewage disposal
- At least one bathroom with a toilet and bathtub or shower
- Structural integrity of the home
Buying a condo with an FHA loan can be tricky because it must be on the FHA’s approved condo list. After the housing crisis in the 2000s, most condo complexes were removed from the list and had to get re-approved. Many didn’t due to the onerous process. So, it’s quite likely that you won’t find your condo community of choice on FHA’s approved list. That being said, you can search approved condo properties on HUD’s website.
FHA lenders cannot approve a loan if the property doesn’t appraise for the offer price or there are major structural or quality-of-life problems. Ask your real estate agent about the state of a home before you make an offer, and find out whether the seller is willing to make the necessary updates if an appraiser finds serious problems.
Closing cost requirements for FHA loans
All mortgages come with closing costs, though how much you’ll pay depends on where you live and how much you’re borrowing. The average closing costs in the U.S. totaled $3,470, excluding taxes, in 2020, according to ClosingCorp. With taxes, the average jumped to $6,087.
As a general rule, expect to pay 2-5% of your loan in FHA closing costs — perhaps more for small loan amounts.
Where you buy can seriously impact how much money you need when it comes time to close. Homebuyers in D.C. paid steep closing costs with and without taxes, at averages of $29,329 and $6,250, last year.
Buyers in the Midwest had much more economical closings. Missourians paid an average of just $1,571, while Iowans averaged little more than $2,200 with taxes included.
Regardless of where you live, there’s no getting around closing costs. Even if you get a closing cost credit from the seller or lender, in reality, you are paying for them via a higher home price or interest rate.
Here are some of the expenses you might see, based in part on estimates from the Federal Reserve:
- Loan origination fee: 0-1% of the loan
- Application fee: $300
- Appraisal fee: $500
- Home inspection fee: $300
- Pest inspection: $100
- Homeowners insurance: $300-$1,000
- Title search and insurance: $900
- Credit report fee: $30
- Attorney fee: $500-$1,000
- Survey fee: $150-400
This is not an exhaustive list of closing costs. Other fees include prepaid taxes, in addition to other inspections mandated in your area.
Whatever the closing costs associated with your loan, they should never come as a surprise. Your lender is legally required to send you closing disclosure documents three days before your closing. The disclosure documents outline all of the fees and expenses you owe. That’s your opportunity to review the details and ask questions about anything that seems unfamiliar.
However, if you want to negotiate some costs, such as the origination fee or points to lower your interest rate, you’ll want to do that well in advance of your closing date.
FHA mortgage insurance requirements
The FHA requires borrowers to pay a mortgage insurance premium (MIP) throughout the life of the loan if they put less than 10% down. This is a big difference from a conventional mortgage, for which private mortgage insurance (PMI) falls off when you reach 20% in home equity.
Here’s how MIP works:
All FHA borrowers pay an upfront mortgage insurance premium equal to 1.75% of the loan.
This is typically wrapped into the loan amount, though you have the option to pay it in cash or using any available closing cost credits or assistance to cover it.
Most people, though, wrap it into the loan. Here’s how the loan amount is affected:
- $300,000 purchase price
- 3.5% down payment ($10,500)
- $289,500 “base” loan amount
- 1.75% ($5066) upfront MIP added to the loan
- $294,566 final FHA loan amount
If you refinance into a new FHA loan within the first three years, you can get get part of the upfront MIP refunded to use toward the MIP on your new loan.
You’ll also pay an ongoing annual mortgage insurance premium. How much you pay in MIP, and for how long, depends on your loan.
Most FHA borrowers will pay MIP as long as they have the loan. There is an exception, though: those who put down more than 10% pay MIP only for the first 11 years.
Annual MIP rates vary between 0.45-1.05%, depending on loan amount, down payment, and length of the loan.
To avoid paying MIP for the life of your loan, you can refinance an FHA loan to a conventional mortgage once you have 20% equity in the property. Conventional mortgages require private mortgage insurance (PMI) on loans with less than 20% equity.
FHA debt-to-income (DTI) requirements
Debt-to-income ratio (DTI) is mortgage industry speak for how much of your gross monthly income goes toward debt payments.
There are two ways to calculate DTI:
Front-end DTI: Estimated mortgage payments, including interest, MIP, taxes, and other fees
Back-end DTI: All monthly debts, including mortgage, credit cards, student loans, car payments, and other debt accounts
FHA lenders generally want to see you at or below 45% back-end DTI. However, many lenders will issue an approval with a 50%+ DTI as long as they receive an approval from FHA’s computerized system.
About a quarter of all FHA purchases in 2020 were completed with DTIs above 50%.
My DTI is above 45%. What should I do?
If you’re surprised by your DTI, don’t panic. Knowledge is power, especially when getting ready to buy a home. Use this information to set debt payoff goals, and brainstorm creative ways to lower your DTI quickly.
Remember, FHA is pretty lenient when it comes to DTI. About one in four FHA home purchase loans had a DTI above 50% in 20201.
