FHA Loan Requirements for Home Buyers

The 2024 FHA Loan Handbook

Many home buyers use the FHA loan program because it offers flexible qualification criteria and a down payment as low as 3.5%. But borrowers must meet specific qualification criteria and requirements in order to qualify for an FHA loan.

These requirements come from the Department of Housing and Urban Development (HUD). That’s because the Federal Housing Administration (FHA) falls under the Department of Housing and Urban Development.

FHA Loan Requirements at a Glance

Let’s start with the short version. To qualify for an FHA loan, you’ll probably have to meet all of the requirements listed below.

  • You’ll need to make a down payment of at least 3.5%.
  • You need a credit score of 580 or higher to qualify for this low down payment.
  • Your debt-to-income ratio should be no higher than 43%, unless you have compensating factors like cash reserves and residual income.
  • You need to have sufficient and stable income that can cover your monthly mortgage payments along with all other recurring debts.
  • The property you want to buy must pass an appraisal and meet minimum property requirements relating to related to general health and safety.

If you meet all of these requirements, you might be an excellent candidate for the FHA loan program. But there’s a lot more you need to know about these requirements, so let’s tackle them one at a time.

1. A Down Payment of 3.5%

Borrowers who wish to apply for an FHA home loan must make a down payment of at least 3.5% of the purchase price or appraised value (typically whichever is less). This minimum down payment requirement has been in effect for many years and probably won’t change anytime soon.

Borrowers with lower credit scores might need to make a down payment of 10% or more. We will cover this distinction in the next section, when talking about credit score requirements for FHA loans. For now, just know that most people who use this program qualify for the 3.5% down payment.

Acceptable sources for down payment funds include (but are not limited to) the following: checking and savings accounts, cash on hand, retirement accounts, down payment assistance programs, stocks and bonds, and gift money provided by an approved donor.

You can use money gifted from a third-party donor to cover your FHA down payment. But it must truly be a gift, not a personal loan. The donor will have to sign a letter stating that they do not expect repayment for the gifted funds.

The down payment represents one of the most significant requirements for an FHA loan, because it could add up to thousands of dollars. You have to pay it upfront, when you close on the home.

On a median-priced ($354,000) home, a down payment of 3.5% would come to around $12,390. In more expensive real estate markets, the down payment can easily exceed $20,000. So the sooner you start saving up for this requirement, the better!

2. Credit Score Requirements: 500 and 580

When it comes to credit scores, there are two important numbers you need to know about.

  • 500: Minimum score required for FHA loan eligibility.
  • 580: Minimum score needed for the 3.5% down payment.

Borrowers with scores between 500 and 579 might still qualify for an FHA loan, but they have to put down at least 10%.

As it states in HUD Handbook 4000.1: “The Borrower is not eligible for FHA-insured financing if the MDCS is less than 500.”

(MDCS stands for minimum decision credit score, which is explained here.)

Credit scores give mortgage lenders a snapshot of how you have borrowed and repaid money in the past. A high score shows you’ve been good at paying back loans in the past, so lenders see you as less risky. A lower score might indicate that you’ve struggled to repay debts in the past, which can be a red flag.

So the higher your credit score, the better chance you have of getting approved for an FHA loan.

3. Debt-to-Income Ratio Limits: 43% – 50%

Debt ratios are another important requirement for FHA loans. Borrowers need to have a manageable level of debt to qualify for this program. Mortgage lenders look at all of your debts, including credit cards, car loans, and the monthly mortgage payment itself.

Lenders use a metric known as the debt-to-income ratio (DTI) to assess your financial stability. As its name suggests, this ratio compares how much you owe each month (debt) to how much you earn before taxes (gross income).

 In the context of FHA loans, you have two of these ratios:

  • The front-end debt-to-income ratio looks at how much of your income goes toward housing expenses like your mortgage payment, property taxes, and insurance.
  • The back-end debt-to-income ratio considers all your monthly debt payments, including housing expenses plus things like car loans, credit card payments, and student loans.

The FHA has specific requirements for a borrower’s debt-to-income ratios. They’ve established a “soft” limit at 31% on the front end, and 43% on the back end.

What this means: If your combined recurring debts (including the mortgage payment) add up to more than 43%, the mortgage underwriter will have to look for compensating factors to offset that risk. See table below for more.

Table Showing DTI Ratio Limits

The following table comes from HUD Handbook 4000.1, which outlines the official guidelines and requirements for an FHA loan. As you can see, borrowers with credit scores above 580 might be able to carry more debt if the underwriter finds “compensating factors.”

(Notes: In this table, “qualifying ratio” refers to the DTI ratio described above. The 31/43 numbers indicate a front-end DTI of 31%, and a back-end DTI of 43%.)

