Understanding FHA Loans: Who Qualifies and How They Work

Estimated reading time: 3 minutes

Not every mortgage program is the same. Many people may think a traditional conventional mortgage with 20% down as the only home financing option available. FHA financing offers an alternative!

With flexible lending guidelines and lower down payment requirements than other loan programs, FHA mortgage loans are great for first-time homebuyers, people who have credit challenges, or those with little savings. Let’s learn more about FHA loans and their qualifications.

What is an FHA Mortgage?

FHA mortgages are insured by the Federal Housing Administration, a part of the United States Department of Housing and Urban Development (HUD). As they are insured by the federal government, lenders are protected from financial loss if the borrower defaults, or stops paying, their loan. This is different from a conventional mortgage, where a lender will assume the loss without government insurance.

As a lender is protected from major financial loss, the borrower requirements are more flexible than other mortgage loan programs.

What are the Basic Qualifications for an FHA Loan?

Specific loan qualifications will vary between mortgage lenders, but the basic qualifications for FHA mortgages are set by HUD.

Property Requirements

FHA mortgages may be used for:

• Single family homes
• 2-to-4 unit multifamily homes
• Condominium units
• Double wide manufactured homes

Credit Score and Down Payment Requirements

Your credit requirements will depend on your down payment amount, but it’s best to aim for a score of 600. Your down payment can be gifted from a friend, relative, employer, or labor union.

Debt-to-income Ratio Requirements

Your debt-to-income ratio, or DTI, is a metric that a mortgage lender uses to determine a borrower’s ability to make their monthly payments. This is achieved by adding up your monthly debt and dividing it by your gross monthly income.

A lower DTI ratio informs a lender that you are more likely to be able to pay your monthly mortgage payments. For an FHA mortgage, your DTI should be 43% or below.

Does an FHA Loan Require Mortgage Insurance?

FHA mortgages require mortgage insurance, regardless of your down payment amount. Your upfront mortgage insurance premium (MIP) is paid at closing. Additionally, your annual MIP is divided by twelve and added onto your monthly mortgage payment.

How Much Money Can You Borrow with an FHA Mortgage?

FHA loan limits are annually calculated and updated based on median home prices for the country. For 2023, the FHA loan limits range from $472,030 up to $1,089,300, depending on property location.

What FHA Loan Types are Available?

FHA mortgages are available for purchase, renovation, or refinance. They are offered as fixed interest rates with loan terms of fifteen or thirty years.

Your Mortgage Experts

Building a great team of home finance professionals starts with a professional and experienced mortgage lender. When you’re ready to get started, contact us today. Our certified Licensed Loan Originators will walk you through the process, all the way to the closing table!