Who Is Eligible For a FHA Loan?

Written by Bill MacDonaldSeptember 14th, 20226 minute read

Who Is Eligible For A FHA Loan

The standard 203B FHA loan includes a low down payment, lower credit score requirement & less cash at closing. The FHA interest rate tends to be lower than other mortgages.

FHA loans require monthly mortgage insurance, regardless of down payment. And It never goes away. A funding fee is also required, which can be paid in cash at settlement or funded with the loan. The lending limit is lower than a conventional mortgage in most US counties.

FHA, VA, and USDA are the three government mortgage loans offered to potential house buyers. The federal government does not "create" or "initiate" mortgage loans, but it does provide default insurance to lenders who offer government-backed loans.

Because of the default insurance, lenders are more willing to provide mortgages to home buyers with modest down payments and low credit scores. The government-backed insurance program's purpose is to encourage home ownership for people who can't afford a large down payment or can't meet the lending criteria of typical mortgage programs. The FHA loan provides low- to moderate-income applicants with the opportunity to purchase a home. There are no first-time home buyer requirements.

FHA Loan Qualifications & Eligibility

  • Area Requirement - None
  • Co-signer and Co-borrower - Yes, permitted
  • Credit Score Requirement - Usually 620 - lower with some lenders
  • Gift Funds - Down payment and closing costs to 100%
  • Income limits - None
  • Loan Limits - Yes
  • Minimum Down Payment - 3.5% with scores 580 and higher
  • Monthly Mortgage Insurance (MIP) - Yes, varies
  • Mortgage Programs - 30 and 15-year fixed-rate and adjustable
  • Occupancy Types - Owner occupied only
  • Seller Paid Closing Costs (seller assist) - Up to 6% of sales price
  • Upfront Mortgage Insurance - 1.75% of the loan amount

Area requirement

No area restrictions

Co-signer and co-borrower

The FHA home loan program allows for cosigners and co-borrowers. Co-borrowers and cosigners can help the applicant's debt-to-income ratio and allow the borrower(s) to purchase a home that is more expensive.

Credit score requirement

The minimum credit score allowed by the FHA is 500. However, a credit score of 500 to 579 requires a 10% down payment. At 580 or higher, the minimum down payment is 3.5%.

Gift money for down payment and closing costs

The Federal Housing Administration (FHA) allows gift money. The funds can be used to pay for the down payment and closing cost.

The following people can give you a down payment or closing cost gift:

  • a member of the borrower's family;
  • the borrower's employer or labor union;
  • a close friend who has a strong and proven interest in the borrower
  • a benevolent institution (charitable organization);
  • a governmental organization or public institution that offers homeownership help to low-or moderate-income families or first-time homebuyers.

The developer, builder, real estate agent, or any other interested party to the transaction may not be or have any connection with the gift donor.

Loan limits

There are lending constraints in the FHA loan program. The 2021 loan limits are:

  • 1-unit home - $356,362
  • 2-units (duplex) - $456,275
  • 3-units - $551,500
  • 4-units - $685,400

For high-cost counties, there are several exclusions. See FHA loan limit exceptions.

Income limits

There are no income limits with FHA loans.

Minimum down payment

The FHA down payment is 3.5% for home buyers with a credit score of 580 or greater. Applicants with a credit score of 500 to 579 will need a 10% down payment.

Monthly mortgage insurance (MIP)

Monthly mortgage insurance is required for an FHA loan. The monthly cost varies based on down payment. Unlike the conventional loan program, the FHA does adjust the monthly payment based on credit score.

Mortgage programs

30 and 15-year fixed-rate and adjustable interest rate programs.

The FHA offers a normal 1-year ARM as well as four "hybrid" ARMs. Hybrid ARMs have a fixed interest rate for the first three, five, seven, or ten years. The interest rate will adjust annually after the initial period.

The interest rate cap structures for various ARM products are listed below:

After the initial fixed interest rate period, 1-and 3-year ARMs may increase by one percentage point yearly, and by five percentage points throughout the life of the loan.

5-year ARMs allow for yearly increases of one percentage point and five percentage points over the life of the loan, or annual increases of two percentage points and six percentage points over the duration of the loan.

After the initial fixed interest rate period, 7-and 10-year ARMs may only rise by two percentage points each year and six percentage points throughout the life of the loan.

Occupancy types

One to four-unit owner occupied principal residences only. No investors

Seller paid closing costs (seller assist)

The seller of a home has the option of paying the buyer's closing and prepayment charges up to 6% of the sales price.

Find out more about seller paid closing costs. Learn more about seller assistance

Upfront mortgage insurance

The Federal Housing Administration (FHA) charges a financing fee to home buyers.
The funding charge helps to keep the FHA home loan program afloat. The expense is insignificant. Only 1.75% of the mortgage amount.As an example, if you want to borrow $100,000, multiply $100,000 by 1.75 percent to get $1,750. The funding fee can be paid in cash or financed at the time of settlement. The loan amount, if funded, would be $101,750.

Frequently Asked Questions About FHA Loans

Q. Are FHA loans easy to get?
A. The FHA home loan was created to help home buyers who may not qualify for a conventional/conforming loan. The reason FHA loans are less difficult is due to the federal backing.

Q. FHA or conventional loan which is better?
A. Conventional home loans typically have a greater lending limit than FHA loans, and conventional loans can eliminate private mortgage insurance (PMI) if the loan amount falls below 78 percent or 80 percent of the purchase price. See Get rid of PMI. The lending guidelines are a bit more stringent with conventional loans. The FHA mortgage program requires monthly mortgage insurance for the life of the loan or until the FHA loan is refinanced.

Q. How can I get an FHA loan with bad credit?
A. The FHA loan guidelines do allow applicants with a 500 credit score, however, the minimum down payment is increased to 10%. Lenders have the final say if they want to extend a loan to home buyers with a depressed credit score and history. The best option is to delay the purchase and work toward rebuilding your credit profile. See Repair my credit report.

Q. How do I get rid of my FHA loan's PMI?
A. Removing PMI (actually mortgage insurance premium) depends on the date the FHA loan was taken out. Read more FHA funding fee MIP explanation.

Q. How can I qualify for an FHA loan?
A. Please review the FHA loan qualifications.

Q. How hard is it to get an FHA loan?
A. The FHA loan is the most straightforward way to get a mortgage. Credit requirements for an FHA loan are less stringent. Cosigners are allowed, and the home seller may contribute up to 6% of the purchase price toward the buyer's closing fees.

Q. How much are closing costs on an FHA loan?
A. The closing expenses are comparable to those of other home loans, however the FHA does charge a funding fee. Although the finance fee isn't strictly a closing cost, it is a cost that home buyers must pay. The funding fee can either be paid in full at the time of settlement or financed as part of the loan.

Q. How much is the FHA loan limit?
A. The FHA loan limit can be found at: https://entp.hud.gov/idapp/html/hicostlook.cfm.


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