FHA MORTGAGES

The option of a low down payment and more lenient credit requirements can make FHA loans particularly attractive for first-time home buyers, although you don’t have to be a first-time home buyer (within 3 years of owning a home) to qualify. Here are some benefits of FHA loans:

• Credit score requirements are lower compared to other loans.
• Your lender can accept a lower down payment.
• You could still qualify for an FHA loan if you have a history of bankruptcy or other financial issues.
• FHA Closing costs can often be rolled into your loan.
• You can purchase up to a four-unit property with an FHA loan.

FHA Loan Requirements

There are specific requirements borrowers must meet to qualify for an FHA loan, including:

• An FHA-approved appraiser must appraise the home you consider.
• You can only get a new FHA loan if the home you consider will be your only primary residence within three years, which means it can’t be an investment property or a second home.
• You must occupy the property within 60 days of closing.
• An inspection must occur, and the assessment must report whether the property meets minimum property standards.
• Mostly, the FHA requirements to qualify for a mortgage are the same for DACA recipients.
• Some specific conditions to qualify to include a down payment amount, mortgage insurance, credit score, loan limits, and income requirements.

FHA Loan Down Payments

Your down payment is a percentage of a home’s purchase price and the upfront amount you put down for that home. The minimum down payment you can make on an FHA loan is directly linked to your credit score. Your credit score is a number ranging from 300 to 850 that’s used to indicate your creditworthiness.

An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. A mortgage calculator can help you estimate your monthly payments, and you can see how your down payment amount affects them.

Note that cash down payments can be made with gift assistance for an FHA loan, but they must be well-documented to ensure that the gift assistance is, in fact, a gift and not a loan in disguise.

FHA Mortgage Insurance

You have to pay a mortgage insurance premium (MIP) for an FHA loan. Mortgage insurance is put into place to insure your FHA lender against losses if you default on your loan.

In most cases, you pay mortgage insurance for the life of an FHA loan (unless you made a down payment of at least 10%, in which case, MIP would be on loan for 11 years). FHA loan mortgage insurance is assessed in a couple of different ways. First, an upfront mortgage premium is charged, which usually amounts to 1.75% of your base loan amount.

FHA borrowers also pay an annual mortgage insurance premium based on the term (length) of your mortgage, your loan-to-value (LTV) ratio, your total mortgage amount, and the size of your down payment. Annual MIP payments run approximately 0.45% – 1.05% of the base loan amount.

FHA Loan

If you have a higher credit score, you might be able to qualify with a higher debt-to-income ratio or DTI. DTI refers to the percentage of your monthly gross income that goes toward paying debts. Your DTI is your total monthly debt payments divided by your monthly gross income (your monthly income before taxes). This figure is expressed as a percentage.

To determine your DTI ratio, divide your debts (student loans, car loan, etc.) by your monthly gross income. For example, if your debts, including your student and car loans, reach $2,000 per month and your income is $8,000 per month, your DTI is 25%.

The lower your DTI, the better off you’ll be. If you do happen to have a higher DTI, you could still qualify for an FHA loan if you have a higher credit score.

The FHA states that your monthly mortgage payment should be no more than 31% of your monthly gross income and that your DTI should not exceed 43% of monthly gross income in certain circumstances if your loan is being manually underwritten. As noted above, if you have a higher credit score, you may be able to qualify with a higher DTI.

FHA Loan Limits

There’s a maximum limit to what you can borrow for an FHA loan, and how much you can borrow depends on the county where your potential home is located.

According to the Department of Housing and Urban Development, the maximum FHA lending amount for high-cost areas (such as large metropolitan areas) is up to $970,800 for 2022. This is also the limit for Alaska and Hawaii at Rocket Mortgage®. Lenders’ policies regarding Alaska and Hawaii differ in terms of loan limits. In lower-cost areas, the FHA limit can dip as low as $420,680. Loan limits are set based on county property values. These are the limits for one-unit properties. If you have multiple units, limits may be higher.

You can look up the FHA mortgage limits for one or more areas on the FHA mortgage limits page. The page also includes a median sale price value for each area. According to HUD, those are the median price estimates used for loan limit determination.

FHA Interest Rates

FHA interest rates can be competitive compared to conventional mortgages. This is because the government backing decreases your risk and allows lenders to offer you a lower rate. The rate depends on several factors, including the prevailing interest rates, income, credit score, amount you plan to borrow, down payment amount, DTI ratio, and more.

FHA Income Requirements

Your eligibility for an FHA loan doesn’t hinge on a particular income amount, but you must prove that you have a steady employment history. Your income must be verifiable by sharing pay stubs, W-2s, federal tax returns, and bank statements with your lender. Your lender may ask for other examples of verification as well.