Mortgage BasicsFHA Loans: Requirements and Limits

FHA Loans: Requirements and Limits

The 20% down payment is considered the worst financial barrier to homeownership. With home prices continuing to rise, an average American family often struggles to save up enough cash to cover the down payment. Many also don’t have the credit score required to qualify for a non-government-backed loan. Therefore, the Federal Housing Administration (FHA) established loan programs to make homeownership possible for buyers with limited income or low credit scores.

In this article, you’ll learn about

What is an FHA Loan?

FHA loans are mortgages backed by the Federal Housing Administration (FHA). They have a minimum down payment of 3.5% and allow for credit scores as low as 580 to start. They’re the optimal home loan option for first-time homebuyers with little savings or issues regarding their credit history. 

When a loan is backed by the FHA, it means that the Federal Housing Administration insures and protects the lender from financial losses on riskier mortgages. They protect against loan default, meaning that if a borrower stops paying, the lender doesn’t lose money on the endeavor. The protection makes many lenders more willing to offer home loans to applicants who wouldn’t typically qualify. Note that, however, only FHA-approved lenders can offer FHA loans.

FHA home loans can be secured to purchase single-family homes, two to four-unit multi-family dwellings, and some manufactured homes or condominiums. You can also buy a new construction home or repair your home with an FHA loan.

FHA Loans vs. Conventional Loans

Because FHA home loans are designed to help families with limited income or individuals with low credit scores, they’re easier to get than traditional home loans. Here are some of the features of FHA loans compared to conventional mortgage loans.

  • FHA loans are more accessible to people with lower credit scores than conventional mortgage loans and sometimes come with lower monthly payments.
  • FHA loans allow for gifts from family members and employers as down payments; some allow for assistance from charitable organizations.
  • However, FHA loans do have higher closing costs, as they require additional processes and paperwork.

Different Types of FHA Loans

Various FHA loans are available, all of which have slightly different details. As such, you should know what the best option for you is ahead of time by reviewing the choices.

Basic Home Mortgage 203(b)

The basic home mortgage 203(b) loan from the FHA can be for purchasing or refinancing a home with a low minimum down payment. However, the home being purchased cannot need more than $5,000 in repairs.

Rehab Mortgage 203(k)

This is similar to the basic home mortgage but is specifically for purchasing fixer-uppers. The repairs to the home must exceed $5,000, but the time frame for repairs cannot take longer than six months. The repairs must be done by a professional or an organization. In other words, you cannot do the repairs yourself.

Construction to Permanent Loan

If you want to build a house rather than purchase an existing property, an FHA construction loan might be a great option. However, this loan is much more challenging to secure than any other FHA loan available, and it can take more time.

Title I Property Improvement Loan

This loan is specifically for making home improvements. Title I Property Improvement Loan can also be secured with a 203(k) rehab mortgage. This loan doesn’t require applicants to refinance to secure it. Single-family homes are eligible for up to $25,000 in financing, while multi-family dwellings can secure between $24,000 and $60,000 depending on the number of units. This loan could also cover nonresidential properties, manufactured homes, and historic preservation for residential dwellings.

Energy Efficient Mortgage

An improvement loan that’s dedicated to making a home more energy-efficient. The home must be inspected by a professional, and the suggested improvements to the property must be deemed cost-effective.

FHA Loan Requirements

If you’re seeking an FHA loan, you must meet the minimum requirements for the loan. The requirements include:

  • Your credit score must be 500 or higher. Any credit score of 500 to 579 will impact the minimum down payment required from the applicant, which is discussed below. The higher your score, the better your chances are of approval and a lower down payment. Conventional lenders ask for a minimum score of at least 620.
  • If your credit score is higher than 580, an FHA down payment can be as low as 3.5%. However, if your credit score is below that, the minimum down payment increases to 10%.
  • Your debt-to-income (DTI) ratio must be lower than 50. In other words, the total amount of debts cannot exceed 50% of your pretax income.
  • The FHA must approve the property you want to purchase through an FHA loan. An appraisal by an FHA-approved appraiser is required to determine the property’s market value.
  • The home must be your primary residence, and you must occupy the property within 60 days of closing.
  • Mortgage insurance payments are required by FHA loans, which are set up during the mortgage process. 

FHA Loan Limits

FHA loans come with limits assigned to them. The limits for 2022 range from $420,680 to $970,800. Depending on the area that you live in, the house you’re looking to purchase can cost no more than the area’s maximum loan limit. The ceiling differs by every county in the United States. You can research the limits based on the area using the tool here.

Things to Remember

FHA-approved lenders may have requirements in addition to the FHA minimum requirements. However, their requirements will not exceed the FHA’s. As such, you should always shop around before making a decision.

Key Takeaways

FHA loans are an excellent option for low-income families or people who have a credit history with a checkered past. The program gives everyone an opportunity to purchase a home in the United States. If you’re looking for an FHA loan, it’s crucial to find an FHA-approved lender in your area. Each area will have different requirements, and local lenders will know how to help you through the process.