A home is the largest purchase most people will ever make, and many buyers rely on mortgage financing. However, some will struggle with getting approved for a loan, which is something that could result in the transaction falling through for you as a real estate agent. That’s where FHA loans can save the day for everyone.
FHA loans, backed by the Federal Housing Administration, offer low down payments and flexible qualification requirements. This makes it possible for buyers who might not qualify for traditional loans to still secure financing. As a real estate agent, understanding FHA loan requirements can allow you to guide your clients towards homeownership, close more deals, and earn the trust of first-time homebuyers.
FHA vs conventional loan eligibility requirements
To give you a rough idea of just how much easier it can be to qualify for an FHA loan, I’ve compared the requirements and features of FHA loans and conventional loans below. Note that specific requirements can vary depending on the specific type of mortgage loan being used, as well as the lender offering the financing. However, you can consider these relatively typical requirements.
| FHA mortgage loan | Conventional mortgage loan | |
| Credit score | 500 | 620 |
| Income required (debt-to-income ratio) | 50% | 36% to 45% |
| Minimum down payment | 3.5% | 3% to 20% |
| Occupancy | Owner-occupied | Owner and non-owner occupied allowed |
| Maximum loan amount | $524,225 to $2,326,875 | $806,500 to $2,326,875 |
| Amount of paperwork/documentation involved | Heavy | Moderate to heavy |
| Funding speed | 30 to 60 days | 15 to 30+ days |
| Mortgage insurance requirement | Up-front and monthly payments | Monthly; required if down payment is less than 20% |
As you can see, qualifying for an FHA loan can be easier, which is why many borrowers should consider an FHA loan if they are having trouble getting approval for a conventional loan. Now, let’s move on to the details of each qualification category.
Credit score
Credit scores are used by lenders to determine your likelihood of defaulting on a loan. Your score is based on a snapshot of your credit profile, and considers how you’ve handled debt in the past in order to determine whether you exhibit characteristics of potentially defaulting in the future.
The Federal Housing Administration mandates that the minimum credit score for an FHA loan is 500. However, since FHA loans are only insured by the government and are offered by private lenders, those lenders may have higher credit score requirements as a way to minimize their risk exposure.
For lending purposes, most lenders use a version of a FICO score ranging from a low of 300 to a high of 850, which considers the following items in calculating your score:
- Payment history: Having a history of on-time payments helps boost your credit score. If you do have late payments, they’ll have less of an effect as time goes on.
- Amounts owed: This considers the number of accounts you have with a balance, as well as how much credit you’ve utilized. To maximize points here, keep your balances low in relation to your credit limits (I recommend less than 10%), and try to only have balances on a small handful of accounts.
- Length of credit history: The longer you’ve had credit, the better you’ll score in this category. This also considers the average age of your accounts, so limiting new account applications can help keep that average age higher.
- New credit: Borrowers who apply for credit frequently are seen as more risky in the short term, something that is detrimental to a credit score.
- Credit mix: Having experience with more types of credit can be beneficial to your credit as it demonstrates your ability to handle different repayment terms. Examples of different types of credit include revolving accounts (like credit cards), mortgages, auto loans, and student loans.
Income requirements
When it comes to income, FHA lenders will generally allow a maximum of a 50% debt-to-income ratio (DTI). The DTI is calculated by taking the sum of all your monthly payments and dividing it by your gross monthly income. However, there’s more that goes into that figure.
The 50% figure is typically only allowed for borrowers with compensating factors. A common example of this can include the ability to demonstrate a high amount of financial assets that the borrower can tap into should there be a temporary loss of income. Another compensating factor could be a large down payment, typically 10% or more. Another example can include borrowers with high credit scores (I recommend 700 or greater). Ultimately, however, lenders usually take a holistic view of an applicant’s situation to determine what will be sufficient to justify a higher DTI.
Finally, FHA lenders will consider what is called the front-end ratio, or the amount of the housing payment in relation to the borrower’s gross monthly income. This limit will generally be 31%. Housing payments will include the mortgage loan’s principal and interest portion, property taxes, homeowner’s insurance, and homeowner’s association (HOA) dues if applicable.
Minimum down payment
The minimum down payment on an FHA is just 3.5%, calculated from the home’s purchase price. For example, if your client is purchasing a home for $300,000, the minimum down payment would be $10,500.
