FHA Loan Requirements (2020): A Clear And Helpful Guide

Certified Mortgage Advisor
NMLS 1701021
Published 
July 29, 2019

FHA loan requirements that you need to know

My goal is to help you get a crystal clear home loan that helps you win the house you love. So let's talk about the requirements for FHA loans. You might have decided FHA is the option for you and FHA loans are fantastic loans.

Who created FHA?

They're actually a program created by the government some years ago to help mainly people get into home ownership for the first time. So they were one of the first true first-time home buyer programs, but now FHA has morphed into such a large program that so many lenders carry that it's not just for first-time home buyers.

FHA has really great requirements and rules on how you can get the FHA loan that make it really accessible for a lot of people. There are a lot of pros. There are also some cons and we'll talk mainly about some of the requirements for getting an FHA loan. So right up front, the two big things that people are concerned about when it talks when we're talking about requirements, is how much money do I have to put down and what does my credit score have to be?

How much money do I have to put down

FHA will allow you to do a minimum down payment of 3.5%. As long as your credit score is 580 and above. So that is one of the lowest down payments that you can get outside.

Down payment for other loan option

Conventional sometimes can go down to 3%, USDA will do 0% and VA will do 0%, but 3.5% down is a fantastic option if you have a credit score of 580 and above, which most people do. If you have a credit score of less than 580 down to 500, you'll be required to put 10% down and you might have some extra reserve requirements, which means you need some extra money in the bank to close on the loan.

FHA is lenient than conventional

Also with FHA, the requirements in terms of how much debt you can have versus how much income you can have are a lot more lenient than conventional loans.

Why conventional is strict?

So conventional loans tend to be a little bit strict on what your credit score looks like normally conventional loans, like a higher credit score, and they want you to have a lower debt-to-income ratio, which basically means how much monthly debt obligation you have divided by your total income.

DTI

So FHA will allow us to go up to 56% most of the time. So you probably don't know your debt-to-income ratio off-hand, but 56% is a pretty high number. That's saying that if you took your income multiplied to 0.56, that's how much monthly debt you could carry every single month including your housing payment it's pretty high up there. This means that if you have a good amount of debt or maybe student loans, FHA might be a really great option for you because it allows some more leniency there. Or if you have maybe income on the lower side maybe you're in a high-cost area and you need a little bit more flexibility. FHA does not have as strong requirements on that debt-to-income ratio.

Student loans

So that brings us to student loans. Student loans are big debt that we're seeing sweeping across the nation.

How student loan affect your FHA loan?

So your student loans are either going to report a monthly cost, a monthly minimum cost on your credit report. And if it doesn't, so if your loans are deferred or in forbearance, then what will happen is your lender will take 1% of your balance and use that as your monthly payment.

So for instance, let's say you had $10,000 in student loans and it was deferred until next year, what your lender would do is take that 10,000 multiplied at times 1%. And then use that as part of your debt-to-income ratio there. If there wasn't a minimum payment showing up on the report.

Strick about health and safety standards

Also, some requirements with FHA loans are a little bit more strict in terms of what the property is allowed to look like. And not how it looks cosmetically, but FHA is really concerned about property requirements when it comes to what they call health and safety standards.

Conventional loans are a lot more lenient on what you can buy. For example, most people will buy foreclosed properties with a conventional loan, but FHA is more strict and they want to make sure that everything in the home meets their health and safety standards. So that means you can't have things like missing rails on steps. You can't have chipping paint, can't have broken windows. You cannot have things rotting or things torn down. You need to make sure that the home has no health and safety issues. And if there's any possibility of it, then an FHA appraiser is going to call out, and want it fixed before you moved in. So it's something to be aware of.

203K

So it's something to be aware of, there is an FHA loan called 203K that allows you to do some rehab, but that involves. A little bit more than just the traditional FHA. So if we're sticking to traditional FHA property requirements are a little bit more strict on the FHA side. Your realtor and mortgage advisor can help you navigate some of those restrictions as well.

When are you allow to get a gift?

As far as asset requirements for FHA loans. So how much money do you have to have in the bank, FHA allows you to take all of the funds needed as a gift. So for instance, if your down payment and closing costs, let's say the whole thing together is going to cost you 10 grand out of pocket. You are allowed to get a gift from a family member for that entire amount. Some loan products don't let you get a gift for all of it. Sometimes they. A certain requirement in there, but you're allowed to get a gift for the full amount of the down payment and closing costs as well.

Mortgage insurance

Finally, one of the biggest drawbacks is the mortgage insurance requirement on FHA loans. So they're fantastic loans but what happens is FHA loans are given out by lenders across the nation. But the federal government is the one who backs these loans. It's called an insured loan, which means that the government makes sure that if the lenders ever have to foreclose on a property, they'll get their money back because the government ensures it. So the person who has to foot the bill for the insurance is you, unfortunately, and that comes in two ways.

Upfront mortgage insurance premium

The first way is there's an upfront mortgage insurance premium. So all that means is you take your initial loan amount. Let's say it was a hundred thousand dollars. FHA is gonna charge 1.75% and add it to the loan. So instead of having a loan for a hundred thousand dollars, you now have a loan for $101,750. So that's that one thing to keep in mind.

Monthly mortgage insurance

Then you also have to pay monthly mortgage insurance over the life of the loan. That mortgage insurance will not fall. Off, unless you put 10% down, if you put 10% down, then the mortgage insurance will drop off after 11 years. But if you put any less than 10% down, mortgage insurance will be there for the entire duration of the loan. So you have this really great flexibility. It comes at the cost of mortgage insurance, but then another pro to offset some of the cost of the mortgage insurance is since it's backed by the government, you usually can get really low-interest rates than any other loans on the market.

So the reason why the interest rates are lower is that the lenders have less risk of losing their money since the loans are insured. So if you get an FHA loan, That interest rate should be a lot lower than anything else you're seeing on the conventional side. So if you are going with an FHA loan, make sure that it's it has a low-interest rate because you're gonna be paying that mortgage insurance.

You need these costs to offset each other a little bit. You can't be paying a lot in mortgage insurance with the upfront and the monthly mortgage insurance plus paying in high-interest rate. So something to definitely keep in mind.

FHA loan requirements are pretty lenient

As far as what can go in on a pretty traditional loan, it's hard to find any other loan that is going to be laxer in its requirements, unless you're going into something like a portfolio loan, which has really high-interest rates, probably around the 7%. Those are loans where you can do one day out of bankruptcy or only, no dated type loans. You can do those loans and they have more lax requirements, but they cost you a lot more.

FHA can be a great choice!

FHA is a fantastic option if you're looking into getting a loan in the easiest way possible the best way to figure out if it's the right loan for you is to talk with your mortgage advisor and see what options you have available. And can you compare the cost of the conventional versus the FHA if you qualify for both and what's going to be the total cost over a period of time?

The requirements for an FHA loan really are not too terrible. Usually what you're gonna find is that 3.5% down, you need to make sure the home is pretty much ready to move in. You're also gonna have those mortgage insurance requirements and you're a lot more lenient on the requirements of debt and income that you're allowed to have.

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