What is an FHA Loan?
An FHA Loan is a type of mortgage loan that is insured by the Federal Housing Administrations (FHA). FHA Loans have more flexible qualifying guidelines than that of a conventional loan, allowing for many great benefits like:
Low Down Payment Requirements: You can secure your loan with as little as 3.5% down, compared to the typical 5% for many conventional loans.
Higher Debt-to-Income (DTI) Ratio: A more generous DTI Limit, sometimes up to 50% or more, helps borrowers with other monthly payments, like car or student loans, qualify for a mortgage.
Flexible Credit Requirements: Borrowers may qualify with less-than-perfect credit. However, a lower score may require a slightly higher down payment than the minimum.
Competitive Interest Rates: Buyers can enjoy stable monthly payments with competitive, fixed interest rates.
Gift Funds Allowed: Borrowers can utilize gift funds from eligible sources to help cover their down payment and closing costs.
These benefits significantly lower the barrier to entry into the housing market, making the dream of homeownership achievable for more people.
What are the Key Requirements for an FHA Loan?
While FHA Loans are flexible, they do have specific requirements. In addition to the property needing to be your primary residence and having proof of steady income and employment, you will need to consider:
- Mortgage Insurance Premium (MIP): All FHA Loans require an MIP. This includes an upfront premium and an annual premium. Unlike Conventional Loans, the annual premium is typically required for the life of the loan, however, many borrowers choose to refinance later to remove it.
- Down Payment and Credit Requirements: Your FICO score determines the minimum required down payment.
- FICO score of at least 580: Qualifies for the minimum 3.5% down payment
- FICO Score between 500 and 579: Requires a 10% down payment
- Debt-to-Income Ratio: While exceptions exist, your total monthly debts should generally not exceed 43% of your gross monthly income
Worried you might not meet all the requirements? Talk with one of our experienced Loan Officers today, there are still options and strategies to get you to the closing table!
What are the property requirements for an FHA Appraisal?
When purchasing a home with an FHA Loan, the property must meet the FHA’s Minimum Property Standards (MPS) for safety, security, and structural soundness.
Your FHA-approved appraiser will look for common issues like:
- Missing handrails or exposed wiring (safety hazards)
- Peeling paint (especially in homes built before 1978 due to lead concerns)
- Non-functional or deficient utilities like heating, water heater, or electrical
- Signs of active water damage or structural issues
Important Note: If your appraiser flags a necessary repair, it usually must be completed before the loan can close.
Additional Info You Should Know
Do FHA Loans have Loan Limits?
Yes, FHA Loans have maximum loan limits that vary by county and are updated annually by the Department of Housing and Urban Development. Most areas have a baseline limit, but high-cost areas usually have a higher limit. Before you start looking for homes, it is important to confirm the current loan limit for your area.
What is the FHA Amendatory Clause?
Another benefit of using an FHA loan is that it prevents you from overpaying for the property is the Amendatory Clause. This clause is included in your sales contract and offers you protection if the home’s appraised value comes in lower than the agreed-upon sales price. Meaning if your FHA appraisal is low, you will be allowed to cancel the contract and receive your earnest money deposit (EMD) back or renegotiate the purchase price with the seller.
If you are looking to start your homebuying journey, an FHA Loan, especially when paired with local grant and down payment assistance programs, is a powerful mortgage option for those looking to break into the housing market. Get started with one of our loan officers today!
Please visit hud.gov for more information about FHA Loans and how they may benefit you.
