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NEW 2023 FHA Loan Requirements — The Ultimate Guide For First Time Buyers

Certified Mortgage Advisor
NMLS 1701021
December 29, 2022

2023 Updated FHA Loan Requirements

Now, we're going to go through everything that you need to know about an FHA loan to see if you can qualify for it and if it's the right loan for you. With this, you're gonna know more about FHA loans than most first-time home buyers, and probably more about FHA loans than a lot of loan officers.

So this is gonna help you see if this is the right loan for you and if you should pick it and be able to win an offer with an FHA loan.

One of the easiest loan to qualify for

This is one of the easiest loans to qualify for. Out of the four main types of loans you have conventional, FHA, VA and USDA. This is one of the easiest because it allows lower credit scores, a higher debt-to-income ratio, which we'll talk through and is more lenient on things like bankruptcy and late payments.

Not just for first-time home buyers

Now, a lot of people pitch this as a loan for first time home buyers, mainly just because it has a lower down payment and it's really flexible with who can qualify for it. But you don't have to be a first time home buyer to qualify for this FHA loan.

Credit score plays a big role

One of the biggest things about FHA is the credit score that you're allowed to have when you qualify for it. So conventional loans require a 620 minimum FICO credit score. FHA actually allows you to have a 500 credit score. And if you have a 500 credit score, you have to put 10% down. If you have a 580 and higher, then you can do 3.5% down.

Now you can also have a 740, 800, and 620. You can have a much higher credit score and still qualify for an FHA loan. This isn't just for if you have lower end credit.

A lot of people have questions about, Hey, I can't find a lender who does 500 credit score. I will show you more about this in an upcoming slide.

Best for lower to mid credit score borrowers

The reason most people get this. It's primarily because they can't qualify for something like a conventional loan that has maybe cheaper mortgage insurance.

Should NOT be along-term loan

Also, this is not something that's going to be a long-term loan. I'm gonna show you the strategy that you need to use that I call the bridge strategy to make sure that you're taking advantage of the FHA loan so that it doesn't take advantage of you.

Easy to qualify

So quick pros and cons here at the top, bro. Super easy to qualify for. If you can't qualify for a traditional conventional loan, then FHA is usually one of the easiest places to get approved for a mortgage.

Low interest rate & low down payment

Second is it does have a low interest rate has a low down payment, 3.5% if you have a 580 credit score.

Flexible rehab options

Also there's some flexible rehab options where you could buy a home, get money to do the work for it, and then increase the value that way.

Beginning "investing" options

There's also some investing options that I'll talk through. This is a strategy called house hacking that you can do with an FHA loan.

Costly mortgage insurance

Now, some cons that we need to run through costly mortgage insurance. This is one of the biggest downsides of FHA. It's easy to get approved. It has a low down payment, but the problem is you pay for that in what's called Mortgage Insurance, and I'll show you that as well.

Loan limits is LOW

Also, the loan limits are pretty low considering the median home price in the us. It's not super high. It tracks just a little bit lower than the median home price in the US. So if you're looking to get a really big house it might not be the best strategy with an FHA loan.

Stricter appraisal requirements

It has stricter appraisal requirements, so something like conventional loan will allow you to do something that's a little bit more as is condition or you can do some work on where FHA wants a move-in ready home unless you're using a rehab loan with it.

Not favored by sellers

Also, FHA is not super favored by sellers. A lot of sellers look at FHA as they think the buyer can't qualify and they think that the financing is gonna fall through.

And that really is just it. It's stupid that sellers think that way because if you're approved for a loan, you're approved for a loan. It doesn't mean that if you're approved for FHA, if things are gonna fall through the cracks. That's not how it works, but unfortunately that's, health sellers can sometimes view it.

Market changing & FHA is more accepted

So some big changes that have happened recently that no one is seeming to cover is number one, is the market is changing and FHA is becoming more accepted. So these past couple years as home prices have increased a lot, we've seen a lot of c competition, a lot of multiple offers. What ends up happening is a seller might get, or was getting like 20 different offers on their home.

And a lot of those were for cash or conventional financing, which again, sellers can view as more favorable. I don't think it's fair that they do that, and I think it's it's not really logical that they do that, but that's the reality of the situation. So as the market switches back to more neutral territory and into more of a buyer's market, you start to see FHA more accepted.

Whereas it might have been difficult for somebody to get an FHA. Loan approved. Now it's becoming a lot more accepted.

New Loan Limits

Also, there are new loan limits. So as home prices increase the loan limits for FHA loans increase as well.

Private flood insurance allowed

Also with FHA, you used to have to get flood insurance through the government. That was just the requirement. Now you can actually get private flood insurance, which should lower the cost if you live in a flood zone.

Relaxes FHA COVID rules

FHA COVID rules have also been relaxed quite a bit primarily with when it comes to income. FHA was a little bit tough to get approved if you were laid off or you had you were self-employed and your income dropped or you got reduced hours With covid lenders were primarily looking at that lower income because of covid, and now they've relaxed those rules a little bit where your income can be averaged since you've been back at work from a covid lapse, whether it was a reduced income or laid off or whatever that circumstance was.

Also rental history can now be accepted on FHA loans to help nudge you towards an approval. So all these things putting together FHA has evolved quite a bit, even over just the past year.

What is FHA?

So first of all, what in the world is FHA? What does this stand for? This stands for the Federal Housing Administration.

FHA is a part of HUD

So this is just a part of HUD, which is the US Department of Housing and Urban Development. None of this matters a ton, but this is what the acronym stands for. And this is the government's kind of goal was to provide easier financing for people where conventional loans used to require like 20% down. They usually required low debt-to- income ratios.

Things have changed quite a bit, but this is where FHA evolved into providing more housing options for people who couldn't qualify for conventional loans. But this is a type of loan offered by many different lenders, okay? This is not just offered through one specific lender. Most lenders offer an FHA loan.

Now, it's important to note that in this video we're talking about the base guidelines set by FHA. These are set by the government entity that ensures these loans.

How Overlay works

So you have the base guidelines, but each lender gets to add what they call an Overlay. So for instance, we talked about the minimum 500 credit score. A lot of lenders add an overlay. Basically, it's a rule stacked on top of a rule. So the base rule is 500 is the minimum. Lenders can, if they want to say their own minimum is let's say 640, they're allowed to do that.

Don't make loans but insure payment to investor

Also, FHA does not make loans. They don't issue loans. What they do is they insure payments to investors. So for instance, a lender would offer an FHA loan, and then the FHA, they actually insure that mortgage so that in the event. That let's say you don't pay back that loan the FHA can actually come in and help that lender recoup any losses there.

But because of that, the requirements on things like the appraisal can be more strict. In the event that there is a foreclosure, they wanna make sure that they can sell the home without, losing as much money as possible.

Kyle: Mortgage Advisor

So really quickly about me I'm a certified mortgage advisor, licensed in all 50 states, and I work with a team of quite a few helpful mortgage advisors.

Our goal

To provide home loans that fit your budget to help clarify some of the confusing parts of the mortgage process in videos like this. So you're welcome to email me. Also, what we do is we do free home loan consults at Win The House You Love. We'd love to start a conversation and walk you through some of these programs and see how we can help you.

Requirements: Down payment

So one of the main requirements with FHA is the minimum down payment. Of course, you can always put more down than the minimum if you want to.

How FICO affect your down payment?

But as we talked about in the beginning, if you have a FICO score between a 580 plus, so anything 580 FICO score and higher, you can do 3.5% down.

So in an example where let's say we're looking at a $425,000 home, 3.5% down would be $14,875. Okay? Now, if you have anywhere between a 500 to a 579, you need to put 10% down. So in our example of a $425,000 home, that would be $42,500.

Down payment Assistance

So, then we work into down payment assistance. FHA is one of the most common loans to have with down payment assistance. And the way that it works is down payment assistance is added to an FHA loan. So even though that the minimum down payment on an FHA loan is 3.5% down, if you have a 580 credit score or higher, down payment assistance is a program where you could get additional assistance to reduce the 3.5% down payment.

Where you can get assistance?

And this comes in a bunch of different like flavors if you will. You have different like grants, you have second liens, you have loans that you have to pay back, tons of different options.

Expect higher interest rate

But ultimately, these down payment assistance programs often will have a higher interest rate or different kind of strings attached. For instance, there's a lot of down payment assistance programs where they'll say you have to live in the home for, let's say five years, and then after five years you have to pay back half of it when you sell it. Or there's some that reduce the amount that you have to pay back. There's some that require a payment on it where it's basically a second loan.

There's all different types of down payment assistance. Usually it's one of the more financially best options to not go with down payment assistance. But I'll run through an example of down payment assistance program that we work with nationally. And again, you can just go to Win The House You Love, set up a consult and we can walk you through this.

Empowered Down Payment Assistance

One that we work with is called an Empowered Down Payment Assistance. And this is a forgivable grant, meaning that you walk out of the closing and it's completely forgiven. You don't have to pay that money back. Where a lot of down payment assistance programs do have this kind of if you wanted to sell, you'd have to pay back a portion or all of the down payment assistance.

