FHA loans are a terrific option for home buyers with lower incomes, imperfect credit ratings or limited cash available for a down payment. In fact, FHA loan requirements feature a certain flexibility which makes them the only option available for millions of American mortgage applicants with “average” qualifications. That’s why FHA loans jumped in popularity after the 2008 financial crisis when subprime mortgage options were eliminated.
2017 FHA Loan Requirements
While FHA requirements aren’t quite subprime, they still offer more flexibility than conventional loan programs. To qualify, applicants must meet some straightforward and simple guidelines regarding their credit background, income and cash reserves. These requirements can generally be grouped into four categories:
1. FHA Credit Requirements
When evaluating an FHA loan applicant, the lender reviews your credit scores through a tri-merge credit report. Credit history is important, and the minimum FICO middle credit score for FHA loan programs is 580 or above. Additionally, you can’t have any late housing payments for at least a year. These minimum FHA credit requirements that must be met:
- You need 580 minimum FICO score to meet FHA loan credit score requirements (some lenders may even require a 620.)
- You can’t have any late payments for at least 12 months.
- If you’ve ever filed Chapter 13 Bankruptcy, it must be discharged at least 1 year.
- If you’ve ever filed Chapter 7 Bankruptcy, it must be discharged at least 2 years (12 months may apply if bankruptcy was due to economic event).
- You can’t have a Foreclosure during the last three years (12 months may apply if your foreclosure was due to a documented economic event).
If you have a history of bankruptcy, it’s still possible to be approved if an acceptable amount of time has passed since the discharge date and all court-ordered payments have been made on time.
2. FHA Income Requirements
Applicants for FHA loans must prove they earn enough money to comfortably repay their new mortgage payment as agreed. FHA mortgages utilize debt-to-income ratios to analyze borrower income and expenses, and that determines if they can afford their new mortgage. These FHA loan requirements for income and employment must be met:
- You must have a reliable two year work history.
- You must must meet FHA debt to income ratio requirements of 31/43 with documented income.
- The new housing payment can’t exceed 31 percent of the applicant’s combined income.
- The new housing payment plus all additional expenses can’t exceed 43 percent of the applicant’s combined income.
FHA Debt-to-Income Ratio Requirements
To qualify, the applicant’s the new monthly housing expenses must be less than 31 percent of their total monthly income and the applicants total monthly expenses including the new housing payment and all other payments must be less than 43 percent of their total monthly income. Factors such as credit card payments, student loans, car payments and other monthly bills are taken into account.
3. FHA Home Requirements
FHA loans can be used to finance primary residences only. The subject property must be appraised by a certified FHA appraiser to determine it’s value and if it meets FHA home requirements.
The home must be completed and in fairly good condition, it can’t be in disrepair. Things that can disqualify the property include leaky roofs, structural problems, foundation issues, missing siding, missing paint, plumbing problems and other issues. Only a certified FHA appraiser can determine if FHA loan house requirements are met.
The appraised property value must meet or exceeds the Loan-to-Value (LTV) requirements for FHA loans. If the appraised value is determined to be below those requirements, borrowers might have to bring more money to the closing table.
The FHA Appraisal Process
It’s important to understand that it’s the lenders job to order the FHA loan appraisal, and it must be obtained in a manner that’s completely objective. Important things to remember:
- An FHA approved appraiser must do a visual inspection of the interior and exterior of the property to determine if it meets FHA loan requirements.
- The appraised value of the home must meet or exceed the minimum loan-to-value requirements for the mortgage program being used.
- FHA loans can only be used to finance primary residences.
4. FHA Down Payment and Loan-to-Value Requirements
One of the most attractive features FHA loans offer is their low down-payment requirement and high loan-to-value. Here’s how FHA loan limits are determined:
- The maximum FHA loan amount: Lenders can’t insure an FHA mortgage amount that’s higher than the loan limits set by HUD for the area the property is located. In most rural areas around the country, the maximum FHA loan amount is $275,665. Limits are higher in larger cities and densely populated areas with higher media home values. The highest maximum FHA mortgage limit right now is $636,150. You can view what the limit is in the county in which you’re interested here.
