Required credit scores
FHA's credit score requirements vary based on your down payment amount. If you put down the minimum amount (3.5%), then you'll need at least a 580 credit score in order to qualify. If you can make a down payment of 10%, then you may be able to qualify with a credit score as low as 500.
FHA mortgage down payments can go as low as 3.5% -- meaning 3.5% of the total loan balance ($7,000 on a $200,000 loan). The important thing to remember is that the smaller down payment you make, the higher your loan balance will be and the more you'll pay in interest in the long run. It also means a higher monthly payment.
Other eligibility requirements
To qualify for an FHA loan, you'll need a front-end debt-to-income ratio (DTI) of 31% or less, which includes only your projected mortgage payment. You'll also need a back-end DTI of 41% or lower, which includes your projected mortgage payments plus all your current debts. In some cases, you may be able to get an FHA mortgage with a back-end DTI as high as 50%, but only if you have good credit and compensating factors like substantial cash reserves.
Here are the other requirements you'll need to meet in order to qualify for an FHA loan:
- The home you're buying must be intended as your primary residence (at least one unit of it)
- You must move into the home within 60 days of closing on your loan
- The home must meet FHA's minimum property standards and be safe, secure, and sound
- You must pay mortgage insurance premiums up-front and annually over the course of the loan term
- You must have reliable income and two years of consistent employment
- You must have the cash to cover your closing costs (usually 2% to 5% of the total purchase price of the home)
Keep in mind that these are only the minimums set by the FHA. Many lenders may have stricter lending policies than those noted above.
The FHA mortgage process
The FHA mortgage process starts with finding an FHA-approved lender. Most major banks and financial institutions offer FHA loans, or you can go to HUD's lender search tool to find one in your area.
Once you've chosen a lender, you can get pre-approved for your loan. This requires a little bit of information about your income, debts, and the property you intend to purchase, but once you're done, the lender will give you a letter stating the loan amount you'll likely qualify for, as well as your interest rate. You can use this letter to guide your home search and give sellers more confidence in any bids you submit.
After you've found a home and the seller has accepted your offer, you'll need to fill out the full loan application with your lender, submit a number of financial documents, and agree to a credit check. The lender will then order a property appraisal to ensure the home is worth the money it's lending you. Two scenarios can emerge from this:
- The home appraises for as much or more than what you've offered. Your loan proceeds forward.
- The home appraises for less than you've offered. Your lender will only loan you up to the appraised value, so you'll need to renegotiate with the seller or come up with the extra cash out of pocket.
When the appraisal is done, your loan will move into underwriting. This is when the lender analyzes your application and evaluates your qualifications for the loan. Many times, your lender will request additional documents during this stage or, in some cases, a letter of explanation detailing any large deposits or other suspicious activity. Once your loan makes it through underwriting, your loan will be approved and you'll be scheduled for closing. That's when you'll sign the paperwork, pay your closing costs and down payment, and receive your keys.
How much do FHA loans cost?
As with other mortgage loans, there are closing costs and a down payment associated with FHA loans. But more than this, you'll also need to pay mortgage insurance -- both up-front (paid at closing) and annually (paid with your monthly payment).
Here's how the costs of an FHA loan break down: