FHA Loan Requirements
Borrowers must meet certain requirements to qualify for an FHA loan. For example:
- The home you consider must be appraised by an FHA-approved appraiser.
- You can only get a new FHA loan for your primary residence, which means it can’t be an investment property or second home.
- You must occupy the property within 60 days of closing.
- The loan requires an inspection, and the inspection must report whether it meets minimum property standards.
There are a few more specific conditions to qualify, including a down payment amount, mortgage insurance, credit score, loan limits and income requirements. We’ll explore these conditions in more depth below.
FHA Loan Down Payments
Your down payment is a percentage of the purchase price of a home and is the amount you put down for that home. The minimum down payment you’re required to make on an FHA loan is directly linked to your credit score. Your credit score is a number ranging from 300 – 850 that’s used to indicate your creditworthiness.
An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans. A mortgage calculator can help you estimate your monthly payments, and you can also see how your down payment amount affects them.
Note that cash down payments can be made with gift assistance for an FHA loan, but they must be well-documented to ensure the assistance is truly a gift and not a loan in disguise.
FHA Mortgage Insurance
You’ll pay a mortgage insurance premium (MIP) for all FHA loans – similar to private mortgage insurance (PMI) for a conventional loan. Mortgage insurance protects your lender against losses if you default on your loan.
How Long Do You Have To Pay Mortgage Insurance For An FHA Loan?
In most cases, you pay mortgage insurance for the life of an FHA loan. The exception is if you made a down payment of at least 10% – in that case, MIP would be on the loan for the first 11 years). FHA loan mortgage insurance is first charged as an upfront mortgage insurance premium, which normally amounts to 1.75% of your loan amount.
FHA borrowers also pay an annual mortgage insurance premium, which is based on the term (length) of your mortgage, your loan-to-value (LTV) ratio, your total mortgage amount and the size of your down payment. Annual MIP payments run approximately 0.15% – 0.75% of the loan amount.
FHA Loans Credit Score
Several factors determine your credit score, including:
- The type of credit you have (credit cards, loans, etc.)
- Credit utilization, which is how much credit you use
- Whether you pay your bills on time
- The amount you owe on your credit cards
- How much new and recent credit you’ve taken on
FHA Home Loan DTI
If you have a higher credit score, you might qualify with a higher debt-to-income ratio, or DTI. DTI is your total monthly debt payments divided by your monthly gross income (your monthly income before taxes). This figure is expressed as a percentage.
How To Calculate Your DTI
To determine your DTI, divide your debts by your monthly gross income. For example, if your debts – which include your student loans and car loan – reach $2,000 per month and your income is $8,000 per month, your DTI is 25%.
The lower your DTI, the better off you’ll be. If you have a higher DTI, you could still qualify for an FHA loan if you have a higher credit score.
The FHA says your monthly mortgage payment should be no more than 31% of your monthly gross income. Meanwhile, your DTI should not exceed 43% of monthly gross income in certain circ*mstances if your loan is being manually underwritten. As noted above, you may qualify with a higher DTI if you have a higher credit score.
FHA Income Requirements
Your eligibility for an FHA loan doesn’t hinge on a particular income amount, but you must prove you have a steady employment history. Your income must be verifiable by sharing pay stubs, W-2s, federal tax returns and bank statements with your lender. Your lender may ask for other examples of verification as well.
Types Of FHA Home Loans
There are several types of FHA loans. The type you choose limits the type of home you can buy and how you can spend the money you receive. This makes it especially important to be sure you’re getting the right type of loan. If none of the loan types discussed next match your goals, you might want to consider another type of government loan.
Purchase
When purchasing a home, you can put as little as 3.5% down if you have a median FICO® Score of 580. If you have a score that low, you’ll need to keep an equally low DTI. Rocket Mortgage requires a ratio of no more than 38% before your mortgage payment is included, and no more than 45% once it’s included.
If your median FICO® Score is 620 or higher, you may be able to qualify with a higher DTI. In no event will your DTI be able to rise above 57%.
At Rocket Mortgage, you can purchase up to a two-unit property with an FHA loan.
FHA Rate-And-Term Refinances
Let’s say you have a different type of mortgage and interest rates are falling. Perhaps you’re interested in refinancing to take advantage of better mortgage rates but your credit profile has taken a hit.
An FHA refinance could be a good option because of its less stringent credit requirements. You can use this to lower your rate or change your term with a FICO® Score median as low as 580, assuming you have a low DTI. You may be able to carry more debt into the transaction if your median FICO® is 620 or higher.
Depending on the amount of equity you carry into the rate-and-term refinance, you could end up paying mortgage insurance premiums for the life of the loan in addition to an upfront premium. If you’re already in an FHA loan, you can save some money on your rate-and-term transaction.
FHA Streamline
An FHA Streamline Refinance allows homeowners with an FHA loan to do a rate-and-term refinance with a few special benefits. To begin with, you may be able to refinance to a lower rate.
The logic here is that if you have a more affordable payment, you’re more likely to stay in your home and pay it off, which is good for the FHA. You’ll also usually be able to get a lower mortgage insurance rate because the MIP for FHA Streamlines is 0.55% of your loan amount each year. Additionally, the upfront MIP is only 0.01%.
Another benefit of FHA Streamlines is reduced documentation. Every situation is different, but because you already have an existing FHA loan, you may need less documentation for:
- The appraisal
- Employment verification
- Income and assets
FHA Streamline Requirements
If you don’t have an existing home loan with Rocket Mortgage, we require a 640 median FICO® Score. If your loan is with us, the required median FICO® Score is 580.
Timing is also important: You must make at least six payments on your current loan before you can be approved for a Streamline. Also, at least 210 days must pass between the first payment you make on your current loan and the first payment on the new Streamline.
Finally, you have to be up to date on your loan. For the purposes of an FHA Streamline, that means having no 30-day late payments in the last 6 months and only one payment that’s 30 days late in the last year.
FHA Cash-Out Refinance
It’s also possible to get a cash-out refinance with an FHA loan. Rocket Mortgage requires a minimum median credit score of 620 for an FHA cash-out refinance. The FHA requires that if you convert your property value into cash, you leave at least 15% equity in your home.
If you’re doing a cash-out refinance, you’ll need full documentation of income and assets, as well as employment verification.
FHA 203(k) Loan
While Rocket Mortgage doesn’t offer this particular loan, an FHA 203(k) loan allows you to buy a home and make renovations on a single loan. While it’s possible to only make renovations with a 203(k) loan, this usually isn’t your most affordable choice.
The minimum FHA 203(k) loan balance is $5,000, so you can’t borrow less than this. Any home repairs or improvements you make must conclude within 6 months in order to stay within your loan terms.
Some eligible projects you can complete with a 203(k) loan include:
- Replacing old or dangerous flooring
- Making improvements to the home’s modernization (This can include adding systems such as central air.)
- Adding or replacing roofing, sections of gutters or plumbing
- Making accessibility improvements for disabled people who live in the home
- Making structural repairs and changes to the home’s foundation
There are two types of 203(k) loans: Standard loans and Limited loans. Limited loans require less paperwork for approval, while Standard loans give you more freedom to repair your property.