Forgivable Grant & 620 Credit Score

So this would provide 2% to 3.5% of the down payment has a 620 minimum credit score. And then you need to either be a first time home buyer, be under 140% of the area and median income, be it an underserved census tract or current or retired first responder, educator, medical personnel, civil servant, or military.

Down payment assistance and it's own rules

So you can see you have the normal FHA loan, but then the down payment assistance program on it has its own rules on top of it. And there are thousands of down payment assistance programs, all that have their own different rules to them. And even with a program like this, you would expect somewhere around a 1% higher rate.

So if on an FHA loan you were getting close to, let's say a 6% rate, you might be looking at closer to a 7% rate. And this, again, depends on tons of different down payment assistance programs. So we have the down payment, which is 3.5% for most people. Unless you have less than a 580 credit score, you're looking at 10% now.

Closing Costs

Then you have closing costs, and closing costs are going to be associated with all lenders. So closing costs are going to be things like your appraisal, your title insurance your recording fees, any taxes in your county or state. Also things like your homeowner's insurance and property tax escrow as well.

So closing costs on FHA loans are gonna be the same as all other loans, except for one big exception. And that's the FHA Upfront Mortgage Insurance Premium in your closing costs.

So I wanna look at a real FHA quote with you. Now, it's important to note this is an educational scenario. This is not your quote specifically for you. This is just an example quote here.

So we can see on this quote this is what's called a Loan Estimate. And this is given to every single buyer when they get under contract for a home. And so this allows you to take a look at different loan side by side. So we can see this is an FHA loan for a $425,000 purchase. We're getting a loan of four 15,849.

And this is because there is an FHA Mortgage Insurance Premium added into the loan amount, which again, I'll explain here in the future slide. So we can see where the interest rate could possibly be with the monthly Principal and Interest would be. Really what I wanna take a look at though, is what closing costs could look like on an FHA loan.

So in Section A up here would be the cost of working with a lender. So depending on who you work with, the costs are gonna change. This is a quote from us to one of our clients. So we didn't have any origination costs here on this loan. Section B, you're gonna run into things like an appraisal, a credit report fee.

And this is the mortgage insurance premium that FHA loans have. So you can see it's $5,724. And so what ends up happening is this actually gets financed. Into your loan amount, it gets added to your loan amount. With an FHA loan. Most people don't pay this outta pocket. Then you also have your title fees. So you get to choose the title company that you work with.

So there would be an estimate of fees, also your county usually is gonna record or charge cost to record the deed and the mortgage usually is somewhere around 200 bucks. Then you also have prepaids. So when you get a loan, you're gonna pay 12 months of your homeowner's insurance upfront.

Of course you get to choose your homeowner's insurance company. You also have prepaid interest. This is from the time that you close till your first payment is due. Then you have an escrow account. FHA does require all loans to have an escrow account. This is where a little bit of homeowner's insurance and property taxes are set in a, an account that the lender manages for you.

And this is because those bills are usually due annually or semi-annually. So instead of you having a big bill due once or twice a year, the lender collects monthly payments from you, sets it into the account, and then they will be in charge of paying your taxes and insurance for you.

Optional Title Insurance Policy

Then you also have an optional Title Insurance Policy offered to you by the title company as well. So that all comes down where you add your closing costs plus your down payment, giving you a cash to close. And I'll walk through as well how you can reduce your closing costs by asking the seller for a credit.

Quick Note

It's important to remember that a lot of people talk about, loan programs as just the down payment. You do still have closing costs. Closing costs are probably gonna be a good estimate as around 2% of the purchase price. Of course we can get the seller to pay some of that as well. But if you really wanna look at a detailed quote just ask us for one here. Just go to Win The House You Love and schedule a call with us.

Prove you have Money

So for your down payment closing costs, you have to prove that you have the money. You can't just show up and say yeah, I have the money. Don't worry about it. As someone once said to me, they were like don't worry about it. No, that's the job of a mortgage lender.

60 days of bank statement

They have to know where the money is coming from. So this is verified most of the time through two months worth of bank statements. So your lender is gonna ask you for two previous months of your bank statements. And then anything that is more than 1% of the purchase price as a deposit is what's considered a large deposit.

1% - large deposit

So again, if we're looking at a 425 thousand dollars home, anything that is above, let's say $4,000 is going to be flagged as a large deposit. And the lender needs to source any non payroll deposits that are these, over 1% of the purchase price. And they can actually ask for things that are less than that.

Large non-payroll deposit must be "sourced"

Basically what they wanna do is see if there's any non-payroll deposits. Where did that money come from? Because on FHA loans, you can't use things like, a personal loan or a credit card.

You can't use unsecured loans to fund your down payment and closing costs.

Collateralized loans are allowed

You can, however, use things like your 401k or, maybe a home equity line of credit from real estate or any sort of secured loan you can use there.

What is Patriot Act?

And I know this can be frustrating, but really what ended up happening is the Patriot Act is what requires lenders to look at bank statements for evidence of money laundering and evidence of terrorism.

And then of course, they also wanna make sure that the money didn't come from borrowed sources because to a lender, in their mind, if you need a credit card to pay your down payment, then they probably don't want to issue a loan because in their mind they're thinking if you can't pay the down payment, how are you gonna pay all the other costs and the monthly payment for the home and so that can be frustrating.

But ultimately, any of those kind of large deposits do need to be sourced. If you're selling things, let's say you sell a car and you get $5,000, you can document the receipt of that sale and use that money. That's perfectly fine.

Down payment from family

Also you can get down payment assistance from family if you're so lucky that your family has money and they're willing to help you out, which a lot of people are not in that situation, but if that's the case, your family is allowed to give you a secured or unsecured loan for the down payment, but not the closing costs.

Gift from family member

You could also get a gift from a family member if they're even more generous and they're saying, we'll give you money and you don't have to pay us back. You can get a gift and that can be used for the down payment or, and, or closing costs.

Cash on hand allowed BUT

Cash on hand is technically allowed in the FHA guide. But you have to document it. So specifically that most underwriters will not allow cash on hand again, even though it's in the guidelines. This is an overlay that a lot of lenders have where if they just see a deposit in your account for, let's say, $5,000 and you're like, it was cash, I've been saving most of the time you're not going to be able to use that for your down payment are closing costs, okay?

Crypto must be liquidated and seasoned

Crypto must be liquidated and in an account for 60 days FHA has not really caught up to the whole cryptocurrency world and is still a little bit outdated. Now, the one kind of way around a lot of these rules is by seasoning your funds for over 60 days. So basically what it means when money is seasoned, it means it's been sitting in your bank account for over 60 days because again, the underwriter's going to look at 60 days worth of bank statements. So two full months. Worth of bank statements.

How to season your account

If we have money, let's say we have cash on hand, okay, let's say I have $5,000 cash and I wanna buy a loan in maybe four months. It's better for me to go ahead and put that money into my account right now because then four months is gonna pass when I apply for my loan. An underwriter's gonna ask for the past two months.

What underwriters look at

An underwriter doesn't ask about a beginning balance on an account. They do look at the deposits though. So if that money is already in the account before the seasoning happened, before they look to those statements, then it doesn't get questioned. If those deposits happen within those two months, it will get questioned.

So that is something that you can use if you have something like cash on hand that you want to be able to use.

Seller Credits/ Seller Concession

Now to lower these costs, the down payment and the closing costs, we can ask for what's called a Seller Credit. This is also called Seller Concession.

6% of the purchase price allowed

And what this means is we can ask for up to 6% of the purchase price towards our closing costs. For instance, we'll actually we'll run through an example here in a second.

Seller Credits is less attractive?

So seller credits can make your offer less attractive. That's really important to keep in mind here is because what's happening is, let's say we're offering, we were looking to buy a $425,000 home and we're like, man, we love this home but we need money for closing costs.

And then we ask the seller, Hey, could you pay us money for our closing costs? The seller's gonna walk away with less money.

Working with a realtor can be helpful

So often what you'll want to do is work with a realtor who can help you negotiate this, where you might actually raise the purchase price and then ask for that money as a credit back.

Example computation

Effectively, what you're doing is you're financing your closing costs in that way, right? So for instance, let's say the home is 425,000.  and we want $5,000 back. In closing costs, we can actually offer $430,000 asking for a $5,000 credit. To the seller, there's really no difference. They're making the same amount of money net to us.

We get $5,000. We just financed it into the home purchase. Okay, so here's a quick example. Let's say we're looking at a purchase price of $425,000. The down payment is 14,875. Let's estimate closing costs around $6,500. And let's say we ask for 1% of a seller credit, that's 1% of 425 is $4,250. So the down payment plus the closing costs minus the seller credit, would give us a total due at closing of $17,175.

Now, you don't have to be too overwhelmed by the math here. If you work with a really solid realtor who understands how this works and also understands more about FHA loans they can really help you figure out what number do you need down here to do the math for these numbers up here.

Home and Money Referral

So if you'd like to be connected and get a referral for a fantastic real estate all throughout the nation, you can go to Home and Money. Fill out a couple questions and they'll connect you with one of the best realtors in your area.