Because FHA loan eligibility requirements are more flexible than those for conventional mortgages, you can likely get your DTI to a qualifying point faster.
I’m a first-time homebuyer. Should I get an FHA loan?
Flexible credit and DTI requirements, plus the low down payment option, may smooth the homebuying path. Many buyers can afford monthly mortgage payments but are struggling to save money upfront.
In fact, over 80% of FHA purchase loan use is by first-time buyers, according to HUD.
You can also use gift funds for closing costs with most loan types. That may be a more affordable way to get into your first home.
If you have excellent credit, you may want to explore conventional mortgage options. You can get a conventional loan with as little as 3% down, though if you put down 20%, you won’t need private mortgage insurance (PMI).
And if you can’t put 20% down at the outset, the PMI requirement goes away once you reach 20% equity. Even better, you won’t need to refinance to eliminate that cost the way you would with an FHA loan.
The key to choosing the right loan as a first-time homebuyer is to understand all of the options available to you. Request quotes from several lenders, and choose the one that not only gives you the best deal but the one you trust. If you do want to go with an FHA mortgage, make sure they have plenty of experience with these types of loans.
How to get an FHA loan - FAQs
What credit score do you need for an FHA loan? The minimum credit score for an FHA loan is 500. Borrowers with scores of 500-579 will need a 10% down payment. While the rulebook allows for scores below 580, less than 1% of all FHA loans go to buyers in this category, says HUD. If your score is 580 or above, you may qualify with a 3.5% down payment.
Do I need a down payment for an FHA loan? Yes. The minimum down payment for borrowers with credit scores of 580 or higher is 3.5%. If your score is 500-579, you’ll need at least 10% down. However, the entire down payment can come from an eligible gift source such as a relative.
What if I don’t have money for a down payment on an FHA loan? You’ll need at least a 3.5% down payment to qualify for an FHA loan. But you may qualify for a VA or USDA mortgage with 0% down. You can also use gift money for your down payment on FHA and USDA loans. Down payment assistance programs in your state or city can help you close the gap as well.
What types of properties can I buy with an FHA loan? You can buy a single-family or multi-family property (up to four units) with an FHA loan. Eligible property types include a standalone home; a duplex, triplex or quadplex; condos and manufactured homes. If you buy a multi-family property, you must live in one of the units as your primary residence, but you can rent out the remaining units.
How much can I borrow with an FHA loan? FHA loan approval amounts depend on several factors. These include your credit score, down payment, and debt-to-income ratio (DTI). The FHA also sets loan limits for different parts of the country. In [loan_year], the FHA loan limits for a single-family home range from [loan_limit agency='fha' units='1' type='standard'] to [loan_limit agency='fha' units='1' type='high-cost'].
How much income do I need for an FHA loan? There are no income minimums or limits on an FHA loan. However, lenders will need to see proof of monthly income, and they will use your gross monthly income to calculate your debt-to-income ratio — a calculation that shows how much of your income goes toward housing and other debts.
Are there any other FHA loan qualification rules I should know about? You must meet the debt-to-income (DTI) requirement, which is typically 50% or less on an FHA-insured loan (though this loan type can go higher than this). FHA loans also require you to pay a mortgage insurance premium (MIP) for the life of the loan. You can refinance to a conventional loan without mortgage insurance once you reach 20% equity in the home.
Are FHA loans difficult to get? FHA loans can be easier to qualify for than conventional mortgages. Thanks to flexible FHA loan guidelines on credit score, down payment, and debt-to-income ratios, they’re attractive to first-time homebuyers and folks with lower credit scores.
Are conventional loans better than FHA loans? Conventional loans have a couple of advantages over FHA loans: lower down payment requirement (3% vs. 3.5%), no private mortgage insurance once you have 20% equity, and they may be more attractive to sellers. Also, conventional loans don’t require an upfront mortgage insurance payment, lowering the total amount owed. If you have great credit, check out a conventional loan first.
But FHA loans offer flexible eligibility requirements that may make it easier to qualify if you have a low credit score, high debts, and a limited or bad credit history.
Why do sellers not like FHA loans? FHA guidelines require that a property meet certain standards before an FHA loan can be approved. A seller may be wary of offers with FHA loans if they’re reluctant to make upgrades or repairs based on an appraiser’s report.
Additionally, lenders will not approve FHA loans if the appraised value of the house is lower than the seller’s asking price. When an appraisal comes back low, the seller will have to reduce the price before the loan will go through. Otherwise, they’ll need to put the house back on the market and wait for a buyer with a conventional loan. In a hot market where sellers get plenty of offers, they may favor conventional borrowers to avoid the FHA requirements.
An FHA mortgage sounds great. Where do I get started?
FHA loans were created to make homeownership affordable and attainable for borrowers who didn’t meet traditional lending criteria. Whatever your financial circumstances today, an FHA loan may be your ticket to buying your own home.
If you’re interested in an FHA loan, get started with a short online eligibility request. You may be on your way to FHA homeownership sooner than you think.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.