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FHA Loans - Limits, Requirements, Rates and Tips

By Daniel Cohen May 22, 2013
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Can An FHA Loan Benefit You? Learn all about FHA limits, benefits, rates, and how to qualify in this video.

Editor’s note: FHA Mortgage Insurance Premium Costs changed on April 9, 2012. FHA mortgage insurance rates increased in April 2012. The increase affects new home purchasers and anyone seeking an FHA refinance loan who currently has a non-FHA loan. The Up- front Mortgage Insurance Premium (UFMIP) increases to 1.75% instead of 1%, quite a significant increase. The annual MIP will increase by 10 bps.(That means an additional $8.33 per month for every $100,000). The increase in the rates was a result of the Temporary Payroll Tax Cut Continuation Act of 2011 signed by President Obama on Dec. 23, 2011.

Is An FHA Mortgage Loan Right For You?

With home prices down, interest rates down and many Americans struggling with credit problems, there has never been a better time to check out FHA Loans!

If you are in the market to buy a home, there are many reasons for you to consider applying for an FHA mortgage loan to finance your home. One key reason to explore FHA-insured mortgage loans is that FHA Loans are easier to qualify for than conventional mortgages. An FHA loan is guaranteed by the government. Because of this, your loan application is more attractive to lenders, as their risk is lower. The second big reason is that you can qualify for a new FHA mortgage with a very low down-payment. We cover all this below, so read on!

FHA Loans Inforgraphic

Less Strict Credit Requirements

FHA loans have less stringent credit requirements than conventional loans. If you are a first-time FHA home loan applicant, you may not have established an extensive credit history. You also may have other debts, such as student loans that need to be paid. An FHA home mortgage often costs less and is more forgiving of small problems with your credit history and timely payments on your debts.

Low Down Payment

FHA home loans don’t require a big down payment. If you are a first-time homebuyer, this can be a major benefit. The FHA mortgage programs require only a 3.5% down payment, and the down payment money can come from a variety of sources, including HUD down payment assistance grants! If you are like many borrowers, especially first-time homebuyers, you may not have the 20% down payment that most conventional loans now require. It can take you years to save up enough to make a 20% down payment, so the low down payment requirement of an FHA loan may be the only way for you to qualify for a purchase loan to buy the house you want. Some programs, such as the American Dream Downpayment Initiative (ADDI) are only available to first-time homebuyers, although the ADDI is not the only form of down payment assistance available.

Closing Costs

Closing costs are important to consider. Coming up with the money to cover the closing costs out-of-pocket can be a problem. Closing costs typically run between 2% and 3% of the total mortgage. One advantage when taking out an FHA loan is that the FHA mortgage terms may allow you to include most of your closing costs in your mortgage.

FHA Loans - Rehab a Home

Rehab a Home

The FHA offers a special loan program that allows you to buy a home that needs fixing up and to finance the costs of fixing it up into one loan along with your purchase money. This loan is called an FHA 203K Rehabilitation loan. This is a great option, especially if you want to buy in an area where many homes have been foreclosed on and fallen into disrepair.

Manufactured and Mobile Homes

Homebuyers looking to purchase a manufactured or mobile home may find conventional mortgage financing difficult to obtain. The FHA has special loan programs designed for manufactured and mobile homes. One program is available if you own the land where the home will be placed, another program is available if you want to finance a purchase of a mobile or manufactured home that will be located in a mobile home park. Not every manufactured or mobile home is eligible. View the program requirements at the HUD Web site.

Energy Efficiency

The FHA even has a loan program that allows you to improve the energy efficiency of a home you want to buy, the FHA’s Energy Efficient Mortgage program (EEM). EEM helps you save money on your utility bills by enabling you to finance the cost of adding energy efficiency features to new or existing housing as part of you FHA insured home purchase mortgage. EEM can also be used with the FHA Section 203K Rehab loan program and generally follows the 203K program’s financing guidelines.

Help on FHA Restrictions

FHA Advice Despite the wide range of FHA programs available, the less strict credit requirements, and the smaller down payment requirements, there are still hurdles you need to clear to qualify for an FHA loan.

Debt-to-Income Ratio

The FHA mortgage programs require you to have a certain level of income to qualify for a loan. The income requirements protect the FHA from mortgage defaults and protect you, the borrower, by preventing you from purchasing a home that you can’t afford. Your monthly FHA mortgage payment can’t take up more than 29% of your gross monthly income. You will have to provide verifiable proof of your income, often including your tax returns. If your job status has changed, you may be required to provide proof of your income from your employer.

