FHA loan requirement basics

FHA loans work best for people who want to purchase a home but don’t have a stellar financial history. Since 1934, FHA loans have been provided by approved private lenders. Potential homeowners are able to obtain this type of loan because the loan is insured by the Federal Housing Administration, the FHA.

FHA Pros

FHA loans are popular with first-time homebuyers who have not established themselves financially yet due to other financial burdens, such as student loans.

  • A huge perk of FHA loans is that the down payment can be as low as 3.5%. Compare that to the national average of 12% for traditional home loans.

To qualify for the lowest down payment, potential borrowers must have a FICO score of 580 or higher. Scores between 500 to 579 require a 10% down payment. The U.S. Department of Housing and Urban Development determined that a person can only receive up to 96.5% financing for their home, meaning qualified borrowers must make a down payment of at least 3.5%.

  • FHA loans don’t require a low debt-to-income ratio, or DTI, compared to other loans. For FHA loans, individuals can have a DTI as high as 43% with some lenders accepting even higher percentages.
  • Past foreclosures or bankruptcies, which would usually kill the opportunity for other home loans, will not disqualify individuals from FHA loans.

FHA Cons

  • Mortgage insurance is required if borrowers do not make at least a 20% down payment. However, all FHA loan borrowers are required to pay monthly mortgage insurance, which can add up into the thousands. Additionally, there will be an up-front fee to pay.
  • In the interest of protecting the homebuyer, there are strict housing standards for FHA loans, meaning the fixer-upper down the block may not qualify.

Considering an FHA loan? There are some unique requirements to consider.

Specific FHA loan requirements:

  • A maximum housing ratio of 30%.
  • A debt-to-income ratio below 43%.
  • For primary residency only.
  • Mortgage insurance.
  • Minimum FICO score of 500.
  • Strict inspection guidelines:
    • Lead-based paint
    • Noise hazards
    • Insects
    • Proximity to electrical lines
    • Location of gas lines
    • Heating and electrical systems
    • Stationary tanks with over 1,000 gallons of explosive material
    • The roof must be able to stand for a minimum of three years.
  • FHA loans can be used on single and multi-family homes in the United States and its territories.