FHA
Guidelines

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders, making it easier for first-time homebuyers and those with lower credit scores or limited savings to qualify for a mortgage. FHA loans are designed to help more people achieve homeownership by offering flexible qualification criteria, smaller down payments, and lower credit requirements compared to conventional loans.

Credit Score Requirements
One of the primary benefits of an FHA loan is its more lenient credit score requirements compared to conventional loans.

– Minimum Credit Score 
The minimum credit score required for an FHA loan depends on the down payment

  – Borrowers with a credit score of 580 or higher are eligible for the minimum down payment of 3.5% of the home’s purchase price.

– Borrowers with a credit score between 500 and 579 can still qualify for an FHA loan, but they will need to make a larger down payment of at least 10%.

– Borrowers with a credit score below 500 are not eligible for FHA financing.

While the FHA sets these minimum requirements, individual lenders may have their own credit score standards (often called “overlays”) that are higher than the FHA minimums.

Down Payment Requirements
FHA loans offer lower down payment requirements, making them appealing to first-time homebuyers or borrowers with limited savings.

– 3.5% Down Payment
With a credit score of 580 or higher, borrowers can qualify for an FHA loan with just 3.5% down. This lower down payment option makes FHA loans accessible to many borrowers who may struggle to save for the larger down payment required by conventional loans (often 5% to 20%).

– 10% Down Payment:
If your credit score is between 500 and 579, you’ll need to provide a 10% down payment to qualify.

Down payments for FHA loans can come from personal savings, financial gifts from family, or approved down payment assistance programs.

Debt-to-Income (DTI) Ratio
FHA loans have more flexible guidelines for debt-to-income (DTI) ratios compared to conventional loans.

– Front-End DTI
This measures the percentage of your gross monthly income that goes toward housing costs (including mortgage payments, property taxes, homeowners insurance, and HOA fees). The FHA generally prefers a front-end DTI of no more than 36% of your gross income.

– Back-End DTI
This includes all your monthly debts (credit cards, student loans, car payments, etc.) relative to your income. The FHA allows a back-end DTI of up to 43%, though higher DTIs (up to 50%) may be accepted with compensating factors, such as excellent credit, large cash reserves, or a significant down payment.

– Current guidelines refer to the Fannie Mae or Freddie Mac automated underwriting response.

-Traditional guidelines are capped between 45-50% maximum debt to income, although FHA ratios often exceed 50% with excellent credit.

Lenders will evaluate your income, debts, and expenses to ensure you can afford the mortgage payments.

Mortgage Insurance Premium (MIP)
FHA loans require mortgage insurance premiums (MIP) to protect the lender in case the borrower defaults. MIP applies to all FHA loans, regardless of down payment size, and consists of two components:

– Upfront Mortgage Insurance Premium (UFMIP) 
This is an upfront fee equal to 1.75% of the loan amount. You can pay this at closing, or it can be rolled into the loan balance.

– Annual Mortgage Insurance Premium (MIP)
This is an annual premium that ranges from 0.45% to 1.05% of the loan amount, depending on factors like the loan amount, loan term, and loan-to-value (LTV) ratio. This premium is divided into monthly payments and added to the mortgage payment.

FHA MIP remains in place for the life of the loan if your down payment is less than 10%. However, if you make a down payment of 10% or more, MIP will be canceled after 11 years.

Loan Limits
The FHA sets loan limits that vary depending on the geographic location of the property and the median home prices in that area. The loan limits are adjusted annually and categorized into two main ranges:

– Low-Cost Areas
In areas where housing costs are more affordable, the FHA loan limit for a single-family home in 2024 is $498,257.

– High-Cost Areas
In more expensive regions, such as major metropolitan areas, the loan limit can go up to $1,149,825 for a single-family home.

To determine the FHA loan limit for your area, you can check the FHA’s loan limits by county.

Property Requirements
FHA loans have specific property standards to ensure that the homes being purchased or refinanced meet minimum health, safety, and livability standards.

– Primary Residence
FHA loans are only available for properties that will be used as the borrower’s primary residence. You cannot use an FHA loan to buy a second home or investment property.

– FHA Appraisal
The home must undergo an appraisal by an FHA-approved appraiser to confirm that the property meets FHA’s minimum standards.
– The appraisal ensures that the property is in good condition, free of significant structural issues, and meets local building codes.
– Appraisal must meet FHA minimum property requirements/standards (MPR/MPS)

– Property Types
FHA loans can be used to purchase or refinance various property types, including single-family homes, multi-family homes (up to four units), condominiums (if FHA-approved), and manufactured homes (if they meet certain guidelines).

Employment and Income Verification
FHA lenders require that borrowers demonstrate a stable employment history and sufficient income to afford the mortgage payments.

– Employment History
Borrowers generally need to show a consistent two-year work history. Gaps in employment may be acceptable if there is a valid reason (such as returning to school) and the borrower can demonstrate income stability.

– Income Documentation
Borrowers must provide documentation of their income, typically through recent pay stubs, W-2 forms, and federal tax returns. Self-employed borrowers need to provide two years of tax returns and profit-and-loss statements.

– Two-year employment history must be documented via the two most recent tax returns
– Previous two years W-2s
– Recent paystubs to illustrate earnings for the previous 30 days

– Self-Employed Borrower(s)
– Business must have been in existence for at least two years
– Personal signed individual tax returns as well as the corporate or partnership tax returns for the two most recent tax periods

Rental Income
Will be determined by the supplemental income/loss reported on the respective Schedule E from the two previous tax periods.

Properties Listed for Sale

– Primary residence only |Limited Cash-Out | Cash-Out Refinance loans
-The subject property must be taken off the market on or before the loan closing date and the borrower must confirm their intent to occupy the subject property.

Minimum Loan Amount
– Minimum loan amount $125,000 for all property types.

Student Loans
–Underwriting may use the payment on a current credit report or a recent statement for qualifying purposes
-Otherwise 0.5% of the outstanding loan balance reported on the credit report will be calculated to determine the monthly obligation

Mortgage rating
– No lates accepted in the last 12 months.

Reserves
– Based upon the Fannie Mae or Freddie Mac automated underwriting response
– (3-4) Unit properties require 6 months of the total monthly obligation.

Seller concessions
–May not exceed 6% of the value of the property as indicated on the FHA Appraisal.

Bankruptcy
– CH7 Bankruptcy requires 24 months seasoning from discharge date
– CH13 Bankruptcy requires 24 months worth of acceptable payments have been made.

Foreclosure
– Minimum 36 months seasoning from completion.

FHA Assumable Loan
FHA loans are assumable, meaning that if you sell your home, the buyer can “assume” or take over your mortgage, provided they meet the FHA’s eligibility requirements. This feature can make your home more attractive to buyers, especially in times of rising interest rates, as they can take over your existing mortgage at a potentially lower rate.

FHA Loan for First-Time Homebuyers
While FHA loans are commonly associated with first-time homebuyers, they are not limited to that group. Anyone who meets the credit, income, and property requirements can qualify. However, first-time homebuyers often find FHA loans appealing due to the lower down payment and credit flexibility.

No Prepayment Penalties
FHA loans do not come with prepayment penalties, meaning you can pay off your loan early or make extra payments without facing any fees or financial penalties. This is beneficial if you want to reduce the total interest paid or refinance into a different loan in the future.

Is an FHA Loan Right for You?
An FHA loan can be an excellent option if you have lower credit, less savings for a down payment, or if you’re a first-time homebuyer. However, the requirement for mortgage insurance premiums can increase the cost of the loan over time, so it’s important to compare the benefits of an FHA loan with other options, such as conventional loans, to find the best fit for your financial situation. Consulting with a mortgage professional can help you determine whether an FHA loan is the right choice for your home purchase or refinance.