What is an FHA loan?
FHA home loans are mortgages insured by the federal government through the Federal Housing Administration (FHA), a branch of the Department of Housing and Urban Development. FHA home loans reduce the barrier to entry for homebuyers and refinancers by featuring low down payments, flexible credit requirements and more purchase power. If funds are limited, an FHA home loan can help you finance more than 80% of your home value.
What are FHA loan requirements?
In order to ensure that you meet the minimum FHA loan requirements, you need to consider the following factors.
You’ll likely need to be able to answer all of these questions with a hearty ‘YES’ in order to meet FHA home loan requirements.
- Are you over the age of 18?
- Do you have a valid Social Security number and lawful residency in the United States?
- Do you have a steady employment history? If not, have you at least worked for the same employer for the past two years?
- Can you afford the minimum down payment of 3.5% or 10% (depending on credit score)?
- Do you have a credit score above 580?
- Have you been out of bankruptcy for at least the past two years? (If the answer is no, there may still be exceptions that can be made on a case-by-case basis.).
- Will this home be your primary residence?
You’ll likely need to be able to answer all of these questions with a hearty ‘YES’ in order to meet FHA home loan requirements.
The FHA home loan advantage
FHA home loans are backed by the federal government and offer you a myriad of advantages for your home purchase or mortgage refinance.
Minimum down payment option of 3.5% for qualified buyers
For those with credit scores of 580 and above, the down payment for an FHA loan is 3.5%. (For those with credit scores below 580, a 10% down payment is required.)
Easier to qualify
FHA requirements are, typically, less strict than typical loans. Although a credit score below 580 does not allow you to take advantage of the 3.5% down payment option, conventional lenders require a minimum credit score of 620 or higher.
No maximum income restrictions
Seller assistance with up to 6% of closing costs
FHA home loans allows the seller to pay up to 6% of the closing costs, including any costs of the appraisal, title expenses and a credit report.
Loan limits adjusted annually
FHA home loans have a maximum loan amount (or “ceiling”) that is regularly adjusted every year and vary according to the cost of living in a given area. In 2019, the ceiling for FHA home loans is $331,760. This annual adjustment increases your likelihood of getting an FHA home loan that meets your current needs.
With an FHA loan, you can use borrowed money and other gifts from family members to cover down payments and closing costs. And don’t worry about prepayment penalties! An FHA loan lets you refinance or pay off your home early without having to deal with extra fees or other sticking points. As long as you meet FHA requirements, an FHA home loan may be within your future!.
Minimum down payment option of 3.5% for qualified buyers
For those with credit scores of 580 and above, the down payment for an FHA loan is 3.5%. (For those with credit scores below 580, a 10% down payment is required.)
Easier to qualify
FHA requirements are, typically, less strict than typical loans. Although a credit score below 580 does not allow you to take advantage of the 3.5% down payment option, conventional lenders require a minimum credit score of 620 or higher.
No maximum income restrictions
Seller assistance with up to 6% of closing costs
FHA home loans allows the seller to pay up to 6% of the closing costs, including any costs of the appraisal, title expenses and a credit report.
Loan limits adjusted annually
FHA home loans have a maximum loan amount (or “ceiling”) that is regularly adjusted every year and vary according to the cost of living in a given area. In 2019, the ceiling for FHA home loans is $331,760. This annual adjustment increases your likelihood of getting an FHA home loan that meets your current needs.
With an FHA loan, you can use borrowed money and other gifts from family members to cover down payments and closing costs. And don’t worry about prepayment penalties! An FHA loan lets you refinance or pay off your home early without having to deal with extra fees or other sticking points. As long as you meet FHA requirements, an FHA home loan may be within your future!.
FHA Loans vs. Conventional Home Loans
The main difference between a FHA Loan and a Conventional Home Loan is that an FHA loan typically requires a lower down payment and the credit qualifying criteria for a borrower is not as strict.
This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.
Those with credit scores under 680 with less than 20% down many times will find a cheaper overall monthly payment with an FHA loan.
This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Some borrowers, with extenuating circumstances surrounding bankruptcy discharged 3-years ago, can work around past credit problems. However, conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.
Those with credit scores under 680 with less than 20% down many times will find a cheaper overall monthly payment with an FHA loan.
If I've Had a Bankruptcy in Recent Years, Can I Get a FHA Loan?
Yes, generally a bankruptcy won’t preclude a borrower from obtaining a FHA Loan.
Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn't be paid.
Ideally, a borrower should have re-established their credit with a minimum of two credit accounts such as a car loan, or credit card. Then wait two years since the discharge of a Chapter 7 bankruptcy, or have a minimum of one year of repayment for a Chapter 13 (the borrower must seek the permission of the courts). Also, the borrower should not have any credit issues like late payments, collections, or credit charge-offs since the bankruptcy. Special exceptions can be made if a borrower has suffered through extenuating circumstances like surviving a serious medical condition, and had to declare bankruptcy because the high medical bills couldn't be paid.
What Documents are Needed to Apply for a FHA Loan?
Your loan approval depends 100% on the documentation that you provide at the time of application. You will need to give accurate information on:
Employment
Employment
- Complete Federal 1040 Income Tax Returns for past 2 years
- W-2 & 1099 Statements for past 2 years
- Most recent 30 days Pay Check Stubs
- Self-Employed Income Tax Returns, K1's and YTD Profit & Loss Statements for past 2 years for self-employed borrowers
- Complete bank statements for all accounts for most recent 2 months
- Account statements for retirement, 401k, Mutual Funds, Money Market, Stocks, etc. for most recent 2 months
- Landlord's name, address, telephone number
- Recent utility bills to supplement thin credit (if applicable to your situation)
- Bankruptcy & Discharge Papers - if applicable
- 12 months cancelled checks written by someone you co-signed for to get a mortgage, car, or credit card, this indicates that you are not the one making the payments.
- Current Drivers License
- Social Security Card
- Any Divorce, Palimony or Alimony or Child Support papers
- Green Card or Work Permit - if applicable
- Current mortgage statement for all properties owned
- Current Property Tax Bill for all properties owned
- Current Hazard Homeowners Insurance Policy for all properties owned
- Current HOA Payment Coupon for all properties owned (if applicable)
- Current Rental Agreements for all investment properties owned