WHAT IS AN FHA LOAN AND WHAT'S REQUIRED TO QUALIFY?
 

An FHA loan is a government-insured mortgage designed to make homebuying
accessible to people with lower incomes or poor credit scores. FHA loans have lower
eligibility requirements than conventional mortgages, but they also have more costly
insurance fees and different loan limits. If you're looking to finance your home with a smaller down payment and more lenient approval process, an FHA loan could be right
for you.

What is an FHA Loan?

FHA loans are meant to encourage home ownership among consumers who wouldn't
usually be approved for a mortgage without the government's backing, and who aren't able to afford making a large down payment. FHA loans are mortgages insured by the Federal Housing Administration (FHA) and financed by FHA-approved lenders. When a private bank or credit union extends an FHA loan, the government promises to repay
the mortgage lender if a borrower stops making payments.  If you're looking to purchase a primary residence, you'll likely be interested in the FHA's Basic Home Mortgage Loan, officially known as the 203(b). The FHA also offers the 203(k) loan for home improvement and 203(h) loan for disaster relief. FHA 203(b) mortgages are offered in either 15- or 30-year term lengths with either fixed or adjustable rates.

The 203(b) mortgage loan will allow you to borrow up to 96.5% of your home's purchase price, meaning you can make a down payment as low as 3.5%. The FHA requires a minimum credit score of 500 for loan approval, and has no minimum income
requirement. In exchange for these features, FHA borrowers pay both an annual and
upfront mortgage insurance fee.

Basic Home Mortgage Loan FHA 203(b)

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• For low income and low credit score borrowers

• Borrowers pay upfront and annual insurance fees

• Loan limits set by county

• Minimum credit score of 500 for loan approval

• Minimum down payment of 3.5% of home value

• No minimum income requirement

WHAT ARE THE REQUIREMENTS FOR FHA LOANS?

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FHA mortgages have specific requirements for both home buyer and loan eligibility. For
potential borrowers, the FHA requires that all loan applicants have the following:

• At least two established lines of credit — for example, a credit card and a car loan;

• A debt-to-income ratio (DTI) no greater than 31%, meaning that existing monthly debt payments (before mortgage approval) are less than 31% of your monthly income;

• No delinquencies or federal debts, such as a loan default or unpaid taxes.

Because there is no income minimum for FHA mortgage approval, lenders evaluate the
financial situation of each applicant using the factors listed above. Strong applicants
demonstrate stable employment, minimal outstanding debt and a guarantee of future
income. Once applicants are approved for FHA loans, the FHA also requires that every
borrower pays mortgage insurance (MIP) for the life of their loan. Unlike with
conventional mortgages, borrowers must pay for insurance on FHA loans even after
they have paid for 20% of their home.

Credit Score

To be eligible for an FHA mortgage with the minimum 3.5% down payment, your credit
score must be above 580. Borrowers with credit scores from 500 to 579 must put down
at least 10% of their home's cost in up-front cash, and applicants with credit scores
below 500 are ineligible for FHA mortgages.

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However, it's important to remember that the FHA does not actually loan money for
mortgages; they only insure the mortgages in the case of default. In turn, the private
banks and credit unions who make the loans are likely to accept credit scores that are
slightly higher than the official government figures — lender's effective credit score floor is usually between 600 and 620. These higher minimums are known as "overlays", through which lenders overlay a higher floor on top of the government's minimum.

FHA Loan Limits
In addition to home-buyer eligibility requirements, the FHA also requires that mortgages
are under a certain dollar amount according to property type and region. The
government calculates maximum loan amounts by multiplying each county's median home price by 1.15, or 115%. For example, if the median home price in your county is $250,000, the maximum FHA loan would be $287,500.

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In 2017, the FHA loan maximum for a single family unit in the areas of the country with
the highest property values is $636,150. For the same property in the lowest income
region, the maximum mortgage amount is $275,665.