4. Stable Income That’s Likely to Continue

Compared to everything we’ve covered so far, the income requirements for an FHA loan are a bit more vague. Unlike the 580 credit score and the 43% debt ratio mentioned above, the FHA does not offer any specific numbers relating to a borrower’s income.

The main requirement is that borrowers have sufficient and stable income to cover their monthly mortgage payments and all other recurring debts. Additionally, mortgage lenders must determine that the income is “likely to continue” for at least the next few years.

However, there is no minimum income requirement for FHA loans. There’s no rule that says you need to earn X dollars per month in order to qualify for the program. But there is a maximum debt-to-income ratio limit, as described in section 3 above.

As the official HUD guidelines state: “Income must be reasonably likely to continue through at least the first three years of the Mortgage, and meet the specific requirements described below.”

Lenders examine the borrower’s past and present employment and income situation to determine the likelihood of continued income. They use W-2 forms and pay stubs to establish a history of consistent income and also assess the borrower’s job security.

To verify a borrower’s current employment and income, FHA guidelines require mortgage lenders to obtain one of the following:

  • The most recent pay stub and a written Verification of Employment (VOE) covering two years; or
  • direct electronic verification of employment by a TPV vendor covering two years

Note: These requirements pertain to automated underwriting. For manual underwriting (which can be required in more complex situations), additional verification and scrutiny might be needed.

5. FHA Mortgage Insurance Requirements

Mortgage insurance is a requirement for all FHA loans used to purchase a house. In fact, this program is basically one big insurance fund.

The federal government insures these loans to protect lenders from losses stemming from borrower default. But it’s the borrowers themselves who pay into the insurance fund.

The FHA requires two mortgage insurance premiums:

  • There’s an upfront premium that typically comes to 1.75% of the base loan amount. But despite the “upfront” label, it can be financed into the loan if the borrower chooses.
  • There is also an annual mortgage insurance premium that can vary based on the borrower’s loan-to-value ratio (LTV), down payment, and loan term.

Many, if not most, borrowers who use FHA loans choose the 30-year term and make a down payment below 5%. In this scenario, the annual mortgage insurance premium would amount to 0.55% of the loan amount.

Example: For a $300,000 loan amount, the annual MIP would add an additional $137 onto the monthly payments.

To estimate your annual MIP, you could multiply your desired loan amount by 0.0055 (the decimal equivalent of 0.55%). This will give you the annual MIP amount. You would then divide that number by 12 to find out how much extra you would pay each month.

If a borrower puts down 10% or more, they might only have to pay the annual MIP for 11 years. But for most FHA borrowers, who put down less than 10%, they have to pay it for the full duration of the loan (until they sell, refinance, or otherwise pay off the debt).

Note: Mortgage insurance is a complex subject that can be hard to take in all at once. So we’ve created a separate and more detailed guide to help you understand it better.

6. Home Appraisal and Property Requirements

The FHA loan requirements explained above apply to home buyers and borrowers. But the Federal Housing Administration has also established some specific guidelines for the actual property being purchased.

In order to qualify for FHA financing, a property must meet the minimum property requirements, or MPRs. These guidelines help to ensure that the home is safe and habitable for the home buyer who is purchasing it.

These guidelines cover everything from damaged walls to peeling paint to exposed electrical outlets. Here’s a more detailed overview of the minimum property requirements.

During the home appraisal process, a HUD-approved appraiser will review the property being purchased to determine its market value. The appraiser will also check to see if the home meets the requirements mentioned above.

As the HUD Handbook 4000.1 explains:

“the Appraiser provides preliminary verification that a Property meets the Property Acceptability Criteria, which includes HUD’s Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).”

7. Primary Residence Requirement

Lastly, we come to the residency requirements for FHA loans, which are fairly straightforward.

If you use this loan program to buy a house, that home must serve as your principal or primary residence. You cannot buy a vacation home or investment property with an FHA loan, according to HUD guidelines.

(But you might be able to purchase a secondary residence, with certain approvals.)

For the most part, the FHA program is designed to help borrowers purchase a primary residence that they plan to live in most of the time.

Here’s how the Federal Housing Administration defines a principal residence:

“a dwelling where the Borrower maintains or will maintain their permanent place of abode, and which the Borrower typically occupies or will occupy for the majority of the calendar year.”

There’s also a move-in timeline requirement for FHA loans. Generally speaking, at least one borrower who is named on the mortgage documents must occupy the home within 60 days of closing.

In some cases, borrowers can use an FHA loan to purchase a secondary residence. But we’re not talking about a vacation home here. In this context, secondary residence refers to a home that the borrower occupies in addition to their principal or primary residence, but less than a majority of the calendar year.

Borrowers need special permission from HUD to use an FHA to buy a secondary residence. So you’ll need to work with your lender on this, if it applies to you.

If you’re buying a primary residence, you don’t need any special permission since that’s the main purpose of the FHA loan program.