FHA Loan Requirements

FHA Loan Requirements For 2022 | First-Time Homebuyers

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss the FHA loan requirements for first-time homebuyers. FHA loans are the most popular loan programs today in the United States. The United States Department of Housing and Urban Development is the parent of the Federal Housing Administration, which is commonly known as FHA by many. FHA is not a mortgage lender. The agency has nothing to do with the origination, processing, underwriting, funding, and servicing of FHA loans.

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What Are The Basic FHA Loan Requirements To Get Qualified


HUD’s main function is insuring residential mortgage loans that are originated and funded by lenders such as banks and mortgage companies. Private lenders such as banks and mortgage companies need to be approved by HUD. They need to follow HUD mortgage guidelines in order for loans they originate and fund to be insured by the Federal Housing Administration. HUD, the parent of FHA, insures lenders in the event borrowers defaults on their loans.

HUD UPDATED FHA Loan Requirements and Guidelines

HUD is the parent of FHA and administers HUD Agency Guidelines on FHA loans. HUD is a giant government agency in charge of the FHA insured mortgage program in the nation. The Department of Housing and Urban Development and its subsidiary, The Federal Housing Administration sets the minimum HUD 4000.1 Handbook financial institution need to follow if they want HUD to insure FHA loans they originate and fund. FHA Loan Requirements have been updated with regards to the following:

  • credit scores
  • credit requirements
  • down payment requirements
  • loan limits
  • debt to income ratio requirements
  • collection accounts
  • charge offs
  • disputed credit accounts

In this article, we will discuss and cover FHA Loan Requirements for 2022 on home purchase and refinance.

2022 FHA Loan Requirements on Down Payment on Home Purchase

There are FHA loan requirements with regards to the minimum down payment on home purchases. One of the great benefits of FHA loans is due to the 3.5% down payment requirement. The low down payment requirement benefits first-time homebuyers and buyers with limited savings to put down on a home purchase.

FHA Loan Requirements for House

If the home buyer has credit scores of 580 or higher, HUD requires a 3.5% down payment on a home purchase. If the homebuyer’s credit scores are 579 or lower, then the minimum down payment required is a 10% down payment. Down payments on FHA loans can be gifted by a family member and/or relatives. 100% of the down payment can be gifted.

FHA Loan Requirements on Gift Funds

FHA Loan Requirements on Gift Funds

HUD allows borrowers of FHA loans to receive gift funds from family members for the down payment and closing costs on a home purchase. Gift funds are not viewed favorably by the automated underwriting system and mortgage lenders. Marginal credit borrowers may not get an approve/eligible per AUS with gift funds. Gift funds can only be used for the down payments and closing costs. Reserves cannot be from gift funds. All reserves need to be the borrower’s own funds. There are certain requirements for gift funds. The donor of the gift needs to sign a gift letter stating the following:

  • gift for the down payment and/or closing costs is only a gift
  • the gift is not a loan
  • the gift will not be paid back after closing
  • the donor needs to complete a gift letter form provided by the lender
  • 30 days of bank statement of donor needs to be provided showing funds have been seasoned 30 days

Why Are Gift Funds Not Viewed Favorably by Lenders

Gift funds are not viewed favorably by lenders including the automated underwriting system. Many mortgage companies will have lender overlays on gift funds. Typical lender overlays on gift funds include lenders requiring a certain credit score from borrowers who can get gift funds. For example, lenders with lender overlays on gift funds can require a 640 or higher credit score in order for borrowers to be able to use gift funds.

FHA Loan Guidelines on Types of Properties

FHA Loan Requirements on the types of properties a homebuyer can qualify for are that the home needs to be a one to four-unit residential property. FHA Loans are for owner-occupant property financing only. A home buyer cannot qualify for a second home or investment property with FHA Home Loans. Any residential one to four-unit can qualify for an FHA Loan. However, condominiums are different.

FHA Loan Requirements on Condominiums

For a condominium home buyer to qualify for an FHA loan on a condominium purchase, the condominium complex needs to be HUD condo approved. More and more condominium complexes are not renewing their FHA condominium approved list certifications. Many condominium home buyers cannot purchase condominiums due to the condominium complex not being FHA condominium approved. Before shopping for a condominium with an FHA Loan, please make sure that the condominium complex is FHA condo approved.

