What is an FHA Loan?

An FHA Loan is a mortgage that is backed by the Federal Housing Administration rather than a mortgage lender and acts as a gateway to home ownership for people with lower incomes, lower credit scores, and/or minimal down payments. Unlike conventional loans that require a 20 percent down payment or additional private mortgage insurance, borrowers choosing an FHA loan are eligible for a loan with only as little as 3.5 percent down with a mortgage insurance premium. These are most common with first time home buyers.

FHA Loan Requirements (as of 2019)

To be eligible for this type of mortgage, borrowers must meet the following requirements:

Credit Score and Down Payment

Borrowers must have a minimum credit score of 500 to be approved with a 10 percent down payment and a FICO score of 580 or above to be approved with a 3.5 percent down payment.

Work History

FHA loan approval requires steady employment history or two years of work experience with the same employer, and the income must be verifiable through paycheck stubs, bank statements, or your federal tax return.

Housing Guidelines

The mortgage can only be used for a primary residence (as opposed to an income property or vacation home), and an FHA-approved appraiser has to appraise the property and ensure it meets the Housing and Urban Development’s guidelines for FHA properties.

Debt-to-Income Ratio

Your monthly debt payments, not including a mortgage should not go over 31 percent of your pre-tax income. For example, if your gross monthly income is $5,000 a month, your debt from car payments, credit card payments, and student loans should not exceed $1,550 a month. With a mortgage, your debt-to-income ratio should not exceed 43 percent a month, meaning that all of your debt, including your house payment, should be less than $2,150 if your pre-tax income is $5,000 per month.

Bankruptcy and Foreclosures

Borrowers can not be approved for an FHA loan within two years of a bankruptcy or three years of a foreclosure. However, most lenders will factor in extenuating circumstances.

Advantages of FHA Loans:

  • Required down payment is only 3.5% of the purchase price
  • Money for the down payment can be a gifted from outside sources
  • Seller’s concession is up to 6% of home purchase price
  • Bankruptcy or foreclosure does not necessarily disqualify a borrower
  • FHA mortgage can be refinanced up to 97.75% of the value of the home
  • Cash–out refinance available up to 85% of the value of the home