Credit score requirements with FHA loans

Every person most people have three credit scores. One with Equifax, one with Experian, and one with TransUnion. Okay? Now, FHA does allow loans if you don't have a credit score, we'll get to that. It's called Manual Underwriting. But for most people, they're gonna be running into the situation. What lender's gonna do on an FHA loan is actually look at your middle credit score.

So we're gonna find our highest and we're gonna cut that out. We're gonna find the lowest, and we're gonna cut that out. 647 is what we would use on this FHA loan, so 647, that's above 580, so we can do 3.5% down. Also, the 647 is going to control our interest rate.

Quick rule of thumb for Credit Score and Interest Rate

The higher our credit score is, the lower the interest rate is. The lower our credit score is, the higher the interest rate is. So middle score here. With FHA loans. Let's look at a couple different brackets.

500 - Minimum

So 500, that's the minimum for FHA. Now we offer loans all the way down to a 500 credit score with FHA. A lot of lenders don't. They have overlays where they might bring it up to 640. We work with over 80 different lenders and a lot of them offer down to a 500 credit score, which again, you can reach out to us and we'd love to help.

580 - More accepted

Now, 580 is more accepted and easier to get approved. Again, that's because a lot of these overlays, a lot of lenders will put their bare minimum at 580 cuz they don't wanna do those 500 to 579 loans because they can be a little bit more difficult to do and take a little bit longer.

640 - Most accepted

The 640 is what's most accepted with a lot of lenders. You'll find 640 being the bare minimum for a lot of people. I've made a lot of videos on FHA before talking about the minimum credit score, and a lot of people will say, I can't find 500. I can only find people doing down to 640. And that's because of those overlays. Again, we work with lenders all the way down to a 500 credit score. You can reach out to us, Win the House You Love.

680 - Maybe not worth it

For 680, so when we start getting into higher credit scores, anything above a 680, I don't know that an FHA loan is gonna be the best strategy for you. Again, FHA loan is something that I think you're only gonna hold onto for a short period of time and then refinance into something more cost effective, like a conventional loan. So if you have anywhere between a 620 credit score and a 680 credit score, I think it's worth getting a quote for conventional and FHA.

680 and high debt

However, if you have above 680, there's really not a ton of reason to get an FHA loan unless you have a really high debt. That would be really the only main benefit of getting an FHA loan.

No maximum credit score

And there is no maximum on FHA. So again, you can have an 800 score and still qualify for an FHA loan. So this is one of the most lenient types or major types of loans in here compared to, conventional, VA, and USDA.

Conventional or FHA, which is better?

Again, if you're in between a 620 and a 680, also look at a conventional loan to compare those two. Because in between 620 and 680 credit score is where it can go back and forth on which loan is gonna be better for you. For some people, maybe at a 620 score, FHA is gonna be better. Even if you can qualify for conventional or if you're at a 680, conventional might be better, even though you might still qualify for an FHA loan.

And so what I really recommend to a lot of people is, if you're really wanting to buy a house and you're like, I really need to get outta my current situation and get into a home and you have a lower credit score, FHA can be a great option, in this range. I think what's gonna be best though is if you're in the 580, 640 or higher range to get an FHA 640 really is the sweet spot for getting approved for an FHA loan 640 and higher.


So if you're in that spot and you're like, you know what, I actually wanna do a little bit of work on my credit you can go to ScoreMaster and in here is a really cool way to get to your best credit score. So this is what I use to track my credit score as well. And through using the software there's an average 61 point score increase in 20 days. And so it shows you different stimulations on what you could pay down or actions you could take in your credit score to be able to boost it.


So let's talk about, one of the big lender problems here is not all lenders have the ability to do the bare minimum FHA guidelines. Now, we're talking about bare minimum FHA guidelines, which we have lenders who can do those.

But a lot of lenders do have what are called Overlays. And yeah, this is what we're talking about 500 is the minimum credit score, but a lot of lenders, they'll raise that for themselves. It doesn't mean that's the rule for FHA across the board. It just means that's the rule with that one specific lender. So you can talk with other lenders who might go down to the minimum lending guidelines like we do.

Eligibility is not an express pass to be approved

Also, just because you're eligible doesn't mean you're going to get approved. We're gonna talk about the two different underwriting method but a lot of times people will say, oh, I have a 540 credit score, so this means I can get a loan automatically. It doesn't, it just means that you're eligible.

We cannot skip Underwriting

You still have to go through the underwriting process. And there are other requirements than just the credit score to get approved. FHA is not just, oh, you have this credit score, here's a loan. That's not how it works. There's multiple levels of different risk analysis to see if you're approved for a loan. This is just for eligibility, okay? So if you're down to a 500 credit score anywhere in between 800 to 500 you're eligible for an FHA loan, you still have to go through the other approval requirements.

Credit Events

Now let's talk about some credit events. A lot of people use FHA loans because there was something that happened to their credit. There was a bankruptcy, there was a foreclosure, there's a short sale, there was an IRS lien, there was something in there. And other loans, like conventional loans do not like those. So the waiting times for FHA is a lot shorter related to those credit events.

FHA is more forgiving

So first, FHA is more forgiving on revolving and installment lates than a lot of other loans. Conventional loans, really, even though the minimum is 620 as a credit score, conventional loans really 680 credit scores and higher, and they really prefer things in the 700s and higher. And conventional loans can be difficult to get approved for if you do have some of these recent late payments.

Require payment plan for non-medical collections for 2k+

So on FHA non-medical collections greater than 2000 dollars total require a payment plan. They're required to be paid off, or 5% of the balance must be included in the debt-to- income ratio.

So if you do have any non-medical collections, again, FHA doesn't care about medical collections, any non-medical collections, then it needs to be one of these three things. So for instance, if you have a $5,000 collection, $250 per month has to be included in your debt-to-income ratio. And this changes your affordability. So this means that you would qualify for $250 per month, less in a potential future home. So for a lot of people, that's gonna be really tough.

For other people, that's not gonna be a problem at all. And you can strategize with your loan officer on, okay, do I need to get the balance in there or do can I pay it off? Or can I get a payment plan? What's gonna be the best strategy with collections.

Biden's admin CAIVRS wipe

Also what's really been really interesting is the Biden administration has taken loans that have been delinquent and given them what they call a fresh start. So they took them outta delinquency and out of a credit reporting system called CAIVRS, which logs all federal debt. So if you have a federal student loan likely that was reset and taken outta default if it was previously end default. Which can really help you with an FHA loan.

Now, one big note in here is even though FHA is lenient on these things they still affect your credit score. So bankruptcy still affects your credit score, which then affects your approval for an FHA loan. So even though they're lenient on them your credit score can still tank because of things like collections. FHA doesn't care about medical collections, but if you have a ton of medical collections that will lower your score and lower your odds of getting. So we've covered medical collections.

TAT of Credit Events

Let's walk through some of the waiting times here. So if you had a deed in lieu of foreclosure, a foreclosure, or a short sale, then you're going to have to wait three years from the transfer of that to get an FHA loan. If you had a Chapter 7, two years from the discharge of that. If you have a Chapter 13, there's two different options you can take.

The first one is with a manually underwritten loan. And this is 12 months on-time payments and a court approval to be able to qualify. Then the second option is through the automated underwriting system, and that's two years from the discharge. If you have an IRS lien, then you need three on time payments that are also included in our debt-to-income ratio, which can affect your future affordability.

FHA Rates

Now FHA rates are often lower than conventional rates. They're similar to USDA rates. VA loans tend to be lower as well. Now even though the rate is lower unconventional you do have that offset with FHAs, more expensive mortgage insurance.

Easier than conventional to get lender credits if desired

Since the rate can be lower on an FHA loan, what you can do is actually ask your loan officer if you want to raise the interest rate. When they do that, they can give you a credit back towards your closing costs if you need it. Now, the opposite is true. You can ask your lender to lower your interest rate, and then you can actually pay upfront money. Think of it like prepaid interest to lower your interest rate.

Fixed & ARM

You can also get a fixed rate loan, meaning that it's not going to change for let's say 15, 20, 30 years, however long you get your FHA loan for. You can also get an adjustable rate loan, and the way that this works is there's a fixed period and then an adjustable period.

So for instance, a 5-1 Adjustable Rate Mortgage is common, a five one ARM. So that means the first five years are fixed, and then the rest of the loan can change in its interest rate every single year, depending on what happens in the market.

2-1 Buy down

You can also get a temporary buydown. This is often called a 2-1 buy down or a permanent buydown. A temporary buydown is where the first, let's say, two years of the loan have a lower interest rate. This is funded by Seller Credits. A permanent buydown is where you prepay money up upfront to lower the interest rate for the entire life of the loan. And if you wanna take a look at today's interest rates, you can go to WTHYL - Rates. And I chart out all the different interest rates and compare them to other types of loans.

Mortgage Insurance

Now, mortgage insurance, this is the big kicker with FHA loans. This is why a lot of people are afraid of FHA is primarily because there's two mortgage insurance types added to every single FHA loan.

The first one is the upfront mortgage insurance premium. So this is 1.75% of the loan amount added to the loan amount. Most people don't pay this outta pocket. It's included in the loan balance, and I'll get to an example right here. Then you also have the mortgage insurance premium. This is monthly and it's 0.85% of your loan amount.


