FHA Loan
FHA Loans are governed by the Housing of Urban Development (HUD), which offers flexible guidelines for borrowers with limited down payment funds and an imperfect credit history. Since FHA loans require lower credit scores and down payments, they are especially popular among first-time home buyers.
What is a FHA Loan?
An FHA loan can be a good option for individuals who have a lower credit score, a smaller down payment, or a higher debt-to-income ratio.
Here are some situations when you might consider getting an FHA loan:
- You have a lower credit score: FHA loans are available to borrowers with credit scores as low as 500, although a score of 580 or higher is generally required to qualify for the lowest down payment option. If you have a lower credit score and don’t qualify for a conventional loan, an FHA loan could be a good option.
- You have a smaller down payment: FHA loans require a minimum down payment of 3.5%, which is lower than the 5% to 20% required for most conventional loans. If you don’t have a large down payment saved up, an FHA loan could make homeownership more accessible.
- You have a higher debt-to-income ratio: FHA loans are more forgiving of high debt-to-income ratios than conventional loans. If you have a lot of debt relative to your income, an FHA loan could be a good option.
- You’re a first-time homebuyer: FHA loans are a popular choice for first-time homebuyers because of their lower down payment requirements and more flexible credit standards.
- You’re buying a fixer-upper: FHA 203(k) loans are designed to help borrowers finance both the purchase of a home and the cost of repairs or renovations. If you’re buying a fixer-upper, an FHA 203(k) loan could be a good option.
What is the maximum amount you can borrow on an FHA loan?
The maximum amount you can borrow on an FHA loan which is set by The Federal Housing Administration is $472,030 in most areas. Moreover, for FHA borrowers in high-cost areas, the maximum loan limit for a 1- unit property in a high-cost county is $1,089,300. Special exception, loan limits in Alaska, Hawaii, Gaum, and the U.S. Virgin Islands cap single-family home loans at $1,633,950.
The following is true of Direct Mortgage Loans FHA Loans:
- 3.5% down payment.
- Flexible use of gift funds and grants for a down payment.
- Flexible qualifying credit – it’s possible to qualify with a lower credit score.
- Upfront mortgage insurance may be financed or paid at the closing table.
FHA Loan Limits
| Property Size | Low-Cost Area “Floor” | High-Cost Area “Ceiling” | Alaska, Hawaii, Guam, U.S. Virgin Islands “Ceiling” |
|---|---|---|---|
| One-Unit | $472,030 | $1,089,300 | $1,633,950 |
| Two-Units | $604,400 | $1,394,775 | $2,092,150 |
| Three-Units | $730,525 | $1,685,850 | $2,528,775 |
| Four-Units | $907,900 | $2,095,200 | $3,142,800 |
Qualifying for an FHA Loan
Credit Score
Flexible qualifying credit makes these types of home loans a popular option for those with lower credit scores. To qualify for an FHA loan, your FICO score needs to be at least 580.
Debt-to Income Ratio
Your debt-to-income ratio is the percentage of your gross income used to cover your mortgage and other debt payments. The preferred DTI ratio for FHA loans is 43% although this may vary based on your credit score.
Down Payment
A down payment of 3.5% is the minimum amount needed, while 5% down covers most others. If you’re short on funds, there are several DPA programs available that can help!
Mortgage Insurance
All FHA borrowers, no matter how much of a down payment they make, must purchase both upfront and annual mortgage insurance.
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