Since its creation in 1934, the Federal Housing Administration (FHA) has assisted more than 34 million Americans in achieving their dreams of homeownership. The FHA has done this by insuring home loans. This government insurance removes the borrower risk from lenders and allows them to offer home loans with more relaxed eligibility requirements. These easier requirements make getting a home loan possible for Americans who have less-than-perfect credit and little cash on hand for down payments or home fees. Ultimately, because FHA Loans are backed by the FHA, FHA approved lenders are assured they’ll be paid by the government if borrowers default on their loans and moderate borrowers have a stronger likelihood of getting a home loan.
Now that you know what an FHA loan is, how do you find out if you can get an FHA loan? What are the FHA loan eligibility requirements? Read on to learn more.
Eligibility Overview for FHA Loans
FHA loans are not intended to be used for second homes, rentals, or commercial properties, but rather, for primary or principal residences. For this reason, one of the first eligibility requirements of FHA loans is that you must fully intend to use the home as your primary residence. After the loan papers are signed, you must move into the property within 60 days of closing and reside in the home for at least one year. Also, the FHA mandates that they will insure homes that are one- to four-unit properties, only if you intend to use at least one of those units as your primary residence.
The minimum qualifications for FHA loan applications include:
- Occupancy Requirements
- Plan to use the home as your primary residence
- Must move into the property within 60 days of closing
- Must reside in the home for at least a year
- Two years of steady employment history or work with the same employer
- Two years of solid credit history, preferably free of late credit payments
- Ability to make a down-payment of 3.5% or more
- Ability to make the monthly payments, along with the FHA mortgage insurance premium
- Appraisal by an FHA-approved appraiser to determine that FHA standards are met
Property Types That Are Eligible With An FHA Loan
There are a number of different property types that are eligible for FHA mortgage loans:
- Condominiums - one unit of a multi-unit complex, which includes the space inside and the inner walls of the home and shared ownership of the common areas in the surrounding complex. Owners of condos should also factor HOA dues into their monthly housing costs. If you’re thinking of using an FHA loan to buy a condo, just remember that the whole condominium community has to meet the eligibility requirements for FHA loans.
- Townhomes - a one-unit property that is attached to other units in a row, which shares a wall and a roof with the units next door. These properties conform to the FHA’s eligibility requirements.
- Manufactured homes - a home which is constructed in a manufacturing facility, transported to a property, and then fixed to a foundation on a permanent basis. To meet FHA eligibility requirements, it must have been built after June 15, 1976, be an immobile structure, meet stringent safety guidelines, be at least 400 square feet. Also considered by the FHA for eligibility will be the elevation of the land it rests on, the foundation, and the borrower’s ownership of the that land.
- Single-family homes - a property that stands alone or shares a single common wall with another property. In the latter case, there cannot be any means of access from the other property into your home.
- Multi-unit properties - a property with multiple units, one of which the borrower intends to use as their primary residence. The property can have no more than four units total to be eligible for FHA insurance.
FHA loans can also be used to rehabilitate a property, via the FHA 203k loan program. This program is often used by buyers to upgrade a property after purchase through cosmetic changes, like carpet, cabinets, or paint.
How Credit History Affects Your FHA Loan
You don’t need to have perfect credit to be approved for an FHA loan. While conventional lenders usually look for credit scores of 700 or higher, FHA lenders will qualify borrowers with scores of 580 or higher and will allow as many as two 30-day-late payments on your credit history. You may also qualify for an FHA loan if your credit score is between 500 and 579, however, the required down payment increases from 3.5% to 10%.
FHA applies this same leniency to people who come to the table with no credit history at all. In place of a credit history, FHA lenders will use proof of payment and recent utility bills to get a more complete picture of an applicant’s creditworthiness.
Can I get an FHA Loan If I Have Had a Foreclosure, Bankruptcy, or Short Sale?
Even severe financial missteps like foreclosures, bankruptcies, and short sales won't bar you from obtaining an FHA loan. FHA guidelines allow anyone who has experienced a short sale, bankruptcy, or foreclosure to qualify after just 12 months, if they can prove their financial hardship was caused by “extenuating circumstances,” leading to loss of income and/or employment, and if they can demonstrate that they’ve achieved financial stability since then.
FHA Loan Income Requirements
The FHA and their approved lenders want to have confidence that you will be able to make your monthly payments after the loan application process in closed. They do this by asking for evidence of at least two years of continuous employment, preferably with steady or increasing income, and very few gaps of unemployment.
It’s also important to the FHA how your income matches up to your debt, calculated as the percentage of your gross monthly income that you pay for your mortgage. This is called your debt-to-income ratio.
The FHA will allow a debt-to-income ratio as high as 30% – more lenient than the 28% maximum required by most conventional loans. For example, if you had a monthly income of $4,500, the FHA would allow your monthly mortgage payment to be as high as $1,350. Compare that to the $1,260 maximum payment that a conventional loan would allow, and you start to see the financial benefits of an FHA loan.
Required Documents For An FHA Loan Application
If you meet all of the FHA loan eligibility requirements we’ve discussed and you’re ready to move forward, it’s time to start gathering documents. This checklist of required documents will give you a headstart:
- Social Security card
- Gross monthly income at current employer
- Current paycheck stubs
- Past two years of W-2 forms
- Past two years of personal tax returns
- Bank account information
- Evidence of residence for the past two years
- History of past two years of employment
- Information on all active loans
- Information on any other owned real estate
- Approximate value of all personal property
FHA Loan Down Payments
FHA down payment requirements – at least 3.5% down if your credit score is above 580 and 10% down if your score is between 500 and 579 – are far below those you will find with conventional loans, which are anywhere from 5% to 20%.
To see what a difference an FHA 3.5% down payment makes, imagine that you’re buying a $300,000 home. With an FHA mortgage, your down payment could be as low as $10,500. But the down payment on a conventional loan could be $15,000, $30,000, or even $60,000.
These are exactly the kind of large down payments on conventional loans that keep many would-be buyers out of the market and they are exactly why the FHA was created.