The down payment required is, however, dependent on your credit score. For a 3.5% down payment, you must have a credit score of at least 580. If your credit score falls between 500 and 579, the minimum down payment goes up to 10%.
Note that in some cases, lenders may refer to the minimum down payment as a minimum required investment amount.
Occupancy
FHA loans require you to occupy the home as your primary residence. In other words, the property cannot be a seasonal vacation home. Investment homes are generally not allowed, but if you’re purchasing a multi-unit home and you reside in at least one of the units, you’re free to rent out the other units as you please. In general, it’s expected that at least one of the individuals applying for the FHA loan must reside in the property for at least a year.
Life can be unpredictable, so there may be some exceptions allowed in the event that you need to move out before the 12-month clock runs out. For instance, if you’re in the military and are called to active duty elsewhere, you’ll be allowed to have a family member reside in the home. Or, if you obtain a new job that requires you to relocate, you can typically be allowed to use another FHA loan even if it’s within the one-year timeframe.
Although rare, proof of occupancy can be requested by lenders. Utility bills, government-issued forms of identification, and pay statements can be used to establish proof of residency at the home in question. Occupancy fraud is treated quite seriously and may result in fines, penalties, and the requirement to pay your loan in full immediately.
Loan amount
The loan amount you get must be within FHA’s loan limits. These loan limits can be as low as $524,225 or as high as $2,326,875 for high-cost areas. The limits can fluctuate based on the location and type of property, such as whether it is a 1-unit single-family home or a 4-unit property.
Find out your specific property’s loan limits on the HUD website.
Paperwork and required documentation
While FHA loans can offer competitive rates and an easier path to approval compared to other mortgage loan types, it will make you work for it, as documentation requirements can be heavy. Below are common items that will be required from not only yourself, but third-party vendors as well:
- Income: This can often require your two most recent pay stubs, two years of W-2s, and two years of personal and/or business tax returns.
- Assets: As proof of sufficient funds for down payment or reserve requirements, you may be asked to provide two to three months’ worth of bank statements.
- Appraisal: To ensure the property meets FHA’s standards, an appraisal will be required to determine the home’s value and condition.
- Title report: A title report will ensure the legal ownership of the property, as well as the presence of any liens or judgments that may need to be paid off to complete the purchase transaction.
- Purchase contract: The purchase agreement will be evaluated to determine the agreed-upon purchase price and any other details of the transaction, such as seller credits, concessions, or other items included with the sale of the home.
Mortgage insurance
If you get an FHA loan, you’ll be required to make mortgage insurance payments as part of your regular monthly mortgage payment. Additionally, you’ll have an upfront mortgage insurance premium that must be paid, although this cost can be rolled into your loan amount.
Upfront mortgage insurance carries a cost of 1.75% of the loan amount, while the amount of the monthly mortgage insurance will vary depending on the details of your loan. The monthly portion of the mortgage insurance must be paid for 11 years if you make a down payment of 10% or more. Otherwise, the payments will persist for the life of the loan.
Note that mortgage insurance on an FHA loan cannot be canceled the way it can be on a conventional loan. Additionally, mortgage insurance only serves to protect the lender in the event of a default, as the funds collected from mortgage insurance are what allow the FHA to cover lenders for costs associated with defaults.
Looking to help your first-time home buyer clients out even more? Check our agent’s guide to the top tips for first-time home buyers.
Pros & cons of FHA loans
FHA loans carry a lot of positive attributes, but depending on your circumstances, they won’t necessarily be the best option. Consider some of the following pros and cons before you decide to get too far into the application process for an FHA loan.
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- Easier credit qualification requirements: It’s possible to get approved with a credit score as low as 500. Many other mortgage loans, by comparison, require 620 or above.
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- Low minimum down payment: If you’re strapped for cash, you can get approved with as little as a 3.5% down payment. Other loan types, while they may offer similarly low down payment requirements, only do so under a more limited set of circumstances.
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- More flexible DTI thresholds: With the ability to go to DTI ratios as high as 50% (or more in certain cases), it’s easier to get approved when compared to the more traditional maximum DTI limits of 45% and below for many other mortgage loan types.
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- Slower funding speed: Due in part to the extra paperwork requirements involved, FHA loans tend to take longer for lenders to review and issue loan approvals.
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- Less suitable for investors: Since the FHA requires at least one of the FHA loan applicants to live in the property as their primary residence, utilizing a property for investment purposes is really only possible for multi-unit homes.