Credit Requirements

One great feature of FHA loans is that they do not require a high credit score. Normally, a FICO credit score of 580 is the minimum acceptable score. An extensive credit history is also not required. FHA loans generally do require you to have two active lines of credit. The FHA even makes exceptions to that rule, if you can demonstrate a solid payment history on payments for housing rental, auto insurance, and utilities.

Recent bankruptcies or foreclosures can prevent you from qualifying. Regarding a Chapter 7 bankruptcy, the bankruptcy must have been discharged for 24 months, before an FHA loan will be approved. FHA loans generally require that you not have a foreclosure or been issued a deed-in-lieu of foreclosure for the past 36 months. This is not a hard and fast rule. If you can demonstrate a good payment history after the foreclosure and provide a reasonable explanation of why the foreclosure took place, your loan could be approved.

FHA Loan Limits

One potential drawback in the FHA loan program is the dollar-limit the FHA mortgage programs place on loans. The limits are set county by county. In areas that experienced high appreciation, the FHA loan limit may not be enough to allow you to purchase the home that you desire. Currently, FHA loan limits range from $271,050 up to $625,500, although the dollar limits vary from time to time. View FHA loan limits in your area by using the interactive loan limit feature at the HUD Web site.

Summary… and how to get an FHA Loan!

If you are looking to buy a home and do not have 20% of the home purchase price saved up for a down payment, you should look into the FHA loan programs. The FHA does not offer the loans directly, but guarantees loans that are offered by FHA approved lenders.

You can receive a no-cost and no obligation mortgage quote from an FHA approved lender at Bills.com, just apply above and get a free loan quote to see if you can qualify.

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Comments (29)


Ashley D.
Alva, OK  |  May 06, 2013
I am trying to get an FHA loan right now. They are telling me that FHA does not accept cash in my account that I deposited as being able to use as part of the closing costs and down payment. So if I go by what my loan officer told me, I can not use any cash i saved and only my paychecks?
Bills.com
May 12, 2013
To qualify for most FHA loans, you need to show proof you have enough funds to cover the down payment and closing costs for the home and the loan. (The Upfront Mortgage Insurance can be rolled into the loan).

Cash in a savings/checking account is an acceptable source; however, the lender is required to verify the source of the funds. If the funds are newly deposited then it could be a problem, and the lender will require explanations regarding the source of the money.

Your paychecks are certainly not a source of your down payment and closing costs. I suggest you ask your loan officer for more clarifications and/or shop around with other lenders who may interpret the FHA's down payment rules slightly differently.
Nick C.
February 25, 2013
Thanks for providing these valuable info. I am looking to get my first home and have a few questions. I am self-employed and make $4-$5k per month and growing. My initial plan was to save up that 20% within a few months but I feel the housing market is edging back up both price wise and available inventory. Do FHA lenders take self-employed borrowers? My score is over 700 and debt is low Thanks much
Bills.com
February 25, 2013
Yes, self-employed borrowers are eligible for FHA loans. A common problem for a self-employed borrower is determining the qualifying income. Self-employed people have an incentive to show the lowest possible income on their tax returns, so they pay as little taxes as legally possible. The low income can bite then in the backside, when a lender uses the income on the tax return to determine their qualifying DTI. This issue applies to both FHA loans and conventional loans.

I recommend you speak with an experienced loan officer to hear the pros and cons of an FHA loan, so you can figure out if waiting to buy when you have 20% down is best or not. Remember, costs for FHA loans have risen recently, including the significant cost for keeping FHA mortgage insurance in place for the life of the loan.
Owen H.
Bellevue, WA  |  December 28, 2012
I read somewhere that the FHA is going to raise its credit score requirements. Do you know when that change is scheduled to take place?
Bills.com
December 28, 2012
According to what has been released so far, there is no firm date, but the incoming FHA head is aiming to have changes in place by January 31st, 2013.

