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What is an FHA loan?

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans.

You can qualify for an FHA loan with a credit score as low as 500 with 10 percent down. To get FHA’s maximum financing of 97.5 percent, you need a credit score of 580 or higher and 3.5 percent down. FHA borrowers pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

FHA loans vs. conventional mortgages
Conventional loan FHA loan
Credit score minimum 620 500
Down payment Between 3% to 20% 3.5% for credit scores of 580+; 10% for credit scores of 500-579
Loan terms 10, 15, 20, 30 years 15 or 30 years
Premiums PMI: 0.5% to 1% of the loan amount per year Upfront premium: 1.75% of the loan amount;
Annual premium: 0.45% to 1.05%
Interest type Variable rate, fixed rate Fixed rate

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FHA loan requirements

To be eligible for an FHA loan, borrowers must meet the following lending guidelines:

  • Borrowers must make a down payment of at least 3.5 percent of the purchase price.
  • Down payment can come from a verified gift from a relative or government program.
  • A minimum FICO score of 500 to 579 with 10 percent down, and 580 or higher with 3.5 percent down.
  • Steady employment history or worked for the same employer for at least two years.
  • Borrowers’ income must be verified through pay stubs, federal tax returns and bank statements.
  • Loan must be used for a primary residence only.
  • Property must be appraised by an FHA-approved appraiser and meet HUD property guidelines.
  • Borrowers’ front-end debt ratio (monthly debt payments, excluding a mortgage) should not exceed 31 percent of your gross monthly income. Lenders may allow a ratio up to 40 percent in some cases.
  • Borrowers’ back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent of your gross monthly income. Lenders may allow a ratio up to 50 percent in some cases.
  • Borrowers must wait to apply for an FHA loan two years after a bankruptcy and three years after a foreclosure. They must also have re-established a positive credit history in the interim. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.

Who is an FHA loan best for?

FHA loans are ideal for borrowers with little cash saved up for a down payment, and those who have less-than-ideal credit and cannot qualify for a conventional loan. FHA loans tend to be popular with first-time homebuyers, as well as those with low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as they use it to buy a primary residence.

Can I get an FHA loan with bad credit?

People with credit scores under 500 generally are ineligible for FHA loans. However, there may be some wiggle room there. The FHA does make allowances, under certain circumstances, for applicants with “nontraditional credit history or insufficient credit” if other criteria are met. Ask your FHA lender or an FHA loan specialist whether you qualify.

What is the minimum down payment for an FHA loan?

FHA requires a down payment of at least 3.5 percent of the home’s purchase price, but you need a credit score of at least 580 to be eligible. For example, if you bought a $200,000 home, the minimum down payment would be $7,000.

FHA borrowers can use their savings, a financial gift from a family member or a government grant for down-payment assistance. States, cities, counties, local housing authorities and nonprofits are all potential sources for down-payment help. The National Council of State Housing Agencies is a good resource for assistance programs.

Are there closing costs for an FHA loan?

HUD limits how much FHA lenders can charge in closing costs to no more than 3 percent to 5 percent of the loan amount. The total for closing costs will vary based on the state you live in, the size of your loan and whether you pay points to lower the interest rate.

The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as for an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home.

Lenders typically charge more interest on the loan if they agree to pay closing costs. Borrowers can compare loan estimates from competing lenders to decide which option is best for them.

How do I find an FHA lender?

Borrowers get their home loans from FHA-approved lenders rather than the FHA, which only insures the loans. FHA-approved lenders can have different rates and costs, even for the same loan.

FHA loans are available through many sources — from the biggest banks and credit unions to community banks and independent mortgage lenders. Costs, services and underwriting standards vary among lenders or mortgage brokers, so it’s important to shop around.

Will I pay private mortgage insurance for an FHA loan?

Mortgage insurance is generally required when borrowers put down less than 20 percent. It insures the mortgage for the lender in case the borrower defaults. All FHA loans require the borrower to pay two mortgage insurance premiums:

  • Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
  • Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.

So, if you borrow $150,000, your upfront mortgage insurance premium would be $2,625 and your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25 per month), depending on the term.

Can I use an FHA loan to buy and repair a home?

The FHA 203(k) loan is a special program that allows homebuyers who want to make major renovations to a home to roll the cost of the repairs into their mortgage. The chief advantage of a 203(k) mortgage is that the loan amount is not based on the current appraised value of the home, but on the projected value after the repairs are completed.

A “streamlined” 203(k) allows the borrower to finance up to $35,000 for nonstructural repairs, such as painting and replacing cabinets or fixtures.

Among the repairs an FHA 203(k) will cover:

  • Bathroom and kitchen remodels
  • Flooring
  • Plumbing
  • Decks and patios
  • Heating and air-conditioning systems

One key benefit of a 203(k) is that it allows you to buy a fixer-upper that you might not have been able to afford otherwise. However, not all properties qualify and applying for the loan can be more difficult because a detailed proposal of the work and cost estimates are required.

What are FHA loan limits for 2018?

For 2018, the maximum loan limit for FHA loans in high-cost areas is $679,650 and the minimum limit in low-cost areas is $294,515. These are referred to as “ceilings” and “floors” that FHA will insure. FHA updates limit amounts each year in response to changing home prices.

Ceiling and floor limits vary according to the cost of living in a certain area, and can vary from one county to the next. Areas with a higher cost of living will have higher limits, and vice versa. Special exceptions are made for housing in Alaska, Hawaii, Guam and the Virgin Islands, where home construction is more expensive.

Bonus: Financial hardship relief may be available

Loan servicers can offer some flexibility on FHA loan requirements to those who have suffered a serious financial hardship or are struggling to make their payments.

That relief might be in the form of a temporary period of forbearance, a loan modification that would lower the interest rate, extend the payback period, or defer part of the loan balance at no interest.