Now, the reason a lot of people don't like FHA loans, and the reason why I only suggest FHA loans as a bridge is because the mortgage insurance is gonna stay on for the entire life of the loan. If you get a 30-year loan, you're gonna have mortgage insurance on their monthly for 30 years. Compared to something like a conventional loan that mortgage insurance drops off when you have about 20% equity. You also on every loan have this upfront mortgage insurance as well.

Down payment difference

One little caveat here with the monthly mortgage insurance on FHA loans is if you put 10% or more as a down payment, FHA mortgage insurance will fall off after 11 years. Otherwise, if you put less than 10% down, it will stay on for the entire life of the loan.

For instance, let's say we're looking at a $300,000 loan. FHAs upfront mortgage insurance would be $5,250, meaning our new loan balance would be $305,250. You're not paying it out, out of pocket. It's included in your loan amount. Then your monthly payment would be $212.50 cents per month just in the mortgage insurance cost.

Now this does decrease every single year, but you're gonna expect a budget around $212 per month just for that mortgage insurance during the first year. And this is going to be charged by your lender, so you don't have to like separate you don't pay this separately. It's gonna be included in your loan.

Monthly Payment Scenario

With this educational scenario, $400,000 purchase price. Let's say we're doing three and a half percent down as the minimum. And let's say we're getting a 6.125% interest rate.

Our principal and interest would be around $2,400 tax. Let's estimate around 520. Homeowner's insurance around 150, the mortgage insurance premium 272. And you can see how all of this added together brings you to a monthly payment of around $3,300.

The best way to get an estimate of this quote is just reach out to us. We'd love to give you a free home loan consult. We can walk you through all these decision making numbers that you need to know, things like your interest rate, how much money you need down, how much you qualify for, and then a breakdown of all of your monthly payment as well.

Property Requirement: Primary residence

FHA is only for a primary residence. This is not for investment properties. There is a way to do what's called a House Hacking where we can use it a little bit as an investment property which I will cover.

Property Requirement: 2-3 units allowed

You can use this on a two to four unit home where you live in one unit and then rent out the others.

Property Requirement: Work with the right real estate agent

You ultimately wanna work with the right real estate agent because FHA can be a little tricky when you're looking at putting in offers. Number one, we need to make sure that we find an FHA eligible home, okay? Also, we need somebody who's familiar with the process and we need somebody who can help us negotiate with that FHA loan.

When a seller looks at us and says, oh, it's an FHA loan, is this gonna close? We need a realtor who can help communicate why this is gonna be a good offer for the seller to accept. Again, if you're looking for a real estate agent referral, you can go to Home and Money.

Property Requirement: Move within 60 days

So some property requirements in here, people get this confused quite a bit. So first you have to move into the home within 60 days. So after you close on the home you need to be able to move into it. And this is to prevent investors from saying, oh, we'll move into the home eventually, and then they never do. And then they rent it out and then they took advantage of an FHA loan.

Property Requirement: 1 years minimum occupancy time to rent

The minimum occupancy time to rent out the home is one year. So this is where you can take advantage of an FHA loan to use it little bit as an investment of sorts. It's not an investment property in the beginning.

So this is the way it works. You can close on the home, live in it for one year, and then you can decide to move out, rent it without refinancing your loan. If, let's say you bought the home and then you want to move out and rent it out within six months, you have to refinance into an investment loan that has a much higher interest rate and a much higher equity requirement.

Meaning you're probably gonna have to bring money to the closing table to refinance with FHA, as long as you live in it for a year, you can then rent it out.

Property Requirement: when is the time to sell?

Now, when it comes to selling, you can sell at any time. There's no repercussions there. So you can buy your FHA home and then you can actually choose to sell it within three months and then buy another home with FHA.

If you want to. It's only when you decide to rent it out that you have to be in there for a year. Otherwise, you need to refinance into investment loan. If you don't, that's called mortgage fraud, and I promise they will catch up to you.


So most people with FHA tend to buy single family homes that are detached have a little yard with them, however, you can buy a condo. But they can be a little bit tricky with FHA loans.

Condo association must be approved

So the condo association has to be approved. And the reason that FHA requires us is they wanna make sure that the home value is going to be stable. Because in a condo, your home value also depends on the other units in the condo building itself, and how stable the condo association is.

Approved Condo List

FHA has an approved condo list. You can look up a certain condo project and see if it's approved. But this can be very difficult, to see a condo on that list.

Single Unit Approval

There are things with FHA loans called a Single Unit Approval. It's possible, but it's tough. And what ends up happening is this is if you look at for a condo project on the list, it's not there, then you can actually see if you can get one of those units FHA approved. Here's all the requirements for it. It's very difficult to do.

First, there has to be five or more units to qualify less than 10 units. If there's less than 10 units, only two can be fha. If it's greater or equal to 10 units, only 50% can be FHA. Greater than 50% must be owner-occupied association must have 10% of HOA budget and cash reserves.

Greater than 85% of units must be current on their dues. No more than 35% of property can be commercial use. And all these details have to be re-certified every three years. , it's tough cuz also condo associations are not easy to work with or get documents from and the lender has to document all this.

50% Success rate for single-unit approval

So if we're looking at a success rate of a single unit approval it's only 50%. If you look at FHA's condo approval website, there was about 15,000 approved and 15,000 rejections.

6.5% of available condos per HUD

HUD reports only 6.5% of all available condos in the US would be eligible. So ultimately, if you're looking at a condo, I would say look at the condo approved list.

If it's on there, great, you can get an FHA loan with it. If it's not on there, single unit approval is an option, but it's gonna be extremely difficult to do. And what's frustrating is usually you're already putting earn money on the home. Likely you've done home inspection because it takes a long time, most of the time for the condo association to get all these documents back to you and for an underwriter to review them.

When to go Conventional

If I were you, if you're looking at a condo and it's not on the condo approved list, I would try to qualify for a conventional loan and you can talk to a loan officer on, Hey, this is what I wanna do. If I can't qualify for a conventional loan now, can you help me get on the right strategy to qualify for a conventional loan in the future.

House hacking

This is one of the most attractive things about an FHA loan, is because the guidelines are so lenient. And because the down payment is so low for these two to four unit homes house hacking is a really smart strategy.

I had a friend who just recently did this. He has a really high credit score. He has pretty decent income compared to the amount of debts that he has. And he was like, I wanna buy a four unit home. I wanna live in one. I wanna rent out the others and make it work that way. And initially because he's has a low credit age, he's only had the credit history for the past, couple years. He wouldn't be able to get approved for a conventional loan. He put all the stuff we put through the automated underwriting software and he wasn't able to get approved. However, since FHA is more lenient on lower credit history, he was able to get approved FHA.

2-4 Units 3.5% down!

Another benefit of doing this house hacking is you can still do 3.5% down even on a four unit property, on a three unit property, on a two unit property compared to conventional, it's gonna require 15 to 25% down.

So this is really popular for people getting into their first home, along with their first investment. It's not technically an investment property, but their first investment property because you can do 3.5% down up to a four unit home. You can use that other income from the other units to help you qualify for the loan as well. Compared to a conventional loan that's gonna have maybe a 25% down payment, which a lot of first time home buyers can't afford.

So you can use 75% of the future rental income. To help you qualify for this loan. So that would be from the other units.

Self-sufficiency test for 3-4 units

Also FHA does have this, what's called a self-sufficiency test. Anything that's a three to four unit home basically says 70% of future rental income must exceed the mortgage payment. And then usually you need three months of reserves in your bank account after you close. That means that if your mortgage payment is for easy math, $2,000 per month after you pay your down payment and closing costs, you need to have $6,000 left in your account as a reserve kind of emergency fund.

Move up strategy (1-year)

Another strategy that kind of is in the house hacking realm is just a move up strategy. And the way that this would work is you can buy a home. Let's say it's a single family home. You live in it for a year and then you go and buy another primary residence home. You move outta your current home, you rent it out, and you go move into another home.

You don't have to refinance it into an investment loan. Because the main restriction to getting into investment properties is the down payment requirement that a lot of people run into. So you could buy your first home 3.5% down on an FHA loan. Live in it for a year, go buy another house, rent out your current one without having to refinance and collect rental income on that.

You can do this same thing with the two to four unit home. You can live in it for a year and then you can go buy another house. Getting another multi-family with FHA is gonna be really difficult, but you can go buy another primary residence maybe with a conventional loan and then rent out the unit that you were in.

So maybe you now have four occupied units with FHA really common strategy and really great way to utilize an FHA loan.

Property Condition

So FHA appraisals stick with the property for four months. If a buyer let's say you're looking at a home and there was actually a buyer on the property before you and maybe a month ago they got an appraisal. And then that fell through for some reason, then you come in.

Transfer in past FHA appraisal within 4 months

You actually have to use the value from their appraisal so that appraisal sticks with that home for four months, no matter who the buyer is. Now what you can do is actually, so you can transfer this in if a buyer had a previous appraisal with it.

