Many people believe that homeownership is completely out of reach. But the truth is that even with a low credit score or the inability to save for a hefty down payment, you can still buy a house you love.
If you would like to purchase a home but are struggling with credit or savings, an FHA loan may be right for you. Read on to learn more about FHA loan requirements.
What is an FHA Loan?
FHA stands for the Federal Housing Administration. FHA loans are created for low-to-moderate income earners who may not otherwise be able to purchase a home. With these loans, you will technically receive a mortgage from a lending institution, not the FHA itself.
FHA Loan Limits for 2023
The FHA has maximum lending limits in place, but the limits change depending on where you are planning to purchase your home. Below is a breakdown of the limits you can expect to encounter.
Low-cost areas:
- One-Unit: $472,030
- Two-unit: $604,400
High-cost areas:
- One-Unit: $1,089,300
- Two-unit: $1,394,775
FHA Down Payment Requirements
If your credit score is above 580, you are only required to put down a 3.5% down payment. Lower credit scores secure a 10% down payment. These numbers are lower than most mortgage programs, but even so, they can be hard to save for. This is why the FHA allows you to combine your FHA loan with a down payment assistance program. Ask your loan officer for guidance in finding the right down payment assistance program for you.
FHA Loan Credit Requirements
If your credit score is at least 500, you are eligible for an FHA loan. If your credit score falls between 500 and 579 you can receive a loan as long as you can put 10% down. If your credit score is above 580 you can secure a loan with a down payment as low as 3.5%.
Credit Issues
FHA loans are more forgiving than the traditional Conventional loans. If you don’t have a credit history, FHA allows for the use of non-traditional credit options. The lender will take a look at payment history of items utility bills, rent, car insurance payments, etc. A previous bankruptcy or foreclosure won’t disqualify you from receiving an FHA loan. However, you must be out of bankruptcy for at least two years, and your foreclosure must have been over three years ago.
FHA Loan DTI Ratio Requirements
FHA loans take into account your debt-to-income ratio (DTI). Each Lender has different overlays for their DTI requirements but at USA Mortgage we don’t have any overlays on the DTI for an FHA loan. You are allowed to have up to a 57% DTI for an FHA loan. Not sure what your DTI is? Use an online calculator to give you an idea of your personal DTI.
FHA Mortgage Insurance
Instead of private mortgage insurance, FHA loans require an Up Front Mortgage Insurance Premium (UFMIP) and a monthly mortgage insurance premium (MIP). UFMIP is a one-time payment made at closing that can be rolled into the loan. MIP is paid monthly along with your mortgage and may be required for either 11 years or the lifetime of the loan. UFMIP and MIP amounts vary depending on the loan to value (LTV) and how long your loan is for, so it’s important to consult with your lender for more details on these insurance requirements.
Does the FHA loan program sound like a good fit for you? If so, let us know. We’d love to work with you through the lending process.
