FHA Loan Requirements

Federal Housing Administration (FHA) loans can help you get better interest rates on your mortgage from a private lender, bank or credit union. FHA loans work by guaranteeing your mortgage with mortgage insurance from the federal government. This reduces the risk to the lender, therefore making it easier for you to get your loan application accepted. In order to qualify for an FHA loan, there are a couple key requirements that you must meet.

FHA Mortgage Insurance Requirements

Mortgage loans backed by FHA mortgage insurance are typically for borrowers who are making down payments of less than 20 percent. While FHA mortgage insurance can get you a better interest rate, you will still have to pay annual mortgage insurance premiums, part of which must be paid upfront. As of October 4th, 2010, mortgage loans with down payments equal to or greater than 5 percent of the value of the home will be charge an annual premium of 0.85 percent. Loans with down payments below 5 percent pay annual mortgage insurance premiums of 0.90 percent of the outstanding mortgage debt.

Recently, President Obama gave the Housing and Urban Development authority the flexibility to increase these rates to 1.5 percent and 1.55 percent, respectively, though they have not been raised to this level yet. So, if you have a mortgage of $125,000 and you put over 5 percent down, you’ll pay about $1062.50 in insurance premiums each year (this amount decreases as you pay down your mortgage). The Upfront Mortgage Insurance Premium is currently 1.0 percent. For the aforementioned $125,000 mortgage loan, you’d have to pay $1,250 towards your mortgage insurance premiums at the time of your home purchase.

Mortgage insurance premiums must be paid on mortgages with terms of 15 years or less and loan to value ratios of 90 percent or more until the loan to value ratio reaches 78 percent. For mortgages with terms longer than 15 years, the insurance premiums will be canceled when the loan to value ratio reaches 78 percent, provided that premiums have been paid for at least 5 years.

Credit History

Your chances of getting an FHA loan are much higher if you have a good credit score. Your credit history should have at least two lines of credit recorded. If you have had a mortgage foreclosed, you typically cannot qualify for a FHA loan (though there are some exceptions), and borrowers who are delinquent on any federal debt (student loans, tax liens, etc.) are not eligible.

A recent new law now requires that you have a minimum FICO credit score of 580 to qualify for an FHA loan. If you have filed Chapter 7 Bankruptcy, you must wait 2 years after the discharge date and re-establish good credit before receiving an FHA loan. For Chapter 13 Bankruptcy filers, you can qualify for an FHA loan if you provide written approval from the court’s trustee and show that you have made payments for a year.

Debt to Income Ratio

The FHA requires that borrowers have monthly mortgage debt to income ratios below 29 percent. This includes only your monthly home payments. For example, if your monthly mortgage was $750 and you grossed $2,850 each month, your debt to income ratio would be 26.32 percent.

Your total fixed payments to effective income (your mortgage plus other expenses, such as auto loans, student loans and credit cards) ratio must be 41 percent or lower. For example, if your mortgage payment was $750, and you had $1,550 of additional payments towards auto loans and credit cards, your deb to income ratio would be 40.35 percent.

FHA Loan Limits

FHA loan limits vary from state-to-state and county-to-county and by home size. For example, the FHA loan limit for a single family home in Allegheny County, Pennsylvania is $327,500. Meanwhile, the maximum FHA loan limit in Queens County, New York for a four-plex is $1,403,400. Check with your local FHA office to find out what the limits are in your area.