FHA Loan Requirements: How to Get Help Buying Your First Home

When I closed on my first home, I was amazed at the long list of fees and the huge stack of papers to sign. The process can be overwhelming, especially if you’ve never bought a house before. If you want to become a homeowner but only have a small down payment saved, you can apply for an FHA loan. These loans are designed to help people afford homes.

The benefit of an FHA loan is that it is more flexible than a conventional loan in terms of credit and down payment requirements. In this article, we’ll explain how FHA home loans work, list every single FHA loan requirement, and give you the steps to take to find an FHA-approved lender and start the application process.

Table of Contents

1. How do FHA loans work?
2. Are FHA loans only for first-time homebuyers?
3. FHA loan qualification guidelines
   1. Credit score: 500
   2. Income: steady, verified income
   3. ID: Social Security number and valid ID
   4. DTI ratio: 43% or less
   5. Residence: must be your primary residence
   6. Down payment: at least 3.5%
   7. Loan limit: up to $1.2 million
   8. Mortgage insurance: required
   9. Property inspection: must pass the FHA inspection
   10. Closing costs: rolled into loan
4. How to apply for an FHA loan

How do FHA loans work?

An FHA loan is a loan insured by the Federal Housing Administration (FHA). The FHA partners with several banks that administer, process, and manage FHA loans. HUD maintains a list of partner banks that you can search by entering your zip code to find one nearest you. Once you find several lenders near you that offer FHA loans, contact them to start the approval process. 

Several large, well-known banks, as well as smaller credit unions and online banks, like SoFi, are FHA lenders. While certain aspects of FHA loans are standardized, like the maximum you can borrow, some lenders may have stricter qualifications than others. Asking each lender what their credit score and DTI requirements are can help you find the best lender for you.

Once you’ve selected a lender, you can get prequalified and start searching for a home. Working with a real estate agent who has experience with FHA loans can help make the process go smoother. Keep in mind that getting prequalified isn’t the same as being approved. You’ll still need to submit a complete application once a seller accepts your offer.

Are FHA loans only for first-time homebuyers?

No, all homebuyers can apply for FHA loans. However, they are attractive to first-time homebuyers because of the low down-payment options. They’re also helpful for buyers who have previous bankruptcies or foreclosures on their credit reports because FHA loans have shorter waiting requirements than other types of mortgages.

FHA loan qualification guidelines

Here are some of the qualifications you must meet to get approved for an FHA loan.

FHA loan credit score requirement: 500

If your credit score is on the lower end, you may still be able to get approved for an FHA loan. In fact, you can get approved with a credit score as low as 500 if you put down 10%. However, if you prefer to make a down payment of only 3.5%, you’ll need a credit score of 580 or higher.

It’s worth taking the time to improve your credit before buying a house. Even a small increase in your credit score can make a difference in getting a lower interest rate, which can reduce your monthly payment.

FHA loan income requirement: steady, verified income

The FHA does not list a minimum required income. However, you must have proof of steady income, preferably for the last 2 years. You’ll need to verify your income with documents such as tax returns, pay stubs, and bank statements. 

FHA lenders accept several types of income, including child support, alimony, Social Security income, investment income, and more. 

ID requirements: Social Security number and valid ID

When prequalifying for a loan, you will also need to meet identification requirements by showing a valid ID and a Social Security card. Your name should match on all documents. If you recently changed your name, bring documentation such as a marriage certificate or divorce decree that shows your legal name change.

DTI ratio maximum: 43% or less

Your debt-to-income ratio is also an essential factor in qualifying for an FHA loan. You calculate your DTI by dividing your monthly debt payments by your total gross monthly income. Turn that result into a percentage. Most lenders require a DTI of 43% or less. However, your DTI may be higher if you meet other qualifications (such as cash on hand). Some lenders will even issue loans if your DTI is above 50%. Typically, lenders prefer a DTI of 43% or less.

The purpose of a DTI ratio is to show lenders that you have adequate cash flow to make your mortgage payments on time each month. If your debt payments take up too much of a percentage of your monthly income, lenders may consider you a riskier borrower.

Residence guideline: must be your primary residence

The purpose of an FHA loan is to help people afford a home, often for the first time. So, you can’t use an FHA loan to buy a second home, vacation property, or investment property. The home must be your primary residence, and you have to live in it for at least a year.

FHA minimum down payment: at least 3.5%

As mentioned, your credit score determines the down payment you need. Credit scores below 580 require a 10% down payment. The larger your down payment is, the lower your monthly payment will be.

You can also use funds gifted to you by family members, charitable organizations, or other approved entities to assist with your down payment. 

If you have been given funds to help with your down payment, you’ll need to provide dated letters documenting gift funds.

FHA loan limit maximum: up to $1.2 million

There is a cap on how much you can take out with an FHA loan, and it varies by location. Typically, it’s approximately $520k, but can be just over $1.2k in high cost-of-living areas.

FHA mortgage insurance: required

All FHA loan borrowers have to pay a mortgage insurance premium (MIP). This protects the lender, not the borrower. Usually, you have to pay MIP for the life of the loan, unlike with conventional mortgages. If you put down at least 10%, you will pay MIP for 11 years. There is an upfront MIP in addition to an annual mortgage insurance premium of 0.15% to 0.75% of the loan amount.

This is one of the biggest downsides to an FHA loan, especially for homebuyers who put down less than 10%. That’s because the mortgage insurance does not go towards reducing your principal at all, but it’s still money you have to pay to be able to live in your home. 

Property inspection: must pass the FHA inspection

All FHA properties must meet FHA standards during the property inspection. Your property inspector will check the roof, electrical, and plumbing systems, look for water damage, and generally note anything in the home that might be unsafe.  Typically, if the inspector finds issues with the house, the sellers will have an opportunity to fix them before closing.

If you are buying a home that needs renovation and using a 203(k) loan, you can bypass this.

Closing costs: can be rolled into loan

The last step before becoming a homeowner is closing on your FHA loan. A few days before closing, you will receive a document that explains all your closing fees. This includes lender fees, appraisal fees, credit report fees, title fees, and title insurance fees, among others.

Buyers can typically roll these fees into the loan,  which will reduce the amount of money you have to bring to closing. 

How to apply for an FHA loan

If you’re ready to apply for an FHA loan, here are the steps to take.

1. Review eligibility requirements: Before starting the FHA loan application process, review the eligibility requirements above to determine if you meet them. 
2. Make sure you have a down payment plus extra: Even though FHA loans have lower down payment requirements than conventional loans, save enough for closing costs and set aside extra for home maintenance.
3. Gather documents: Prepare your documents in advance to ensure the loan application process goes smoothly. This includes your identity verification, work documents, and financial statements.
4. Pre-apply with an FHA-approved lender: Find two to three lenders in your area, compare rates and terms, and choose the one that’s best for you. Complete the pre-application process.
5. Shop for a house: Now comes the fun part. Once you have a pre-approval letter, work with a real estate agent who has experience helping buyers find homes with an FHA loan. Once you find a home and go under contract, it’s time to fill out your full FHA application.
6. Apply and sign: work with your lender to apply for your loan, sign your documents, and submit your application.
7. Close on your loan: Closing typically takes about 30 days or more. You’ll receive final disclosures a few days before your closing date. Review your documents and make sure you understand all of the fees associated with your FHA mortgage. If everything looks to be in order, you’re ready to close on your loan and get the keys to your new house.