The FHA loan requirements include a minimum credit score of 500 if you can make a 10% down payment and debt limits on the total monthly amount.
Mortgages backed by the Federal Housing Administration are a popular choice for first-time homebuyers. FHA home loans are relatively easy to qualify for, and they offer competitive interest rates and terms.
To take advantage of an FHA loan, you’ll need to meet specific requirements. This article will cover the basics of FHA loan requirements in 2022.
What is an FHA loan?
An FHA loan is a government-backed mortgage that the Federal Housing Administration insures. FHA loans in Texas are ideal for first-time buyers because they have lower minimum credit scores and down payments than many conventional loans, making them particularly appealing to newcomers. FHA’s 2020 Annual Report states that over 83% of all FHA loan originations were made by people buying their first residences.
While the government shields you from risk by insuring these loans, they are underwritten and managed by third-party mortgage lenders. Also, the FHA only provides guidelines that lenders must follow to participate in the program.
FHA Minimum Credit Score: 500
The FHA’s encouragement of lower credit ratings is why first-time homebuyers are frequently drawn to FHA loans. The FHA allows borrowers with credit scores as low as 500 to apply for home loans.
However, keep in mind that while the FHA establishes standards for credit score minimums, FHA lenders may require higher minimum scores. This is because the FHA insures FHA loans on behalf of the lender. They don’t come straight from the government; instead, the FHA protects them. Although lenders prefer to minimize their risk by imposing higher credit minimums, they frequently do so. This is one of the reasons why purchasing and comparing FHA lenders is beneficial.
It’s also worth noting that even if you obtain a mortgage from an FHA-compliant lender who follows the rules to the letter, your loan will be more beneficial if your credit score is higher. This is because a higher credit score should also provide a better FHA mortgage rate.
FHA Minimum Down Payment: 3.5%
Your credit score determines the required down payment with an FHA loan. For example, if you have a credit score of 580 or higher, the minimum down payment is 3.5 percent.
If your score is between 500 and 579, you’ll need to make at least a 10 percent down payment.
Remember that these are simply the bare essentials recommended by the FHA. Many lenders will require a higher down payment, especially if your credit score is on the lower end of the spectrum.
FHA Debt-to-Income Ratio: 50% or Less
Local mortgage lenders pay attention to your debt-to-income ratio regardless of the kind of mortgage you take. The FHA, on the other hand, considers two distinct ratios.
The first is the ratio of your proposed monthly mortgage payments to your income. The FHA uses the term “Total Mortgage Payment to Effective Income Ratio,” abbreviated as “PTI.” It is referred to as the “front-end ratio.” For example, if your credit score is 580, your PTI might be 40%.
The debt-to-income ratio, referred to as the debt-to-income ratio or simply DTI, is a calculation that compares your total pretax income to your monthly debt payments. It includes your mortgage or rent, credit cards, student loans, and other debts. You can use a DTI ratio calculator to estimate your DTI.
The FHA’s rules for DTI are different based on your credit score and other elements of your financial picture, such as how much cash you have on hand. For example, the highest DTI the FHA will accept is 50%; if your monthly debts consume no more than 50% of your pretax income, you should be eligible for an FHA loan.
FHA Loan Income Requirements
While there is nothing like a minimum or maximum salary that will qualify you for an FHA-insured loan, you must:
- Have at least two established lines of credit—for example, a credit card and a car loan.
- Show that you have made all of your payments on time for the last 12 months.
- Demonstrate a history of steady employment for the last two years.
- Prove that your income is likely to continue by providing tax returns, pay stubs, or other documentation.
- Have no outstanding federal debt or judgments, tax-related or otherwise, or debts owed to the FHA related to prior FHA-insured mortgages.
- Account for cash contributions that help with the down payment. A friend or family member, a charity, employer or union, or the government might all contribute. These donations must be documented in writing, signed and dated by the donor, and included in your loan application.
FHA Loan Limits
The property should be located in an FHA-approved jurisdiction, which generally means a community participating in the program. The maximum loan limit for an FHA-insured loan in 2022 is $420,860 for a single-family home in most counties and $970,800 for a four-plex in high-cost areas.
FHA Documentation Requirements
In addition to the standard mortgage application, you’ll need to provide the following documentation to your FHA lender:
- Government-issued ID, such as a driver’s license, passport, or military ID.
- Proof of Social Security number.
- W-2 forms or other documentation of your employment history for the last two years.
- Pay stubs from the last three months.
- Bank statements from the last three months.
- Statements for any other debts you have, such as car loans, student loans, or credit card debt.
- Letters that confirm the source and amount of any gift funds and an explicit statement that you are not required to repay them.
An FHA-approved lender will talk you through the specifics of any additional paperwork you may need to submit.
FHA Property Requirements
Before you may get an FHA loan, the property must fulfill specific criteria.
- The loan must be for a primary residence, and at least one borrower must live there within 60 days of closing.
- It can’t be an investment property, except a multi-unit building where you reside in one of the apartments.
- The home must be in good repair and free of any health or safety hazards.
- It mustn’t be a property flip, which means you can’t purchase another house within 90 days of selling the previous one.
- You must acquire title to the property at settlement in your name or via a living trust.
FHA Mortgage Insurance Requirements
FHA loans are more accessible because lenders are confident that the FHA will repay them in the event of a default. As a result, you’ll frequently hear “insure” when talking about FHA loans. Mortgage insurance saves the lender in case of a default and allows borrowers who might not be certified for a conventional loan to get financing.
You’ll be charged an upfront mortgage insurance premium of 1.75% of the loan amount at closing, but you may cancel it without penalty. Following that, you will make monthly insurance payments. If your down payment is 10% or more, you must make these payments for 11 years.
However, if your down payment on an FHA mortgage is less than 10% of the purchase price, you must refinance into a conventional loan to avoid paying monthly FHA mortgage insurance. FHA mortgage insurance cannot be canceled in the same way that private mortgage insurance can. The amount you’ll pay in insurance is determined by the length and overall cost of your mortgage and the amount of your down payment.
If you’re looking to purchase a home and have less-than-perfect credit or little money for a down payment, an FHA home loan may be good. But, remember that you’ll have to pay mortgage insurance, and the home must meet specific standards to qualify.
If you’re unsure if an FHA loan is right for you, consider talking to a mortgage lender about your options. They will guide you through the process and answer any questions.