FHA loan requirements 2023: what you need to qualify

An FHA loan is a mortgage, one issued by a commercial lender but insured by the Federal Housing Administration (FHA). It is designed for low- to moderate-income borrowers, and comes with lower minimum credit score and down payment requirements.

As a result, FHA loan requirements are generally more flexible than what you’ll find with other types of mortgages. If you have a lower credit score, minimal savings or a higher debt load, this option can offer you a better chance of qualifying for a home loan.

Specifically, though, what are the FHA loan requirements? And what else might you need to qualify? Let’s find out.

FHA loan requirements

What is required for FHA loan qualification? First, we’ll give you a quick overview, then we’ll drill down into each of these FHA loan requirements.

• Credit score: Minimum credit score of 580 (or 500 with a higher down payment)
• Down payment: 3.5 percent (or 10 percent with a credit score between 500 and 579)
• DTI ratio: Capped at 43 percent, although some lenders allow a higher limit if borrower has compensating factors
• Loan limits: $472,030 or up to $1,089,300 in higher-cost areas
• Mortgage insurance: Required for the entire loan term if your down payment is less than 10 percent

FHA loan requirements: minimum credit score

If you want to put just 3.5 percent down, the minimum credit score for a FHA loan is 580. If you can bump up your down payment to at least 10 percent, you can have a credit score as low as 500 and still qualify. Just to put this in context, conventional loans — mortgages backed by private lenders — typically demand credit scores in the upper 600s, at least.

However, each mortgage lender has the flexibility to decide what loans they wish to offer and the lowest credit score for FHA loan borrowers that they’re willing to accept. Even though the FHA has requirements, FHA-approved lenders can also impose their own standards — a practice known as “overlaying” — depending on the level of risk they’re willing to tolerate. That’s why you might see different FHA loan credit score requirements with different lenders.

If your score is below 600, be prepared to find an FHA-approved lender who can put your application through manual underwriting, since getting approved can get more challenging the lower your credit score, says Bob Tait of Motto Mortgage Elite Services in Bucks County, Penn.

If you’re planning to purchase a home within the next year, Tait recommends taking steps to boost your score now to increase your approval odds. “[Start by] getting your credit pulled, finding out what is on your credit report and aligning yourself with a lender who will help you improve your credit,” he advises.

When you check your credit report, make sure it’s correct. If there’s anything listed there you don’t recognize, work with the credit bureau to remove incorrect items.

You might also need to work to pay off any debt that’s fallen into collections — which can seriously hurt your score — or contact previous lenders to clear out any old or resolved debt that’s been paid off. Other steps you can take include making on-time payments, paying down existing debts as much as possible and refraining from taking out other loans or applying for new forms of credit as you’re shopping around.

FHA loan requirements: down payment

Credit score requirements are not the only benchmark you need to meet. You’ll need to make a down payment of at least 3.5 percent. This minimum increases to 10 percent if your credit score is between 500 and 579. In comparison, conventional lenders routinely request 20 percent down payments.

Still, if even 3 or 10 percent seems like a stretch, you might not be completely out of luck. FHA loans allow borrowers to draw down payment funds from sources other than their own savings, such as a gift from a relative or close friend, says Tait.

FHA loans are also appealing to cash-strapped buyers because of the FHA’s flexible standards on who pays for closing costs. You could be eligible for seller credits — meaning the current homeowner pays them, not you — which can possibly cover 100 percent of your closing costs, says Tait. This minimizes your out-of-pocket expenses, and could even help you afford a larger down payment.

FHA loan requirements: DTI ratio

While you’re exploring the qualification process for FHA loans, you’ll hear about DTI, or debt-to-income ratio. The maximum DTI ratio is typically 43 percent, with a 31 percent cap on housing costs. That said, your lender could make exceptions for your overall DTI up to 45 percent, 50 percent or even 57 percent with an FHA loan, assuming you have mitigating factors like a lot of liquid assets or can make a sizable down payment.

Generally, though, the DTI FHA loan requirements mean that on a monthly basis, your combined debt payment, including your mortgage, shouldn’t exceed 43 percent, and no more than 31 percent of your income should go toward your mortgage payments.

FHA loan requirements: loan limits

FHA loans have limits that dictate how much you can borrow depending on the type of property you’re financing and where you’re buying. In 2023, the FHA loan limit for a single-family home in most counties is $472,030, but can be as high as $1,089,300 in higher-cost areas.

FHA loan requirements: mortgage insurance

The FHA loan requirements we just outlined primarily affect you when you’re applying for the loan, or at closing. But what is required for FHA loan qualification on an ongoing basis? A mortgage insurance premium, or MIP.

MIPs are fees you pay to protect the FHA mortgage lender in case you default on your loan. That’s the catch with that 3.5 percent or 10 percent down payment: The fact that you’re contributing so little cash to the home purchase makes you a riskier borrower in the lender’s eyes. The MIP, essentially an extra interest charge, compensates them for its additional risk.

No matter how much you put down, you’ll have to pay an upfront mortgage insurance premium — although you can finance that into your loan — and annual premium (typically, divided up and tacked onto your monthly payments).  In most cases, FHA borrowers pay an upfront MIP equal to 1.75 percent of the loan amount and between 0.15 percent and 0.75 percent annually over the life of the loan.

Most FHA loan requirements dictate that you pay that annual MIP for either 11 years or the life of the mortgage, depending on your loan-to-value ratio and other factors.

Additional reporting by Kacie Goff