The Federal Housing Administration (FHA) insures mortgages made by FHA approved lenders. Since 1934, it has insured tens of millions of single and multi-family residential properties in all 50 states and U.S. territories. It ensures more mortgages than any agency in the world.

Basic Requirements Include:

  • Minimum FICO score of 580 for 3.5% down payment

  • Minimum FICO score between 579 and 500 for 10% down payment

  • Mortgage Insurance Premium (MIP) required

  • Maximum debt-to-income ratio of 43%

  • Proof of employment and steady income

  • Property purchased must be used as the primary residence by the buyer

About FHA Home Loans


FHA loans are like typical home loans except that the loan is insured by the Federal Government. With FHA home loans, borrowers can get financing with as little as 3.5% down. They are especially popular with first-time homebuyers. Even people who have suffered past bankruptcies and foreclosures are able to qualify for FHA loans.

2020 FHA Credit Requirements


A minimum credit score of 580 is required to qualify for a 3.5% down payment. If your score is 579 or below, you’ll need 10% for your down payment. This should make it apparent that your credit score matters and can end up either saving or costing you a lot of money.

You need to keep in mind that there is a variety of data that goes into your FICO score. In addition to your payment history, lenders use foreclosures, bankruptcies, and late payments reflected on your credit report to help determine eligibility for a loan. 

Lenders have the right to require higher credit scores than those set by the FHA. The credit standards they require must be in accordance with the Fair Housing Act and other federal laws.

What is a FICO Score


Your FICO score helps lenders determine how creditworthy you are. FICO stands for Fair Isaac Corporation. They were the first company to put a score to credit versus risk. The data analytics company compiles consumer credit from different credit bureaus to compute scores.

The lender takes this information and analyzes it to determine whether or not you are a good credit risk. The higher your score is the more likely you are to get the loan you apply for at the lowest interest rate.

FHA Loan Credit Issues


When you make your payments on time on a regular basis, you are more likely to get approved for a loan. Here are some of the things lenders find on credit reports that can make it harder for borrowers to get loans.

No History of Credit.If you haven’t established a credit history or don’t use traditional credit, the lender will have to find another way to establish some kind of credit history.

Late Payments.The best time to apply for an FHA loan is when you have had 12 continuous months of on-time payments for all your financial obligations.

Foreclosure.Having a foreclosure in your past will not automatically disqualify you for a loan. It depends on the circumstances.

Bankruptcy.Like a foreclosure, a past bankruptcy will not automatically disqualify you for a loan. You’ll have to wait two years before you can apply for a loan and show that you have re-established your credit or have not incurred new debt.

Tax Liens, Judgments, and Collections.Before you can finalize an FHA loan, any outstanding judgments must be resolved or paid off. This can be done before or at closing.

Benefits of Choosing FHA Home Loans


Ease of Qualifying.FHA loans are generally less restrictive than other types of loans. Borrowers find it easier to qualify with lower credit scores and questionable credit histories.

Interest Rates Are Competitive.Lower interest rates make homeownership more affordable because they help keep monthly payments reasonable. This makes it easier for borrowers with lower credit scores to avoid subprime mortgages and their negative features.

Foreclosure / Bankruptcy.Past foreclosures and bankruptcies don’t disqualify borrowers. Re-establishing credit and making payments on time help borrowers meet the FHA’s requirements. 

Credit History Determination.Lenders can use a variety of different ways to analyze your credit history. This includes utility bills, student loans, and rent. What they are looking for is a pattern of reliability.

FHA vs. Conventional Loans


Many borrowers choose FHA over conventional financing because the down payments are lower, the interest rates are lower, and there are unique refinancing options.

Down Payment Requirements.With a conventional loan, you may need as much as 20% for a down payment. With an FHA loan, all you need is 3.5% as long as your credit score is 580 or above. Your down payment has to come from approved sources, like cash on hand, a savings account, investments, or gifts.

Mortgage Insurance.If you pay less than a 20% down payment on a conventional loan, you are required to pay Private Mortgage Insurance (PMI). With an FHA loan, you pay an insurance premium for the insurance on the loan. This is referred to as the MIP or mortgage insurance premium.