So sometimes this can be a little bit of an issue every once in a while where, you know, that might have happened where a buyer before you looked to buy the home that you're buying the value, maybe came in fine, but for whatever reason they couldn't buy the home. Underwriting fell through or something happened.

But you do still have to have that value for the next or for that period of four months.

Health and safety

FHA is primarily concerned with what's called health and safety. So anything that's structurally sound, think, move in ready. With FHA loans foreclosures are gonna be tough with FHA primarily because they usually have some issues that they, that need to be worked on.

Think move-in ready

This is where you do wanna work with a good realtor. You don't wanna just put in an offer and put earnest money down and pay for an inspection and get an appraisal and spend, maybe a thousand dollars upfront an inspection, an appraisal, and maybe any earnest money all for it to not qualify for FHA.

Because what you can do then is in your post inspection agreement with a seller is actually request the seller to fix things that might not be up to FHA standards, but it does put your deal in jeopardy. There can be a risk of that deal falling through. So you do wanna work with a good real estate agent who can help you negotiate those things upfront.

Spot those things up front so they don't become an issue. I can't tell you how many times we've done an FHA loan and the realtor thinks, oh yeah, this is no problem at all or they don't check. And as loan officers, we don't we can't go and walk through the house and inspect it.

So the realtor really needs to be helping you understand if this house can qualify for FHA or not. And they can ask the loan officer can you gimme some tips and guidelines on what to look out for? But the amount of times that an appraisal comes back and then it's just, there'll be wiring, open, wiring, hanging down, or there'll be a busted window, or even simple things like a handrail is installed on stairs.

These are all easy fixes and things that should be done before an FHA appraiser goes out there. Those are really easy things to negotiate in your contract upfront by working with a good real estate agent, by working with a good loan officer who can help you. Help your real estate under real estate agent understand these things.

That way it doesn't delay the process and you have to pay for a secondary appraisal inspection, and the whole deal just becomes annoying. , just something to keep in mind.

Stricter than conventional

Also, FHA appraisals are stricter than conventional because they are government insured. FHA does ensure the payments to investors for FHA loans. So again, that's why they want the homes to be really more move and ready. They don't want there to be issues in the event that they need to foreclose and sell the home.

Appraisal highlights

So appraisal highlights in here, I'm gonna cover all these things that your real estate agent should be looking out for and you can look out for these things as well.

If you would like to, or you can just send this list over to your real estate agent. The first thing is that FHA loans have what's called an mandatory clause. So you're gonna sign your contract on your home to say, Hey, we wanna purchase this house for, this amount of money. Here's all the details.

But then after that your lender's gonna send you a document called an Amendatory Clause that you need to sign and the seller needs to sign.

Amendatory Clause

The Amendatory Clause says that when the appraisal happens, if the appraisal comes in below the purchase price, so let's say the purchase price is $400,000 and the appraisal comes in at, let's say 350.

If that happens, you're allowed to exit the deal and you're allowed to take your earnest money with you. People get this very confused  because especially in the past couple years, there's been a lot of like appraisal contingency waivers. There's also been a lot of appraisal gaps where people are basically saying, if the appraisal comes in short, then the seller has the leverage and the buyer either has to pay or lose their earnest money.

And no matter what your contract says, the Mandatory Clause is the rule of law with an FHA loan. And the reason why is because even if on your contract you say if the appraisal comes in short, will cover the difference. The mandatory clause gets signed after the contract. It is the thing that rules what happens with the value of your home and your earnest money.

If the appraisal comes in short, no matter what your contract says, if the seller signs the mandatory clause after the purchase contract is signed then you are allowed to leave the contract, exit the contract, and take your earnest money with you if the value comes in short. So you do have this really nice protection in here.

The seller doesn't have to sign it, but that means you won't be able to get an FHA loan. The seller has to sign this to get an FHA loan.

Highlights! Watch out!

So some really quick highlights. Here's some things to watch out for. If you're looking through a home where you wanna write an offer with an FHA loan the roof needs to have two years of economic life remaining.

No exposed electrical wiring

Why are people selling homes with exposed electrical wiring? I can't tell you amount of times, I've seen an appraisal. And there's just open wiring hanging. Just, it's not that hard to cover it. I don't know. That's a pet peeve of mine.

Sellers, if you're selling a house, just cover your electrical wiring. It's not hard.

Appliances must be operational

Appliances if they're being conveyed with the property, they need to be operational. If you're getting an oven and a fridge with a property and needs to be operational


handrails are not needed. If they're if their absence doesn't pose a safety threat this is can be a difficult one cuz it can be subjective. Really. What I've seen is anything that has. Three steps or more needs to have a handrail on at least one side. You can even get away with a temporary handrail that's just some two by fours really solidly screwed in. That is absolutely an option. You don't have to build something nice and ornate.

Stairway down to the basement needs at least one handrail.

Other things to consider

No standing water on the site near the foundation. The attic must be accessible. If it's not, the appraiser is not going to move things out of the way to access the home. The seller needs to make it ready to be accessible by an appraiser.

A pest inspection is only required if the current or past infestation is evident. The property line cannot be located within 300 feet of an above ground or subsurface stationary storage tank with a capacity of 1000 gallons or more of flammable or explosive material. This is more common for people if they're wanna buy a home right next to a gas station which is surprisingly somewhat common.

If it's built before 1978, there can be no chipped or peeling paint on interior or exterior of the home. If it's built after 1978, the exterior defective paint that exposes subsurface must be repaired. And this is these two rules are because of lead-based paint. Broken window glass needs to be replaced while cracked glass does not.

Example Homes 1

So let's run through some example homes. Sometimes it's helpful to run through some real life scenarios. So I pulled some of these off of Zillow, and this is all, public data here. All the costs and payments are just averages in here. So this is in Fresno, California listed for $410,000.

So in here, if we did 3.5% down, that'd be $14,350. I'm gonna estimate closing costs around $8,200. We could ask for a 1% Seller Credit, that'd be $4,100. That means our down payment plus our closing costs minus the seller credit, gives us a total due at closing of 18,450. Now let's assume we got this loan with a 6.125% rate.

That would give us a Principal and Interest payment of $2,446 per month. Mortgage insurance would be around $280 per month. Now the rest of these numbers are going to be averages specific to the property. Taxes on this home are around 300 Homeowner's Insurance, HOI is really gonna be more specific to you, but estimate around $144 and there was no HOA here.

So the total bill from the mortgage company per month on this home would probably be around $3,169. Of course, you still have utilities that you do need to pay, but those aren't mortgage costs. This is what's going to be the mortgage cost that the lender would give you a bill for every month. Okay, let's run through another one.

Example Home 2

This is in Manor, Texas I think is how you say that. Manor, Manor, probably? Just under $500,000. So again, 3.5% down $17,325. Estimate closing costs 9,900. And then on this, let's say we ask for 1.5% Seller Credit, so 1.5% of the Purchase Price towards our closing costs. So down payment plus closing costs minus the Seller Credit is $19,800.

Again, let's say we have a 6.125% rate. Our Principal and Interest payment would be just shy of $3,000. Mortgage Insurance Premium would be $337. And then again, the rest of these numbers are estimates based on the home. So property taxes, for whatever reason on this home, are really high at $800. Homeowner's insurance around 173 that would give us a total of $4,282 per month to buy a home like this.

Now, if you're looking at homes that are much less than that then of course your numbers are gonna be lower. If you're looking at a home, that home numbers are much higher then the numbers would be higher as well. One thing to keep in mind is FHA has loan limits in here.

You can buy a home that is much more expensive than the loan limit, but your loan can't exceed that amount. You have to bring a down payment higher than the difference.

Loan Limits

So let's talk about these loan limits. The Loan Limits change based on the amount of units that you have. And if it's in a normal area or a high cost of living area.

So this is how this works. If we're getting, let's say, a one unit home, which is common for most people this scenario is gonna be what most people run into of the loan limit being $472,030. If you're in a high cost of living area, this goes all the way up to just over a million dollars. So think somewhere like San Francisco, Sacramento, Nashville, Miami. These are gonna be high cost of living areas and that changes the loan limit for FHA.

Loan Limit Lookup Tool

Check out my Loan Limit Lookup Tool where you can type in the county or city that you're in or looking to buy in, and it will show you the loan limit. Then if we get to two units, three units and four units, you can see how that changes along with the high cost as well.

Max Purchase Price

So the way that you then find your Max Purchase Price based on the loan amount is by taking the loan limit. So in this instance, let's run with the, you know what, most people are gonna run into $472,030. Divide that by 0.965. We got that number from one minus 3.5% down that it's the opposite. So this is the total loan amount gives you $489,150.

So the max that we could buy with a one unit home for most of the US with an FHA loan would be $489,150. After 3.5% down, we would have a loan of $472,030. Okay? And you can do the difference here. Let's say you wanna buy a million dollar home. You can buy a million dollar home with an FHA loan in most of the US, but you're gonna need to do a million dollars minus 472,030.

That's gonna be your down payment. You can still get a loan for 472, but that's gonna be the maximum with FHA in most areas.

Income and Affordability

Now, income and affordability, again, you still have to qualify for an FHA loan. Just because you have a certain credit score doesn't mean you're automatically going to get it.

