FHA Loans: Requirements and More

FHA Loans

The FHA loan is a home loan program that has been offered since 1934. It is a government-backed loan, unlike conventional loans, that is insured by the Federal Housing Administration. The FHA is an agency that operates under the Department of Housing and Urban Development. Typically, the credit score and debt-to-income ratio requirements are more lenient than some of the other loan programs available. The option to have a lower down payment, as well as a lower credit score, are what makes the FHA loan enticing for first-time homebuyers.

Down Payment Requirements

The required down payment is a percentage of the purchase price that you will put down on the home. The minimum down payment percentage will vary with your credit score. A minimum down payment of 3.5% is required for credit scores that are 580 and above. However, you can still obtain an FHA home loan if you are below the credit threshold. If you are between a credit score of 500-579, you will need to put down 10% or more.

Credit Score

As mentioned previously, the minimum score required for an FHA home loan is 500 with a minimum down payment of 10%, with a 580 score and above requiring a minimum down payment percentage of 3.5%.

Debt-to-income Requirements

The debt-to-income ratio represents how much of your gross monthly income (unless you’re self-employed) is going towards monthly debt payments. For FHA loans, it is important that your back-end ratio does not exceed 50%.  Important payments that are included in your debt-to-income ratio are typically things like personal loans, credit card payments, car payments, and your prospective mortgage payment.

Mortgage Insurance Premium (MIP)

On all FHA loans, borrowers are required to pay a mortgage insurance premium. Borrowers are usually required to pay MIP for the life of the loan unless they put 10% or more down on their home. If that is the case, then MIP is only required for 11 years. The annual mortgage insurance premium is determined by the following factors: your loan-to-value ratio, the term of the mortgage, and the total mortgage amount and down payment. In addition to this, there is an upfront mortgage insurance premium that is 1.75% of the base loan amount.

Loan Limits

For 2023, the lowest limit or “floor” is $472,030. The highest limit or “ceiling” is $1,089,300. The limit will vary depending on what area you live in which can be found here.