What Is A FHA Loan And What Are FHA Loan Requirement

The Department of Housing and Urban Development is the parent of the Federal Housing Administration.

  • The Federal Housing Administration is known as FHA
  • FHA is not a mortgage company and has nothing to do with originating and funding residential mortgage loans
  • FHA role is to insure mortgage loans that FHA approved private banks and mortgage lenders originate and fund
  • If a FHA insured mortgage loan defaults and goes into foreclosure, FHA will partially insure the lender against loss
  • In order for FHA to be able to insure lenders, lender needs to follow FHA mortgage guidelines
  • If lender does not follow HUD Guidelines, the loan is not insureable by the Federal Housing Administration
  • HUD created FHA in 1934
  • Role of FHA is to make home ownership possible to tens of millions of Americans
  • This is by making it possible for home buyers to purchase homes with 3.5% down payment requirement and lax in credit and income qualification requirements
  • FHA offers only owner occupant properties
  • There are various FHA loan programs such as the following:
    • Purchase loans
    • FHA refinance loans
    • Streamline Refinance
    • 203k Loans
    • Reverse Mortgages
    • Cash-out refinance mortgages

What Is The Minimum Credit Score FHA Loan Requirement?

Minimum credit scores required for a 3.5% down payment home purchase FHA Loan is 580 unless lenders has overlays on credit scores.

  • Borrowers with scores between 500 and 579 can qualify but need 10% down payment
  • FHA minimum credit scores to qualify for a 3.5% down payment home loan is 580 credit scores
  • FHA also allows non-occupant co-borrowers to be added on the loan if the main borrower does not income qualify on the home loan
  • FHA also allows down payment to be gifted 100% by family members or close relative
  • FHA has very aggressive debt to income ratio caps at 56.9% whereas the maximum debt to income ratio cap on a conventional loan is 50% DTI

How Can I Qualify For A FHA Loan?

There are minimum FHA lending guidelines that must be met in order to qualify for a FHA insured mortgage loan.

Here are the basic qualification criteria to qualify for a FHA Loan:

  • Property must be an owner occupied unit
  • Second home financing and investment home loans cannot qualify for a FHA loans
  • FHA loans are available for 1-4 units houses including single family residence, town-homes, condominiums as well as manufactured homes
  • Manufactured home financing requires a higher credit scores by most FHA lenders
  • Condominiums need to have the condominium complex to be FHA approved condos
  • A minimum down payment of 3.5% is required
  • 100% of down payment and/or closing costs can be gifted by family members related to main borrower by blood, marriage, law
  • Escrow account for property taxes and insurance is mandatory
  • Lenders will escrow property taxes and insurance and pay it to the appropriate parties when payment is due
  • A two years employment history and two year residential history is required
  • Debt to income ratios: 
  • Upfront mortgage insurance (UFMIP) of 1.75% and annual mortgage insurance of 0.45 to 0.85% is required on FHA Loan
  • FHA offers both adjustable rate mortgages and fixed rate mortgages

Bad Credit Mortgage Loans

Borrowers can qualify for FHA Home Loans with prior bad credit.

  • However, to get an Automated Underwriting System Approval, timely payments in the past 12 months is required
  • Outstanding collections and charged off accounts do not have to be paid off
  • There are mandatory waiting period after housing event and/or bankruptcy to qualify for government and conventional loans

Here are HUD’s waiting period requirements after housing event and/or bankruptcy:

  • 2 year waiting period after Chapter 7 Bankruptcy discharged date
  • Borrowers can qualify one year into a Chapter 13 Bankruptcy Repayment Plan with Trustee Approval
  • There is no waiting period after Chapter 13 Bankruptcy discharged date
  • Three year waiting period after foreclosure, deed in lieu, short sale

Home buyers who need to get qualified for FHA Loans with a direct lender with no overlays on government and conventional loans, please contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. We are available 7 days a week, evenings, weekends, and holidays.