- Maximum FHA Financing: Depending on the state where the property is located, the maximum FHA loan-to-value financing will be 96.5% of the lower of the purchase price or the appraised value of a home being purchased or 97.75% of the lower of the appraised value of the home or the amount you are refinancing plus closing costs of a home being refinanced. If you are refinancing and taking cash out, the loan will be limited to 85% of the appraised value.
FHA Loan Limits
FHA maximum loan limit amounts vary from county to county throughout the United States. In 2017, maximum FHA loan limits for single-family homes range from $275,665 in low cost areas to $636,150 in high cost areas. You can look up the exact FHA loan limits in your area here.
2017 Standard FHA Loan Limits:
2017 FHA Jumbo Loan Limits for high cost areas:
FHA Mortgage Insurance Rates
1. Up Front Mortgage Insurance Premium (UFMIP)
The first fee is charged up front, and is fittingly called the Up Front Mortgage Insurance Premium or UFMIP:
- The Up Front Mortgage Insurance Premium equals 1.75% of the proposed mortgage amount.
For FHA loans, the UFMIP is calculated at 1.75% of the proposed loan amount and then rolled into the mortgage to be paid over the life of the loan. For example, if you want to get an FHA loan for $100,000 dollars, the UFMIP would be $1,750 , which is added into the mortgage for a final loan amount of $101,750. The UFMIP is the same rate for all FHA loans and borrowers.
2. Annual Mortgage Insurance Premium (MIP)
The second FHA mortgage insurance fee is the Annual Mortgage Insurance Premium or MIP. This insurance fee varies based upon the loan type, loan amount and loan term:
- The Annual Mortgage Insurance Premium is calculated based on several factors including the proposed loan amount, loan-to-value ratio and term length.
- FHA loans with a term length greater than 15 years carry an annual MIP of 1.3% to 1.55%.
- FHA loans with a term length less than 15 years carry an annual MIP of .45% to .95%.
- For FHA loans with an LTV of over 90%, the Annual MIP will be collected for the life of the loan.
- For FHA loans with an LTV of less than 90%, the Annual MIP will be collected for 11 years.
To establish your annual MIP, the term length is considered. Then, the Loan-to-Value (LTV) must be factored in, as well as if the loan is a “Jumbo” or not. Your Annual MIP is then calculated as a percentage of your total loan amount, which is then divided by 12 and added to your monthly payments.
What steps are involved with the FHA loan application process?
Some of the important steps that need to be completed for an FHA Loan Approval are:
- Initiate contact with an FHA Lender
- Compare interest rates and closing costs
- Lean about current FHA Loan Requirements and FHA Loan Limits for your area
- Complete an FHA Loan Application
- Provide your FHA Loan Lender with all requested documentation
- Close the FHA Loan Transaction
What documentation do lenders require from FHA loan applicants?
Once you’ve initiated your loan application, your lender needs certain documentation to verify you meet FHA qualifications. Some of the documentation your lender will request includes:
- W-2s for the past two years.
- 2 most recent year-to-date paycheck stubs (within 30 days).
- Residence Address – Past 2 years and landlord information if applicable.
- Name and address of each employer for the past 2 years.
- 2 years’ tax returns, including all schedules if self employed or commission (1099).
- Last 2 months bank statements for all checking, savings, investment and retirement accounts (all pages included).
- Divorce Decree and 12 months’ proof of child support, when applicable.
- Address of other real estate owned.
- Loan information on all real estate owned.
- Copy of your Drivers License and Social Security Card.
- Copy of the sales contract for the subject property with all addendums if applicable.
Once your application and all of the requested documentation has been submitted, it will be verified by an FHA DE Underwriter who can then issue an FHA loan approval if all requirements have been met.
Additional requirements for FHA Loans
Additionally, applicants must meet the following basic citizenship requirements:
- Have a valid US Social Security Number (SSN)
- Be a legal U.S. resident
- Be at or above the legal age to sign on a mortgage per state law. There is no maximum age limit for a borrower.
Even if you are not a U.S. citizen, you must have a valid Social Security Number (SSN). A Tax ID number (ITIN) does not qualify as an acceptable substitute for a SSN.