2 years history of stable income

So you need a two year stable history of employment. Now, this doesn't mean you have to have any certain set length of time at a specific job. A lot of people interpret this as, I need to have two years at one job in one position. Absolutely not true. Just a two year history lender needs to see over the past two years, what jobs have you done?

What income have they had? Is it stable? Is it trending upwards? Does it look like it's going to continue in the future? So it's ideal if it's in a similar field. If you are changing jobs. This is very common. Especially with COVID recently there were a lot of people who changed jobs to different hospitals and they were still employed as maybe a nurse in multiple hospitals with similar income or income that was increasing, but it was all within the same field, and that's the most helpful.

You can get approved for an FHA loan if you're changing jobs in multiple fields, but it becomes more and more difficult when you do that. An underwriter wants to start looking at, okay, do you have certifications for these new jobs? Is there consistency in these new jobs or these new fields? It becomes a little more tricky when you start working in a bunch of different fields.

Retirement and school do count

So let's say you're starting a job as a new nurse and you just went through four years of nursing school. That counts as your stable employment getting onto the job. So you don't have to have two years as a nurse. Your college will count and often an underwriter will ask for your college transcripts just to verify that you have that or if you're starting in a new line of work, a new field, an underwriter might ask for certain certifications that you have to see if that can help you qualify for the stability of your employment. Retirement counts as well. So even though it's not like a employment necessarily, it's that's what they view it as.

So you can qualify for an FHA loan. If you just are on Social Security income and pension income, and maybe you have a side job, retirement is perfectly fine.

Significance of 6 months

If you have a six month gap or greater, then you need to have six months on the job or more. That's one of the big rules here with job gaps.

Non-taxable income

So things like Social Security income can be grossed up by 115%. This is because non-taxable income obviously isn't taxed, and lenders look at gross income, pre-tax income to qualify you for a loan. Let's say you make $2,500 a month in social security, we multiply that times a 1.15, and you would qualify for $2,875 per month as your affordability income lenders would then use that to see how much of a home you could afford.

No minimum or maximum income limits

There's no minimum or maximum income limits on these. However, there often are income limits on down payment assistance programs if you add it onto the FHA loan.

Requires 2 years of tax returns and gross income

Then if you're self-employed, two years tax returns average is what's most common for most people. So lenders do look at gross pre-tax income. When you're looking at your own budget and affordability of how much you can afford, of course you're not gonna look at pre-tax income, you're gonna look at your take home pay. But lenders look at pre-tax income because net income gets adjusted too much by things like 401ks, or maybe there's garnishments or there's other different things pulled out of your paycheck. So they look at pre-tax income.

Front-end and Back-end

Here are the limits on what's called a debt -to- income ratio. So debt-to-income ratio is what FHA loans use to see how much house you can afford. So when you go to a lender and they're like, Hey, you qualify for $300,000. They're not just pulling it out of the air.

How to compute your DTI

They're using a mathematical formula called a debt-to-income ratio. And this is where you take your total monthly debts divided by your total monthly gross income. And that gives a ratio and it needs to be under a certain limit.  and there's two of these ratios to make it even more complex. The front end is just your potential mortgage payment. our future mortgage payment you wanna qualify for, the maximum that can be is 46.99%.

Now, that's only available for people who have a really high credit score, and this all depends on what the underwriting software says. So these are the absolute maximums, but a lot of people don't qualify for the absolute maximum. This is just the absolute maximum. You may see if you have a really high credit score, if you have a lower credit score, those maximums are gonna get shrunk.

The backend is gonna be your future mortgage payment plus any other monthly debts you have, like a car loan, student loans, credit cards. It does not include expenses. Things like groceries, gas, utilities are not included. So your monthly minimum debt payments plus your future mortgage payment cannot exceed 57% of your monthly gross income. You can see that's very high, right? FHAs allows you to go up very high in your what maximum loan you could get. So not everyone can get approved this high.

Manually underwritten is much LOWER

Also if you're getting a manually underwritten loan, then it's going to be much lower. I'm explained manual versus automated underwriting in a second.

What is a community property state?

And if you're in a community property state, so Arizona, California, Idaho, Louisiana Nevada, New Mexico, Texas, Washington, and Wisconsin. Community property states mean that your, if you have a spouse their debts have to be included in your debt-to-income ratio as well.

They can be on the loan if you want them to include their income, but even if they're not on the loan, their debts have to be included because of the laws of community property in those states.


Let's say you're looking to buy a house with you and your spouse, or maybe they're not your spouse, maybe they're just a partner, maybe they're just whomever to you. Let's say that you make $65,000 per year in your gross income. Let's say they make $45,000 per year in your gross income.

You can do the math for your own situation too. We can also help you do this as well if you would like to. So combined, you make $9,166 in gross income per month. So let's say that you have a $450 per month car payment and $250 per month student loans. Let's say they have a credit card for 250 student loans for 400 and child support for 150. Yes, that is child support and alimony is technically a debt in the mortgage world.

So the maximum that you get on the front end would be $4,300. The max on the back end would be $3,700. Lenders would then take the lower number. This would be the maximum, absolute maximum you could qualify for with an FHA loan.

Co-signer or a co-borrower on an FHA loan

So you can also have a co-signer or a co-borrower on an FHA loan, both or allowed. The difference is who is going to be on title. A co-signer is on the mortgage and is fully responsible for the mortgage just as you are. They just don't have ownership on the title of the home. A co-borrower is responsible on the mortgage just the same, but they do have ownership on the title.

Personally, I think that if you're ever going to sign for somebody on a mortgage that you need to have ownership on the title. I think it's really dumb per personal preference to sign up for a debt and have no stake in the collateral of the home. And that's just my own personal opinion.

Non-occupying co-borrower

FHA allows what's called a Non-Occupying Co-Borrower, and this is a really common strategy to help somebody qualify for a loan. And this is primarily done with a relative. So this happens a lot with somebody who maybe tried to qualify for an FHA loan by themselves, but they couldn't qualify for some reason. They could have somebody like a parent or a child signed as a co-borrower on the loan with them. Not occupying means they're not gonna live there, but they are going to be on the loan and responsible for the debt with you. And that can help you qualify for a loan.

So if you're a relative, a child, a parent, sibling, grandparent, aunt, uncle, or in-laws, then it's still three and a half percent down. If it's a non-relative, FHA puts that all the way up to 25% down. So you can see FHA is not a huge fan of the non-relative, non occupying co-borrower on a loan.

But this is a very common strategy for people who are trying to get approved for a loan and they can't do it on their own. And it doesn't mean that they're a bad person or they won't be able to pay. Mortgage rules are strict and have all these little nuances to them. And not everyone fits in these pretty little boxes.

And so sometimes people need help to look better on paper to qualify for a loan. Just because you can't qualify for a loan doesn't mean that you're a bad person and can't pay back money. I see this happen all the time where people are really good at paying their rent payments or they're really good at covering their bills or, I've talked to a veteran once.

I feel like he's the best example of this. Guys fantastic with his money. Always pays everything on time. Has backup set aside. The emergency fund set aside really good with his budget, but then he got into a car wreck and got care flighted and had a hundred thousand dollars medical bill.

He didn't have a hundred thousand dollars and his credit got destroyed. And just because he couldn't qualify for a loan in a traditional way doesn't mean that he's a bad person and can't pay back money. So if you, sometimes people add these weird levels of shame to it. Of, oh, if you need a co-borrower, then you shouldn't get a loan. That's not the case.

These guidelines here, like everything in the mortgage world it's all just made up on what it statistically it looks like for someone to pay back a loan. Just cuz you don't fit that little box doesn't mean that you're a bad person. Doesn't mean that you can't actually pay back a loan. You just might need help looking better on paper to get that loan.

Max Purchase Price Calculator

Now I do have a tool called the Max Purchase Price Calculator because a lot of this this, all the rules and the calculations around debt income ratios can be confusing. So I put this together in an Excel document if you would like to use it.

What this allows you to do is put in your scenario. So what kind of down payment you want? We're looking at FHA, so 3.5 interest rate. You can also put in your income and your debts, and what it will do is go through a whole affordability dashboard and show you an estimated Max Purchase Price estimate of total your monthly payment.

Break that down for you as well. Show you estimated closing costs. Gives you different risk levels for different payments. You could go with a really risky payment or you could go with something that's more safe and depends on what you want. But it allows you to explore all of the numbers in here and see estimate of utilities and maintenance costs and even shows you how where's it at, shows you how all the math is done.

And then shows you different affordability theories based on people like Dave Ramsey or the 26 ratio or qualified mortgage or 30-33. By a lot of personal finance gurus. So Max Purchase Price Calculator. If you don't wanna do the math yourself, if you wanna know that you're doing it right you can use that tool.

FHA versus other loans

So now FHA versus other loans. This is one of the four main loans types. There's conventional loans, there's FHA, there's USDA, and there's VA. And of course there's tons of other different types of loans. Those are the most common that you're gonna see here.

Versus Conventional

So if you have a 620 credit score, this is the conventional credit score minimum.