Bills.com will update our FHA pages, once requirements and implementation dates are finalized. Please keep checking back.
Deanna M.
Kennewick, WA  |  April 22, 2012
My husband & I had to file chapter 13 bankruptcy & had a foreclosure in 2008. In 12 months, we will be discharged from our bankruptcy having paid back 98% of our debt.Since 2008,we have had a strong rental history, pay all our bills on time, have only one (secured) credit card we opened through our credit union (which is paid off or paid on time each month), do not occurred any other consumer debt, have steady employment with a good income, and have received debt & budget counseling. We have finally begun to dream of owning a home again when we have completed our bankruptcy, and we will have saved a 3.5% down payment on a $280,000 home. Each of our credit scores today is around 600, and we have been told that once we are discharged from bankruptcy and our creditors must report accurately that our debt was repaid under a debtor plan, that our scores should begin to rise. With that said, what is the chance that we could be approved for a mortgage at a typical interest rate? And would we better to work with a mortgage company, or our local credit union where we do business?
Bills.com
April 24, 2012
Congratulations on working out your debt problems. A FHA loan is a good starting place, because of their more lenient underwriting guidelines regarding down payments and chapter 13 bankruptcies. Although credit score requirements are low, many lenders have stricter requirements, and a 620 FICO score is probably required. Shop around including your own credit union.
Quick tip:Get a Bills.com Quick Quote and find great mortgage lenders ready with rate quotes on the best loans for your situation.
Traci W.
Richmond, CA  |  April 02, 2012
If a husband is applying for a FHA loan in his name only, why is the debt of the wife a consideration in the debt to earnings ratio but not her income?
Bills.com
April 02, 2012
Do you reside in a community property state? If so, the presumption is the "community" has liability for the debts of either spouse. Therefore, under FHA rules, "...debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios if the borrower resides in a community property state or the property to be insured is located in a community property state." If you do not reside in a community property state, or the property is not situated in a community property state, then the spouse's debts are not included in the DTI calculation.
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Traci W.
Richmond, CA  |  April 02, 2012
I live in a state with community property. I understand why my debt must be included in a community state however have no agreement with not including my income to cover my debt but the rules are the rules. Thank you for your reply.
Liz E.
San Marcos, CA  |  April 02, 2012
My husband and I are applying for a FHA loan. He and I have varying credit scores, his is about 690 and mine is 760. Which score will they look at? Will they take the higher score, or the lower one?
Bills.com
April 02, 2012
They will look at both scores, so the lowest one is very important. The 690 score your husband has should not be a barrier to getting an FHA loan.
HoneyGurl R.
Atlanta, GA  |  March 11, 2012
I am a first-time home buyer and I am going through the process to receive a FHA loan right now. I need some assistance. What can I expect with this process? I have heard horror stories about the loan process. I just started my job, been in school for the past 3 years and have a middle score of 642. What can I expect?
Bills.com
March 12, 2012
I have not often heard negative information about buying a home with an FHA loan. Working with a good lender and loan officer is important, so your expectations are set realistically and then what is promised to you is delivered.

I think the biggest barrier you will find relates to your employment history. You stated that you just started your job. Here is what the FHA says about required employment history:

The lender is required to verify the applicant’s employment history for the previous two years. However, direct verification is not required if all of the following conditions are met:

  • the current employer confirms a two-year employment history (this may include a pay stub indicating a hiring date)
  • the lender only uses base pay (no overtime or bonus pay) to qualify the borrower and
  • the borrower signs Form IRS 4506 or Form IRS 8821 for the previous two tax years.

Borrower Not Employed with Same Employer:

If the borrower was not employed with the same employer for the previous two years, and/or the above conditions cannot be met, the lender must verify the most recent two years of employment history by obtaining:

  • copies of W-2s
  • written VOEs, or
  • electronic verification acceptable to FHA.

No explanation is required for gaps in employment of six months or less during the most recent two years.

I still recommend speaking with a loan officer, so you know exactly how long it will be before you can get a loan. That way you can work to meet the other lending requirements once the time comes.

Liz L.
Beverly Hills, CA  |  March 09, 2012
It's good to know that new FHA loan borrowers have this great advantage of getting the loan approval easily. Thank God I'm a first time borrower and has a very good credit it's a plus for me.
Jezzy J.
Fremont, CA  |  March 02, 2012
We are planning to buy a house in next 1-3 months and I am still not certain if I would want to go for a conventional loan. I have the extra money to pay the 20% down payment but I wanted to check if I should still go for a FHA loan with about 5% down and invest rest 15% which I would save by not paying 20% down and earn returns more than the PMI that I have to pay on FHA loan? What do you suggest?
Bills.com
March 03, 2012
I don't have enough facts about your situation to make a recommendation, but I will share a few thoughts.

Figure out the costs of the FHA mortgage insurance (both the upfront MIP and the monthly cost over the number of years you have to pay it) and weigh it against what you expect as a return on your investment. Factor into your decision the increased monthly mortgage payment that you will need to make due to having a higher loan amount as well as the risk of your investment opportunity.
Carrie L.
Ashland, KY  |  March 02, 2012
My husband and I are looking to buy a new home in the near future. According to some Web sites, such as yours, the credit score can be below 600. Ours are just below that and we're working on improving, but I haven't found a lender that will go below 640. Any suggestions?
Bills.com
March 02, 2012
A confusing issue today is that the FHA states it will approve loans for credit scores at 580. However, no lender is willing to go that low because loan originators have liability if their loans go bad. Therefore, the FHA says "We will allow loans with low qualifications," but the banks say, "We do not dare going that low because low-qualification loans will kill us later."

My advice? Focus on improving your credit score.
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