FHA Loan Requirements on Two To Four Multi-Family Homes

FHA Loan Requirements

Homebuyers can purchase a two to a four-unit property with a 3.5% down payment FHA loan. Borrowers can use 85% of the potential rental income on the rental units as qualified income:

  • Minimum FHA Loan Requirements on credit scores to purchase a 2 to 4 unit property is 580
  • However, there are three months of reserves required on three to four-unit properties
  • Reserves are one month of principal, interest, taxes, and insurance also known as PITI
  • Reserves cannot be gifted
  • Needs to be the home buyer’s own funds
  • Reserves do not have to be in cash

Common Accounts That Can Be Used For Reserves

The following types of accounts can be used to meet reserve requirements:

  • Stock and investment accounts
  • IRAs, 401k
  • Other liquid assets can be used to meet FHA Loan Requirements with regard to meeting reserves.

FHA Loan Requirements on Debt To Income Ratios

FHA requires a minimum credit score of 580 in order for borrowers to qualify for a 3.5% down payment home loan. HUD debt to income ratio guidelines is more generous than any other loan program. The maximum front-end debt to income ratio is 46.9% and the back-end debt to income ratio is 56.9% to get an approve/eligible for FHA loans. This is substantially higher than the conventional loan debt to income ratio cap of 50%. Borrowers with under 580 credit scores are eligible with a 10% down payment.

Comparing Debt to Income Ratios on FHA versus Conventional Loans

To get a 50% debt to income ratio cap on conventional loans, borrowers normally need a 680 credit score to get an approve/eligible per Automated Underwriting System Approval. There is no front-end debt to income ratio requirements on conventional loans. For borrowers with under a 680 credit score, the debt to income ratio is capped at 45% on conventional loans.

FHA Loan Requirements on Collection And Derogatory Items

Case Scenario for FHA loan

HUD does not require borrowers to pay off unpaid collection accounts in order to qualify for FHA Home Loans. However, there are certain FHA Loan Requirements with regard to collection accounts. For unpaid collection accounts that total over $2,000 on non-medical collections, HUD requires that 5% of the unpaid collection account balance be used to calculate debt to income ratios. This means any outstanding non-medical collection accounts with balances, 5% of the outstanding balance is taken as a hypothetical debt and used for debt to income calculations.

How Can You Use The Monthly Payments on the Written Payment Agreement in Lieu of 5%

Borrowers have an option to enter into a written payment agreement with creditors. The monthly amount agreed upon in the written payment agreement is used in lieu of 5% of the outstanding collection balance. Charged-off accounts are excluded from the 5% rule. Medical collections are excluded.

Case Scenario on How Mortgage Underwriters Calculate Domant Outstanding Collections

For example, here is a case scenario:

  • unpaid collection balance of $10,000
  • FHA does not require to pay off the $10,000
  • borrowers can still qualify for an FHA loan

HUD requires 5% of the unpaid $10,000 or $500 to be used to calculate debt to income ratios on FHA loans by mortgage underwriters. If the $500 will disqualify borrowers due to the high monthly payment used to calculate their debt to income ratios, then the borrower can enter into a written payment agreement with the creditor.

Can You Get an FHA Loan Approval With Unpaid Collections?

The borrower can make a written payment agreement for a lesser minimum monthly payment amount. That amount will be used to calculate the monthly payment used to calculate the debt to income ratios. There is no seasoning requirement on the FHA Loan Requirement. The day both the debtor and creditor sign the written payment agreement, it will go into effect.

Can You Get an FHA Loan With Unpaid Medical Collections?

Can You Get an FHA Loan With Unpaid Medical Collections?

With medical collections, this rule does not apply.  Medical collections are exempt from the unpaid collection account debt to income ratio calculations. With regards to charge-offs, charge-off accounts are exempt and do not matter with FHA loans. The 5% rule does not apply to charged-off accounts.

When Can I Qualify For FHA Loan After Bankruptcy

Homebuyers are eligible for an FHA loan after Chapter 7 Bankruptcy after meeting the mandatory waiting period. HUD is extremely generous and lenient when it comes to derogatory accounts. A home buyer can qualify for an FHA loan two years after the Chapter 7 bankruptcy discharge date. The waiting period starts from the discharge date of the Chapter 7 Bankruptcy. Borrowers cannot have any late payment after Chapter 7 Bankruptcy. Lenders expect the borrower to have re-established credit and new credit tradelines.