So anywhere from a 620 to a 680 I think you should get a conventional loan quote and an FHA loan quote too, because, just because let's say you have a 640 credit score, you still might not get approved for a conventional loan. So that's why a lot of people will look at FHA.

Now, if you can, if you're in that 640 range, like 620 to 680, go ahead and get approved for, or try to get approved for a conventional loan and get a quote for that and try to get approved for an FHA loan and get a quote for that. And then you can compare the two. Talk to your loan officer.

Hey, can you walk me through the differences of these two? Which one would be better for a lot of people, what makes a lot most financial sense is to actually go with the FHA loan, have that build appreciation in your home, build equity in your home and then work on your credit. And then let's say two to five years refinance into a conventional loan so we get cheaper mortgage insurance.

That will eventually fall off.

Versus VA and USDA

Also consider VA and USDA. They also allow down to a 500 credit score, and they both have a zero down payment with them. They're not down payment assistance, they just don't have down payments. So VA is for veterans. USDA is only for homes in eligible rural areas and it does have an income limit as well.

But we can help you with that. You can just go to win the house you love.com. Set up a consultation with us and we'd love to help show you some of those options. USDA and VA are government loans as well, so they're really flexible when it comes to credit standards and qualifying. They just have a couple other restrictions.

Student Loans

Student loans, this one can be a really big, tricky subject that people are afraid of. A lot of people can still qualify for a mortgage even when having student loans. Sometimes I think the fear is greater than the reality of the situation.


So what's a little strange about FHA loans is that when you get one., your profile is gonna be checked against what's called CAIVRS. CAIVRS is think of it almost like a credit report that the government has for anyone who hasn't paid back federal debt. So if you have a federal student loan and you haven't paid it back, let's say it's delinquent your name is gonna be added to the CAIVRS database and it's the whole database. The government has to say who has and hasn't paid back federal debt.


If you are in the CAIVRS database because you haven't paid back federal debt, then you won't be able to get an FHA loan until you're out of CAIVRS.

Now what's been interesting as we've seen a lot of the student loan weirdness happening over the past year and kind of the lot of in and outs on there's pausing and is there gonna be forgiveness and what's gonna. The Biden administration actually restarted CAIVRS. So if you were in default for student loans, that was actually pulled out of a default. And so that might be a really good opportunity for you if you were in CAIVRS.

Current Pause

There is a current pause on student loans through 6-30- 2023, and that might change after this video comes out. This is just as the time of this writing has been published that's what the current pause. So FHA loans allow income driven repayments.

IDR allowed

So Income Driven Repayments are when you're on a program with student loans where it actually lowers your monthly payment with those student loans. And basically what happens is you're allowed to use the income driven repayment to qualify in the debts income ratio for an FHA loan. Like we talked about with the student loan payments in the Debt-to-Income ratio if you have IDR, that can lower what that payment is, which can help you get approved for more.

The only weird caveat here is let's say you're on income driven repayment and your payment is a hundred dollars per month, then that a hundred dollars per month is included in your debt income ratio which can be a lot better than maybe $500 per month than the normal payment.

0.5% of the balance is in the DTI

However, if your payment is $0 per month or deferred, then the lender has to use 0.5% of the balance included in the debt-to-income ratio. So if you have a $50,000 balance in student loans, that would be 20 $250 per month in the debt to income ratio. So this current pause has caused a little bit of some trickiness with FHA loans for people who have a really high student loans because their loans are automatically deferred. Lenders need to use the 0.5% of the balance.


Now what you can do is you can talk to an advisor like someone at LoanSense, for instance, and have a link for them down in the description. Where they can do is help you get out a deferred status and into an income driven repayment plan to help bring down that payment that we can qualify for more of a mortgage if you want to.


So this is how this would work. If you're deferred and can't qualify, you can get on a government plan. Like an income driven repayment plan type to avoid the 0.5%, you can go to WTHYL - Student. There's a little calculator here that would show you how it would reduce your student payments.

This is not refinancing your student loans at all. All you're doing is enrolling in specific type of IDR program to lower that payment, pull you outta deferred status so you can qualify for a loan by something included in your debt-to-income ratio that's less than the 0.5%.

Types of Underwriting

So there's two different types of underwriting with FHA loans. There's automated, and manual.

Automated Underwriting

So the way that automated underwriting works is you submit an application into a lender so that application data is reviewed by a software, okay? And the software is gonna give like a thumbs up or thumbs down and usually give some very cryptic explanations as to why.

If there was a thumbs down, this is where your loan officer can really help you strategize. How can we get the software to give an approval? So after it's put into the software, that data is then verified by a human. And those two primary humans are your loan officer who's gonna help you with your application, and then also an underwriter.

So ultimately your loan officer's gonna take your application, run it through the automated underwriting software which runs through all these rules to see if you qualify for an FHA loan. Then once that's done, an underwriter's gonna take a second look. And basically what they're looking to do is they wanna see that.

If the software has that you make $5,000 per month and is issuing an approval, an underwriter's gonna take a look at your pay stubs and your W2s and your tax returns and see do you actually make $5,000 per month or do you actually make $3,000 per month? So that's where you have the software plus humans who give you this approval on a loan.

Again, it's not just people on the back end being like I think John's a good person, so we're gonna give him $300,000. It's not how it works. You sit, submit an application, your loan officer helps you with that, and then the data is verified by a human, both your loan officer and an underwriter. So automated underwriting is the easiest and most common option when you get into manual underwriting, it takes longer.

There's more paperwork, and often there's a higher interest rate associated with it. Lenders like automated underwriting because there's a level of confidence that the loan will get approved when it's approved by the software. Now I wanna get to this rent history in just a second. This right here is a strategy that a loan officer may use with automated underwriting.


AUS, this is the Automated Underwriting System. First, what a loan officer would do is submit your application data to the automated underwriting software, and they're gonna see it. Does it give a thumbs up or thumbs down. If it gives a thumbs up, great. You're pre-approved. You go start looking for homes.

You get under contract, you move forward with the loan. Great dandy, super easy. If you don't get approved a loan officer's gonna take a look and see what other strategies can we use to get approved for that loan? Do we need to do things like adding a co-borrower? Do we need to add rental history? Do we need to show that you have more in savings?

Do we need to there's all these different strategies to see how we can get the software to give you an approval. So one of the easiest ways is to add your rental history to the underwriting software. So for this, you need to have a 620 credit score higher. You need to be a first time home buyer and you need to have 12 months on time rental.

If that's the case, your rental history can be added into the underwriting software and that can help nudge your approval in the right direction. Or maybe you got a thumbs down, the rental history now turns your approval into a thumbs up if it's still thumbs down. And a loan officer might suggest looking into adding a co-borrower again, someone like a family member who could sign on the loan with you.

If that doesn't work or if that's not an option. Cuz for a lot of people that's not an option. Then might be looking at working on. What are other things on your application that you can do to help your approval? Your loan officer can help strategize this with you. So this is where often credit work is usually needed to see maybe in the next three months, can we nudge this approval in the right direction by clearing up maybe a disputed account, maybe a collections account, and maybe an error on the credit report.

Manual Underwriting

If that doesn't work, then we're looking at a manual underwriting. And manual underwriting is a longer process. A lot of lenders don't offer it. And it can be more expensive. Also are a lot of stipulations inside of manual underwriting. It's not impossible, but it's not the most fun to go through . Okay?

So again, not available with all lenders. Expect more paperwork, longer closing times, and a higher interest rate. So this is used for people who have no credit score loans and refer loans. Refer loans are those thumbs down. When the underwriting software gives a thumbs down, it doesn't actually give a little thumbs down.

It says refer with caution. So it can either be approved eligible, meaning the loan's approved or refer with caution, meaning refer to manual underwriting with caution. That's basically what it says. So either you have no credit score and we need a manual loan, or you get a thumbs down from the underwriting software.

And we need a manually underwritten loan. So manually underwritten loans just mean that an underwriter is gonna have to look at your loan file line by line instead of a software, and they're gonna look at it with more scrutiny and with more rules. So the way payment history works, if you have a manually underwritten loan is in the past 12 months, you can have zero late payments.

Housing and installment loans

Installment loans are you have one balance and you pay it down monthly to zero. So like a car loan or a mortgage or something like that. A revolving loan is something like a credit card. So in the past 12 months, you can have two 60 day lates, zero 90-day lates, okay?

In the past 24 months, there's no rules on the revolving but you can have a maximum of two 30-day lates. Okay. Then we go over here. Manual underwriting loans also have limits to their debt-to-income ratio. We talked about those limits with the Automated Underwriting Software. The Automated Underwriting Software doesn't share all the limits with debt to income ratios based on your credit score.

However, it does change, but they just don't publicize that with manually underwritten loans. You have to look at what your credit score is. Then it shows you the maximum ratio that you can have, and then you need what's called a Compensating Factor. For instance, with this chart, what we would look at, Is, let's say you have the underwriting software gives you a thumbs down and let's say that you have a, oh, let's say a 580 and above.

So we have these two options here. And let's say we want to get approved for 37/47 because we wanna buy as much houses as we can. So we're gonna look here. This is saying we need one of the following, either verified and documented cash reserves, usually three to six months worth minimal increase in housing payment or residual income.

