FHA loan qualifications: FHA required credit scores
The FHA program allows borrowers to have pretty low credit scores, as low as FICO 580 for loans with a minimum down payment. Loans can be made available to borrowers with FICO score from FICO 500 to FICO 579, but a larger down payment is required.
While the FHA program is technically available to these lowest-credit-score borrowers, lenders often add credit "overlays" to these minimum scores. This means some lenders won't make an FHA-insured loan to a borrower unless their score is a FICO 600 or 620.
This isn't the case of a lender being capricious and it does not profit the lender in any way. Lenders are wary of being penalized by FHA if too many low-quality loans should become delinquent or fail. In such cases, lenders can be fined or even see their FHA mortgagee status revoked. As such, they prefer to make loans only to somewhat better credit quality borrowers in hopes of minimizing potential loss and repercussion by FHA.
Downpayment requirements for FHA mortgages
For single-family borrowers with FICO scores at 580 or above, the minimum required downpayment for an FHA-backed loan is 3.5 percent (you can always put more down, too). For borrowers with FICO scores between 500 and 579 the minimum required down payment is 10 percent. As noted in "credit scores" above, lenders may not make loans to borrowers with such low scores at any downpayment size.
FHA Income and debt qualification ratios
For FHA loans, the base calculation for a borrower to qualify for a loan allows 31 percent of his or her monthly gross income (MGI) to be used for Principal, Interest, Taxes, Insurance and any required homeowner Association fees (PITIA). This is known as the "housing" or "front-end" ratio.
Borrowers are allowed to carry other debts of up to 12 percent of their monthly gross income, which sets the total debt ratio at 43 percent of the borrower's monthly gross income. A simple example: A borrower with a $3,000 per month gross income could use $930 for their housing portion (31% of MGI) and be allowed to carry other monthly debts of up to $360 ($930 + $360 = $1290 = 43% of the monthly gross income). As the 43 percent is a "hard" cap, any required monthly debts in excess of $360 would see the amount available for housing be reduced (i.e. $400 per month in debt payments would trim the housing amount down to $320, in turn reducing the amount of mortgage the borrower can obtain).
FHA mortgage insurance costs
All borrowers backed by the FHA must pay into the Mutual Mortgage Insurance Fund (MMIF). There are two components:
- An up-front premium of 1.75 percent of the loan amount;
- An annual premium cost that varies depending on the loan term, size of the down payment and loan amount.
The 1.75 percent fee can be paid out-of-pocket, if desired, but most homebuyers choose to finance it into the loan amount.
For purchase loans with original terms greater than 15 years and amounts less than $625,500, annual MIP costs currently are:
- Downpayment less than 5 percent: 85 basis points (0.85%)
- Downpayment more than 5 percent: 80 basis points (0.80%)
For a $100,000 loan amount, this brings annual premium costs of $850 and $800 in the first year respectively.
Older loans being refinanced could have loan amounts greater than $625,500; premiums for these would be 105 and 100 basis points, respectively (1.05% and 1%).
For purchase loans with original terms of 15 years or less and amounts less than $625,500, annual MIP costs currently are:
- Downpayment less than 10 percent: 45 basis points (0.45%)
- Downpayment more than 10 percent: 70 basis points (0.70%)
For a $100,000 loan amount, this yields annual premium costs of $450 and $700, respectively.
Older loans being refinanced could have loan amounts greater than $625,500, and premiums for them have a slightly different structure. For loan-to-value (LTV) ratios up to 78 percent, the premium cost is 45 basis points; for LTVs above 78 but not more than 90 percent, premium costs rise to 70 basis points, and for LTVs above 90 percent, a 95 basis point annual fee is charged.
Canceling FHA mortgage insurance
For most borrowers with new FHA loans -- anyone with an original LTV ratio of 90 percent or higher --- the mortgage insurance can never be canceled and runs to the full loan term. This includes loans with 3.5 percent and 5 percent down payments. Borrowers who can make a larger downpayment fare better; with a downpayment of 10 percent or more, the mortgage insurance can be canceled after 11 years.
By contrast, conventional mortgages with Private Mortgage Insurance (PMI) can see their premiums and policies canceled in as little as two years, if the LTV ratio has fallen below 80 percent due to a combination of amortization and home price appreciation.
Sources of funds for down payment and closing costs for FHA loans
In additional to using your own properly-documented funds for the down payment and closing costs, the FHA program also allows you to use gift funds from parties not involved in the transaction. Friends, relatives, your employer, a trade union, charitable and government agencies are all allowed to contribute funds toward your goal of homeownership. No one with an interest in the transaction may contribute to this, including the seller, real estate agent or broker, the builder or any associated entity.
Required reserves for FHA-backed loans
While conventional loans backed by Fannie Mae or Freddie Mac can vary, these entities may require reserves of up to six months for borrowers with small downpayments and/or lower credit scores. Each month of reserves is the amount required to cover the principal, interest, taxes and insurance payment for the loan (and any homeowner association fees or required payments). While having these liquid funds available in times of trouble, FHA does not generally require any reserves to be amassed for single-family loans.
FHA maximum loan amounts
The maximum amount you can borrow in an FHA-backed loan varies by county, and these values are derived from a bit of a complicated formula. In most areas of the country, the maximum loan amount allowed is $294,515; however, in so-called "high-cost" markets the amount can be all the way up to $679,650. To see maximum FHA loan limits in your area, use this HUD lookup tool.
FHA mortgage Citizenship requirements
According to FHA regulations, "U.S. citizenship is not required for Mortgage eligibility." However, the lender must determine the residency status of the borrower based on information provided on the mortgage application and other applicable documentation. In no case is a Social Security card sufficient to prove immigration or work status.
FHA borrowers can be lawful permanent resident aliens, provided they satisfy the same requirements, terms and conditions as those for U.S. citizens.
For non-permanent resident aliens, FHA-backed loans are available to those who can meet the following conditions:
- The property will be the borrower’s principal residence;
- The borrower has a valid SSN, except for those employed by the World Bank, a foreign embassy, or equivalent employer identified by HUD;
- The borrower is eligible to work in the United States, as evidenced by the Employment Authorization Document issued by the United States Citizenship and Immigration Service(USCIS); and
- The borrower satisfies the same requirements, terms and conditions as those for U.S. citizens.
Special FHA Eligibility for Manufactured Housing
To be eligible for an FHA mortgage insurance, all manufactured housing must:
- Be designed as a one-family dwelling;
- Have a floor area of not less than 400 square feet;
- Have the HUD certification label affixed or have obtained a letter of label verification issued on behalf of HUD, evidencing the house was constructed on or after June 15, 1976, in compliance with the Federal Manufactured Home Construction and Safety Standards;
- Be classified as real estate (but need not be treated as real estate for purposes of state taxation);
- Be built and remain on a permanent chassis;
- Be designed to be used as a dwelling with a permanent foundation, built in accordance with the Permanent Foundations Guide for Manufactured Housing (PFGMH); and
- Have been directly transported from the manufacturer or the dealership to the site.
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