What an FHA loan is

An FHA loan is a mortgage backed by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The government does not lend you the money directly — a bank or mortgage company does. What the government does is promise to cover the lender's loss if you stop paying. This promise lets lenders offer mortgages to people who might not meet the stricter rules of a conventional loan.

The main difference you will notice is the down payment. With a conventional loan, lenders typically want 10 to 20 percent down. With an FHA loan, you can put down as little as 3.5 percent. You will also pay mortgage insurance — a monthly fee that protects the lender if you default. This insurance is required for the life of the loan if your down payment is less than 10 percent.

FHA loans are used to buy a primary residence — the home where you will live most of the time. You cannot use an FHA loan to buy a second home or an investment property. The home itself must meet FHA standards for safety and condition, which means the lender will order an appraisal that checks for things like working plumbing, a sound roof, and no major structural damage.

Key Takeaways

  • An FHA loan requires a down payment as low as 3.5 percent, but you will pay mortgage insurance for the life of the loan if you put down less than 10 percent.
  • You must have a credit score of at least 580 to get an FHA loan with the minimum down payment, though some lenders require 620 or higher.
  • Your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — cannot exceed 43 percent for most lenders.
  • The home must be your primary residence and must pass an FHA appraisal that checks for safety and structural soundness.
  • You need a Social Security number, valid immigration status, and a U.S. bank account to get an FHA loan.

Credit score and debt requirements

Most lenders will not approve an FHA loan if your credit score is below 580. Some lenders set their own floor at 620 or higher. Your credit score reflects your history of paying bills on time, how much debt you carry, and how long you have had credit accounts open. If your score is below 580, you will need to work on it before explore — paying down debt, correcting errors on your credit report, or making on-time payments for several months.

Lenders also look at your debt-to-income ratio, which is the percentage of your gross monthly income that goes to debt payments. This includes your new mortgage payment, car loans, student loans, credit card minimums, and any other regular debt. Most lenders will not approve you if this ratio exceeds 43 percent. Some will go up to 50 percent if you have strong credit and savings, but 43 percent is the standard.

To calculate your ratio, add up all your monthly debt payments and divide by your gross monthly income (before taxes). For example, if you earn $4,000 a month and your total debt payments are $1,500, your ratio is 37.5 percent. The new mortgage payment will be added to this number, so the lender will estimate what your payment would be on the loan amount you are seeking and include that in the calculation.

Income and employment verification

Lenders need to see that you have a stable income to make your mortgage payment. You will need to provide recent pay stubs — usually the last two months — and tax returns from the past two years. If you are self-employed, the lender will want to see profit-and-loss statements and may ask for three years of tax returns to show your income is stable.

If you recently changed jobs, the lender will want to see a letter from your new employer confirming your position and salary. If you have been at your current job for less than two years, you may need to explain any gaps in employment or job changes. Lenders are looking for a pattern that suggests you will still be earning money when you are making mortgage payments years from now.

Income from Social Security, pensions, disability, or other government programs counts toward your income. You will need to provide documentation — a benefit statement or award letter — to prove the amount and that it will continue. If you receive alimony or child support, you can count it, but you must provide a court order or settlement agreement showing the amount.

Down payment and savings requirements

The minimum down payment for an FHA loan is 3.5 percent of the home's purchase price. If you are buying a $200,000 home, your down payment would be $7,000. You do not have to save this money yourself — it can come from a gift. Family members, employers, nonprofits, and government programs can all give you down payment information. The lender will ask you to document where the money came from, but a gift does not have to be repaid.

Lenders also want to see that you have savings after closing — money left over after you pay the down payment and closing costs. This is called reserves. The amount varies by lender, but many want to see at least two months of your new mortgage payment in savings. If you have very little savings, some lenders will still approve you, especially if your credit and income are strong. Ask your lender what their reserve requirement is before you explore.

Closing costs — the fees charged by the lender, appraiser, title company, and others — typically run 2 to 5 percent of the loan amount. With an FHA loan, the seller can pay up to 6 percent of the purchase price toward your closing costs. This means if you are buying a $200,000 home, the seller could pay up to $12,000 of your closing costs, reducing the amount you need to bring to closing.

Citizenship and documentation

You must be a U.S. citizen or have a valid green card to get an FHA loan. You will need to provide a Social Security number and proof of identity — a driver's license, passport, or state ID. If you are a permanent resident, you will need to show your green card or a receipt showing you have applied for one.

You will also need a U.S. bank account. The lender will verify your account and may ask for bank statements from the past two months to confirm your savings and down payment source. If you do not have a bank account, you will need to open one before you explore.

Property requirements and appraisal

The home you are buying must meet FHA standards. This does not mean it has to be new or perfect, but it must be safe and structurally sound. The lender will order an FHA appraisal, which is more thorough than a standard appraisal. The appraiser checks for things like working plumbing and electrical systems, a roof that does not leak, no major cracks in the foundation, and no evidence of mold or pest damage.

If the appraisal finds problems, the seller can agree to fix them before closing, or you can negotiate a lower price to account for the repairs. If the problems are serious — like a roof that needs replacement or foundation damage — the lender may not approve the loan until they are fixed. This is why it is important to have a home inspection done before you make an offer, so you know what you are getting into.

The appraisal also determines the home's value, which affects how much you can borrow. If the home appraises for less than the purchase price, the lender will base the loan on the lower amount, and you will need to make up the difference in cash or renegotiate the price with the seller.

Frequently Asked Questions

Can I get an FHA loan if I have had a foreclosure or bankruptcy?

Yes, but you will need to wait. Most lenders require at least three years after a foreclosure and two years after a bankruptcy discharge before you can get an FHA loan. Some lenders will go shorter if you can show that the foreclosure or bankruptcy was caused by a one-time event like a job loss or medical emergency, and that your finances have been stable since.

What happens if the home does not pass the FHA appraisal?

The seller can repair the problems and have the home re-appraised, or you can renegotiate the price. If the problems are too expensive to fix or the seller will not fix them, you can walk away from the deal without losing your earnest money deposit. The lender will not approve the loan until the issues are resolved.

Can I use an FHA loan to buy a condo or townhouse?

Yes, but the building must be FHA-approved. The lender will check whether the condo complex or townhouse community meets FHA standards, which includes rules about how many units can be owner-occupied versus rented out. Ask your real estate agent or lender whether the property is FHA-approved before you make an offer.

Do I have to pay mortgage insurance for the entire loan?

If your down payment is 10 percent or more, you can request to have mortgage insurance removed after you have paid the loan down to 80 percent of the home's original value. If your down payment is less than 10 percent, mortgage insurance is required for the life of the loan, no matter how much you have paid down.

What is the maximum loan amount for an FHA loan?

The maximum varies by county and changes each year. In most areas, the limit is between $420,000 and $970,000, depending on local home prices. Your lender can tell you the limit for your county. The amount you can actually borrow also depends on your income and debt, so the county limit is a ceiling, not a may provide.