And your loan officer can help you run through all these things. We can see all these little stipulations tacked onto the manually underwritten loan. So again, these are absolutely possible. It's just a lot easier to go through the automated underwriting experience. And your loan officer can help you through.

Special Requirements

So some special requirements here or special features is DACA is allowed, FHA is allowed for DACA recipients. You just need an employment author authorization document to be able to qualify. Also, house hacking like we covered. Then also FHA has what's called a $100 Down HUD Rio Program. So these are really difficult to find.

But if you go to the HUD home store, you can find housing of urban development foreclosed properties, and actually you can get an FHA loan with a hundred dollars down instead of 3.5% down. Again, super difficult to find these homes, but just should point it out.

You can get a 203K. That's a type of rehab loan that you can get with FHA and there's also the bridge strategy. You can get down payment as. FHA also has a one-time closed construction option, not available through most lenders and can be really difficult to find and get, but this is where you would purchase land and then also finance the loan to build on the land all at the same time.


Then when it comes to refinancing, cuz you have this loan you wanna potentially maybe refinance in the future FHA allows what's called a streamline refinance. To a lower rate. So you have to wait at least six months. And also the market rate has to be lower. So let's say af after six months of living in the home interest rates drop, you can get a new refinanced FHA loan with a lower rate without having to prove income history, credit, or appraisal again.

Also what's really common is to go from FHA to conventional, and this is primarily if your credit score increases or to remove the mortgage insurance premium just to refinance into cheaper debt, right? Because mortgages are just debt. And what we want to do with debt is just if anytime we can get cheaper debt, let's go to the cheaper debt instead of paying more for it.

Kinda the same way with, if you have a credit card that's 25% interest if there's an option to get a credit card at 15% interest, that's gonna be a better option than a 25% interest. Same thing with mortgages is, we have an FHA loan. It's not a terrible loan by any means.

There is cheaper debt available. And if we can't qualify for the cheaper debt, let's use the FHA loan. Work on what we need to work on. Talk to your loan officer about what you need to work on to qualify for conventional and then refinance into the cheaper debt in the future.

Also, you can get cash out with FHA, but you have to have a minimum of 20% equity. So let's say you've paid down your home to 50% equity, you could pull cash out to use towards, savings or paying off debt or whatever you want.

Rehab Options

So some rehab options in here. Two primary rehab options with FHA, you have a 203K standard and a 203K limited. The standard is for work primarily exceeding $35,000.

It has to be a minimum of $5,000 worth of work and it can cover structural repairs. And I you can check out the 203k video here. There's also a limited one. The maximum is $35,000 in repairs. There is no minimum and there's no structural repairs allowed with them.

Bridge Strategy

Now, the bridge strategy, this is what I commonly suggest to people if they are looking on FHA alone is, again, FHA should not be this like long-term option that we hold for 30 years. Because FHAs not bad. There's no moral quality to loans, there's no moral quality to money , to be frank, like an FHA loan isn't good or bad thing.

It just exists. It's just a tool. And really when we look at like tools, like if you're using a hammer or a screwdriver, like which is gonna be the best tool for the job for some people an FHA is the tool that they need for the job at the moment of qualifying for a home, getting that home building appreciation and amortization, building equity in the home, and then refinancing to cheaper debt in the future.

So that's the bridge strategy. We use the FHA loan almost as a bridge to get us to a better loan. So in this you'd use FHA to lock in a home and build appreciation and amortization. So maybe you're in that spot where you're like, Hey, I have a 580 credit score and, building my credit was probably gonna take maybe a year or two to get it to where I need to be to qualify for conventional loan.

You can buy a home now with an FHA loan. Build the appreciation in that right home. Values have appreciated a ton over the past two years. Build also the equity in that cuz when you're renting, you don't build any equity compared to owning a home. While you then own the home, you want to work on what you need to.

And these can be things like your credit increasing your income. Lengthening the seasoning that you had from maybe a bankruptcy or something like that. And then also working on your debt to income ratio. Maybe you need to pay down debts to qualify for a conventional loan. Then after you've worked on all of this refinancing into a conventional loan, we use the FHA loan as a bridge maybe over, one to five years to then refinance into cheaper debt in the future.

Success Rate and Seller Perception

Then finally success rate and seller perception. FHA loans are just less attractive than conventional. They shouldn't be because if you're approved for it, you're approved for it, and it should close just the same way that a conventional one would. And actually, what a lot of sellers don't realize is conventional loans are much more finicky than fha because FHA is more lenient.

There's a lot more room for things to change. We're on a conventional loan. People often can be on the line of qualifying. For conventional, it can be actually more shaky than an FHA appraisal just because there's a lot more leniency on an FHA approval. As the market cools, it's beginning to get more accepted to sellers.

Nationally around 10% of loans are FHA.

Javier Vidana

And then I wanna show you really quickly a clip from my friend and wonderful real estate YouTuber Javier Vidana on FHA loans.

According to him on the video, "Just six to eight months ago, FHA was having some bad luck and specifically his market here in Phoenix, they were only made up 6.6% of all home purchases, whereas cash made up 30.7 and conventional made 56.3.

So as the market has been turning, and of course everybody and their mother are saying it's a terrible time to buy, one person who has made out great out of this is FHA buyers. FHA buyers are now responsible for 13.3% of all purchases and cash purchases have dropped down to 24.9. So yes, with less buyers means you have a better opportunity to get not only an FHA accept offer, accepted but, you know, getting extra stuff like additional closing costs to buy down rates, additional closing costs to potentially pay your closing cost. So you're gonna put yourself in a lot better position as an FHA buyer. So it's back to basics, folks. You're no longer at a disadvantage having an FHA loan when you're making an offer.

Make sure you do some research beforehand. Figure out the seller's equity position, meaning how much they own in the house, and figure out what the offer situation is. If it's a no offer situation, you have leverage. You have the ability to go in aggressively on the price, go in aggressively on the closing costs and really go there and once again, doesn't matter what loan you have.

You are a solid buyer, go and get your money, honey. Now just because the market is cooling doesn't mean that there's houses that are gonna hear that because there's, there might be great houses that just have multiple offers. Yes, believe it or not, they're still out there. We just, a recent kind of mine just lost on a three offer situation.

So if it's a situation, your leverage is a lot lower. And even though if you're FHA still make a strong offer, if you need closing costs, maybe add 'em on the purchase price or maybe not go as aggressively as the others. So you are now part of the game. You're part of the playing field.

Stop looking at yourself at a disadvantage. Go out there."

Please check out Javier's YouTube

So please go over and subscribe to Javier Vidana's YouTube channel. Also, he has a Patreon, has a ton of resources, and you can connect with him directly. There if you would like to. So ultimately, you wanna make your offer stand out because again, from the seller perception, it's not the most favored loan.

Make your FHA offer standout

So what we can do to make our FHA offer stand out is one thing we could do is not ask for seller credits, or we could reduce the amount of credits we ask for. The more that we're in a buyer's market, the more leverage you have to go with FHA and ask for seller credits. The more we're in a seller's market, the more that sellers tend to prefer conventional loans and they don't want buyers to ask for credits.

Also you can have a limited inspection contingency. I would never suggest waiving your inspection contingency entirely. I think that every home every home buyer should have an inspection done. But what you can do is you can say, we want an inspection contingency. However, we're not going to nickel and dime you.

We're only going to ask for requests that are above, let's say, $5,000 or you set the limit. Maybe you talk with your realtor and you say, we can't spend more than $3,000 out of pocket. So we'll only back out of the deal or ask the seller to remedy problems if they're above $3,000 because sometimes sellers don't wanna feel like they're gonna get nickled and dimed when you do an inspection. So that can help with your offer there.

Get a rock solid approval and ask for a quicker closing

So talk with a loan officer, make sure that everything is all documented and buttoned up. Ask them what the closing time could be and then have your loan officer submit your documents and everything to an underwriter ahead of time to get that closing done quickly. and we can do that too. Just go to WTHYL. Set up a consultation with us and we can talk to you through that.

How to get and FHA?

So ultimately, how do you get one? You can get an FHA loan with most lenders in the us of course. I would love for you to talk with my team and get an FHA loan with us, or look at other loan options with us.

So what you can do is schedule a free home loan, consult with my team and you can do that by going to WintheHouseYouLove.com. You'll then see your FHA quote and maybe other loan options that you qualify for to see if there are other better alternatives for you. You'll then shop for your home, and then you can write an offer and then we're gonna help you close on the loan.

And ultimately, when do you start? Really, I don't think there's too early in the process to begin this because you wanna start looking at your decision making numbers.  as soon as you possibly can so you can plan appropriately for the next steps in the future, right? We wanna spot any roadblocks, any hurdles, anything that's gonna get in the way of your goal as soon as we can.

That way you can do the right work, the right meaningful work before you find a home, and then you aren't able to purchase it because the payment was higher than you expected, or there was something in the way of your credit from you being able to qualify for a home. Okay? So please reach out to us. We'd love to start that conversation with you and see if FHA is the right option for you.

Ask us a question →
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Allied First Bank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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