2020 Down Payment Assistance


The cash necessary to make a down payment is often the stumbling block for potential homebuyers with limited means. Down payment assistance in the form of free grants, deferred loans, and low-interest loans help solve this problem. 

To get help with the down payment, the home you are purchasing usually has to be your primary residence and be located within a specific state, county, or city. Many programs require you to complete a homebuyer education course.

Income limits usually apply and may look something like this:
$39,050 - 1 person household
$44,600 - 2 person household
$50,200 - 3 person household
$55,750 - 4 person household
$60,250 - 5 person household
$64,700 - 6 person household
$69,150 - 7 person household
$73,600 - 8 person household

Household income is defined as the total income of every member of the household (18 or older) who will be living in the purchased property.

Down Payment Gifts


Many borrowers need help getting the cash for their down payments. Although using gifts of cash is acceptable to the FHA, it is very specific about the source of those gifts. You will have to provide documentation regarding the source. 
The following gift benefactors are acceptable to the FHA:

  • Borrower’s family members

  • Borrower’s labor union or employer

  • A charity

  • A government or public entity that provides homeownership assistance to moderate to low-income families or first-time homebuyers

FHA Loan Limits for 2020


The FHA has limits on the amount of money it will insure. These limits vary by location and type of housing, such as single-family or duplex. Lending limits are calculated annually. Some homebuyers choose to shop for houses in areas where the lending limits are high, and others look for homes in areas that fit within their budgets.

LOW-COST AREAS
2020 Limits

Single Family - $314,515
Duplex - $403,125
Triplex - $487,250
Four-plex - $605,525

HIGH-COST AREAS
2020 Limits

Single Family - $726,525
Duplex - $930,300
Triplex - $1,124,475
Four-plex - $1,397,400

FHA Closing Costs


The FHA determines what closing costs can be charged to the borrower. What specific costs are considered customary and reasonable are determined by local FHA offices.

  • Lender’s origination fee

  • Appraisal Fee

  • Home Inspection Fee - up to $200

  • Property Survey

  • Title Insurance

  • Title Search

  • Deposit Verification Fee

  • Credit Report

  • Test and Certification Fees

  • Attorney Fees

  • Document Preparation (prepared by a third party)



According to the FHA, a third party or the seller may contribute up to six percent of the property sale price or appraisal value, whichever is less, to offset the buyer’s closing cost, discount points, prepaid expenses, and other financing concessions.

FHA Home Loans Checklist


Borrowers need to make sure everything required by the lender, seller, and title company is on a closing checklist. The checklist should include the fees that must be paid, the information that must be provided, and the disclosures that must be signed before the title can be conveyed to the buyer.

Identification.All parties to the closing will need to provide valid identification.

Title Insurance Policy.The borrower must pay for title insurance guaranteeing the property is free of liens and claims.

Homeowner’s Insurance Policy.The borrower must have homeowner’s insurance in place before the transaction can close. Homeowner’s insurance insures the property against damage.

Closing Funds.The borrower must have all the agreed-upon funds at closing. The funds must be certified or sent via electronic transfer.

Mortgage Insurance Premium (MIP)


The FHA requires mortgage insurance to protect lenders in the event the borrower defaults on the loan. The length of time borrowers are required to carry MIP is either 11 years or throughout the life of the loan depending on the terms and conditions of the loan.

Debt Ratio and FHA Loans


In order to prevent families from getting into loans, they can’t afford, the FHA has put debt-to-income ratio requirements in place. Lenders use these numbers to calculate whether or not the borrower is in a position to meet the demands that come with homeownership.

The FHA allows the buyer to use 31% of their income for housing costs and 43% toward housing expenses and long-term debt.

First Time Homebuyers


Qualifying as a first-time homebuyer doesn’t mean you have never owned a home before. There are several circumstances that can qualify you as a first-time buyer.

  • Spouses and individuals who have not owned a home in the previous three years

  • Displaced homemakers who have only owned a home with a spouse

  • Single parents who only owned a home with a former spouse while they were married

  • Individuals who have only owned a home, not in compliance with state or local building codes and that can’t be brought into compliance without exceeding the cost of building a permanent structure

  • Individuals who have only owned a home not permanently affixed to a foundation as defined by applicable regulations