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- Heavier paperwork than some other mortgage loan types: The amount of paperwork required for an FHA loan to get approved and funded is typically far greater than that of a more traditional conventional loan. It’s not uncommon for borrowers to get frustrated with the need to search for and dig up old paperwork to support their eligibility for a mortgage loan.
Where to get an FHA loan
You can get an FHA loan at any number of banks, credit unions, online lenders, or loan brokers. Each has its own unique set of pros and cons, and I recommend shopping rates with multiple lenders to ensure you find one that’s offering the best rates, best experience, and the best flexibility of qualification requirements to suit your needs.
The Close has compiled a list of the best mortgage lenders that I recommend you check out, all of which offer FHA loans. If you want to shop elsewhere, also consider the following types of lenders:
- Bank: Banks can often offer the widest range of loan offerings, but the downside is that they typically have stricter qualification requirements and slower funding speeds.
- Credit union: Credit unions may offer slightly more competitive rates and terms, along with qualification requirements that more closely mirror the minimums set forth by the FHA. One downside, however, is that credit unions tend to use more outdated technology, so your online and mobile experience may not have all the bells and whistles you’re used to.
- Online lender: Online lenders can offer some of the most competitive rates and terms, as well as flexibility in qualification requirements. This is made possible because online lenders don’t have overhead costs associated with physical branch locations, but the flip side is that it can also be difficult to meet with someone in person if you have questions or concerns about your loan.
- Loan broker: Loan brokers have a network of lenders they work with. As a borrower, this can provide you with a white glove experience, as you’ll have someone pairing you with the best lender for your needs and circumstances, saving you time from applying to multiple lenders on your own. Some brokers do charge for this service, however, and you’ll usually see it reflected in the form of high rates and closing costs.
Alternatives to FHA loans
FHA loans may not be the right fit for you or your clients. For starters, FHA loans aren’t the best fit for those looking to buy a property for investment purposes. They’re also difficult to get approved for if the property is in need of repairs, and the maximum amount of financing can also be limited.
If you find yourself in any of these situations, consider the following financing alternatives.
Kiavi: Best for high loan amounts
With the ability to offer loans of up to $10 million, Kiavi is a good alternative if you need more financing than what’s available in an FHA loan product. Kiavi’s jumbo loans carry rates as low as 8.25%, the ability to lend up to 90% of the purchase price, and have repayment terms between 12 and 24 months with interest-only and extension options. Additionally, Kiavi charges no application fees, requires no appraisal, and does not require income verification.
RCN Capital: Best for long-term rental properties
With rates as low as 5.75% for long-term rentals, choosing RCN Capital was a no-brainer, as most other lenders have much higher starting rates. On top of this, however, RCN Capital also provides for a wide range of payment options such as 30-year fixed terms, hybrid ARMs, and interest-only. The downside here is that compared to FHA loans, you’ll need to have a higher minimum credit score of 660, as well as a minimum 20% down payment for purchases.
Lima One Capital: Best for fix-and-flips
If you’re not able to qualify for an FHA loan because the property is in need of repairs, Lima One Capital is my pick for the best fix-and-flip lender. You’ll be able to cover 100% of the rehab costs with 4-day draws, get financing as high as $5 million, and defer payment of loan origination fees when you exit the property. 1-4 unit properties are eligible, and you can choose repayment terms of up to 24 months.
Frequently asked questions (FAQs)
What is an FHA loan?
An FHA loan is a government-backed loan that’s offered by private lending institutions. They’re designed to expand homeownership by allowing for increased flexibility for certain qualification requirements, while still maintaining a good level of affordability with competitive rates and terms.
How long does it take to get an FHA mortgage loan?
It can take between 30 and 60 days to get an FHA loan. This time is needed for the lender to evaluate your loan application and your qualifications, as well as for third-party vendors, such as title and appraisal companies, to complete their inspections and applicable reporting.
Is it hard to get an FHA loan?
Yes and no. It can be easy to get an FHA loan in the sense that many of the qualification requirements are easier to meet compared to more traditional conventional loans. However, it can also be difficult in the sense that FHA loans often require much more paperwork, which can lead to frustration on the part of the loan applicants.
Why should I or my clients consider an FHA loan?
FHA loans can offer an easier path to homeownership, as the eligibility criteria for many items are easier to meet. FHA loans have lower credit score requirements, lower down payments needed, and allow for a higher debt-to-income ratio.
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