Sweet Homes

What is FHA Loans?

An FHA loan, backed by the Federal Housing Administration, is a mortgage option designed to assist homebuyers with more lenient financial requirements. It offers benefits such as lower credit score thresholds and the ability to make a lower down payment. With an FHA loan, even individuals with a history of financial challenges like bankruptcy may still qualify. Discover the advantages of FHA loans for your home financing needs.

FHA Loan Requirements

FHA loans have specific requirements that borrowers need to meet. Here are the key FHA loan requirements:

1. Credit Score: While FHA loans are more flexible compared to conventional loans, a minimum credit score of 580 is typically required to qualify for a 3.5% down payment. Borrowers with a credit score between 500 and 579 may still be eligible, but a higher down payment of 10% is usually required.
2. Down Payment: FHA loans offer the advantage of a lower down payment requirement. Typically, a minimum down payment of 3.5% of the purchase price is needed. This can be funded by the borrower’s savings, gifts from family, or down payment assistance programs.
3. Debt-to-Income Ratio (DTI): Lenders consider the borrower’s DTI ratio, which is the percentage of their monthly income that goes towards debt payments. FHA loans generally allow a maximum DTI ratio of 43%. This includes housing-related expenses, such as the mortgage payment, property taxes, and insurance.
4. Employment and Income Stability: Borrowers are required to have a steady employment history or consistent income source. Generally, lenders prefer to see at least two years of continuous employment or income from the same source.
5. Property Requirements: The property being financed must meet certain standards set by the FHA, including minimum property condition requirements and certain safety standards. FHA appraisers will evaluate the property to ensure it meets these guidelines.

It’s important to note that these requirements can vary slightly between lenders, and additional criteria may apply. Consulting with an FHA-approved lender will provide you with the most accurate and up-to-date information regarding FHA loan requirements specific to your situation.

FHA Loan Down Payments

Your down payment is a percentage of the purchase price of a home and is the amount you put down for that home. The minimum down payment you’re able to make on an FHA loan is directly linked to your credit score. Your credit score is a number ranging from 300 to 850 that’s used to indicate your creditworthiness.

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. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans. 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 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 $1,089,300 for 2023. This is also the limit for Alaska and Hawaii at Rocket Mortgage. The policies of lenders regarding Alaska and Hawaii do differ in terms of loan limits. In lower-cost areas, the FHA limit is $472,030. 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 FHA mortgage limits page. The page also includes a median sale price value for each area. Those are the median price estimates used for loan limit determination, according to HUD.

FHA Income Requirements

When it comes to income requirements for FHA loans, there are a few key factors to consider:

1. Minimum Income: FHA does not specify a minimum income requirement. However, lenders typically evaluate your ability to repay the loan based on your income and financial stability.
2. Debt-to-Income Ratio (DTI): Lenders assess your DTI ratio to determine your eligibility for an FHA loan. The DTI ratio is calculated by dividing your total monthly debts (including the projected mortgage payment) by your gross monthly income. Generally, the maximum allowable DTI ratio for FHA loans is 43%. However, in certain cases, lenders may make exceptions and consider borrowers with higher DTI ratios.
3. Employment and Income Stability: FHA lenders look for a stable employment history and consistent income. While there is no specific duration of employment required, lenders generally prefer to see a two-year history of steady employment or income from the same source.
4. Self-Employed Borrowers: Self-employed individuals may be eligible for FHA loans. However, additional documentation and scrutiny of income may be required, such as tax returns and profit/loss statements, to verify the stability and adequacy of their income.

It’s important to note that these income requirements can vary slightly among lenders. It’s advisable to consult with an FHA-approved lender who can assess your specific financial situation and provide guidance on the income requirements for an FHA loan.

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 similar interest rates and lower mortgage insurance (that ends when you reach 20% home equity), which is why borrowers often consider refinancing their FHA loan to a conventional loan. 

	Conventional Mortgage Loan	FHA Loan
Minimum Down Payment	3%	3.5%
Loan Terms	Loan terms range 8 – 30 years	Less options than conventional, but several between 15 – 30 years
Minimum Credit Score To Qualify	620	500 with a 10% down payment; 580 and above with only a 3.5% down payment
Loan Limits	$726,200 in most areas; up to $1,089,300 in high-cost areas for a single unit	$420,680 to $970,800 depending on home location
Mortgage Insurance	PMI if down payment is less than 20%; no PMI if down payment is at least 20%.	MIP upfront and monthly insurance throughout the life of the loan (or 11 years with a 10% or more down payment)
Relative Interest Rate	Rates are comparable depending on qualifications	Rates are comparable depending on qualifications
Interest Structure	May be fixed or variable	Fixed or adjustable rate
Who Backs The Loan?	Fannie Mae or Freddie Mac usually buy and guarantee the loan	Backed by the Federal Housing Administration