How Soon After Filing Chapter 13 Bankruptcy Repayment Plan Can I Qualify For a Mortgage?

Homebuyers can qualify for an FHA loan during the Chapter 13 Bankruptcy repayment plan. HUD allows a home buyer to qualify for an FHA Loan one year into a Chapter 13 Bankruptcy with the approval of the bankruptcy trustee. The file needs to be a manual underwrite. The borrower needs to be timely with all of their monthly payment inside as well as outside the Chapter 13 repayment plan. Chapter 13 Bankruptcy does not need to be discharged. Gustan Cho Associates are experts in helping borrowers qualify, approve, and close FHA loans during the Chapter 13 Bankruptcy repayment plan.

FHA Loan Requirements After Chapter 13 Bankruptcy Discharged Date

There is no waiting period after the Chapter 13 Bankruptcy discharged date. All FHA loans during and after Chapter 13 Bankruptcy discharged date not seasoned for at least two years, it is downgraded to a manual underwrite. Most lenders will have lender overlays for borrowers with Chapter 13 Bankruptcy discharge. They normally require a one or two-year waiting period after the discharge date. Gustan Cho Associates has no lender overlays on FHA loans. We do not require any waiting period requirements after the Chapter 13 Bankruptcy discharged date.

Qualifying For An FHA Loan After Foreclosure, Deed In Lieu Of Foreclosure, Short-Sale

Qualifying For An FHA Loan After Foreclosure, Deed In Lieu Of Foreclosure, Short-Sale

Buyers can purchase a home with an FHA Loan three years after a foreclosure, deed in lieu of foreclosure, or short sale. The waiting period starts three years from the recorded date after foreclosure or deed in lieu of foreclosure. The waiting period is three years from the short sale date which is reflected in the HUD Settlement Statement or the Closing Disclosure. Borrowers should not have any late payments after a housing event. Rebuilt and re-established credit after a housing event is highly recommended.

Qualifying For An FHA Loan With A Mortgage Company Licensed In Multiple States With No Lender Overlays

Not all FHA lenders have the same FHA loan requirements. Most lenders have overlays on FHA loans. Lender overlays are additional FHA loan requirements that are above and beyond the minimum HUD agency guidelines. For example, HUD allows borrowers with credit scores down to 500 FICO to be eligible to qualify for an FHA loan. However, a lender may refuse to approve borrowers with 500 credit scores as part of their lender overlays.

What are the FHA Loan Requirements on Manual Underwriting

Lenders can refuse to do manual underwriting on FHA loans as part of their lender overlays. Gustan Cho Associates has no lender overlays on FHA loans. As long as the borrower meets the minimum agency HUD guidelines and can get an approve/eligible per the automated underwriting system, we can approve and close the loan. If the borrower cannot get an approve/eligible and get a refer/eligible per AUS, we can downgrade the file to a manual underwrite. The borrower needs to meet HUD manual underwriting guidelines.  The key to getting approved for an FHA loan with bad credit is to be timely on all payments in the past 12 months. Manual underwrites require 24 months of timely payments.

Over 75% of Our Clients Are Folks Who Could Not Qualify at Other Lenders

The team at Gustan Cho Associates has a national five-star reputation for being able to originate and close government and conforming loans other lenders cannot. This is due to Gustan Cho Associates, headquartered in Oakbrook Terrace Illinois, and licensed in multiple states, being a mortgage broker licensed in 48 states with no overlays on government and conventional loans. Gustan Cho Associates is a mortgage broker and has relationships with over 160 wholesale mortgage lenders. We are not a lead generation company. Gustan Cho Associates has licensed loan officers, a team of loan officer assistants, mortgage processors, and mortgage underwriters in-house, and support/operations staff.

Contact Us at Gustan Cho Associates To Qualify and Pre-Approved 7 Days A Week

Contact Us at Gustan Cho Associates To Qualify and Pre-Approved 7 Days A Week

The team at Gustan Cho Associates is hands-on with all of our borrowers and prides itself on not just being able to close 100% of all of our pre-approvals but closing them on time. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. If you have any questions about the content of this article or need to qualify for a mortgage, please contact us at Gustan Cho Associates at 800-900-8569 or email us at gcho@gustancho.com. Text us for a faster response. Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders. We have a national reputation of being able to do loans other lenders cannot do. We are mortgage bankers and correspondent lenders with the ability to broker non-QM and alternative specialty mortgage loan programs.

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