There are several reasons why a borrower would want to consider applying for an FHA loan. You may want to buy a home, but you don’t have a down payment that a conventional mortgage would require. You would like to refinance your property, but you don’t have the required amount of equity in your home, or you might have had some credit issues in the past that has given you an unhealthy credit score.
What is the Federal Housing Administration?
The Federal Housing Administration, commonly known as “FHA,” is part of the U.S. Department of Housing and Urban Development (HUD.) The program was created for low income individuals, or families that might need a little help in the home ownership process. FHA does not fund loans; they insure residential mortgages for FHA approved lenders in case a borrower defaults. This allows borrowers to qualify with lower interest rates and be subject to less strict underwriting guidelines.
FHA Mortgage Requirements for Purchases and Refinances
- FHA provides insured mortgages for single family homes, multiunit homes, as well as condominiums
- FHA loan maximum can vary per county; however, $521,250 is the average for most counties. You can check what your county’s maximum loan amount is here
- As of late 2009, the minimum down payment has risen from 3% to 3.5%
- You must have two years of steady income and your DTI (debt to income ratio) cannot exceed 29%. Meaning, if you have a monthly income of $3,000, your mortgage payment cannot exceed $870, which is 29% of your monthly income
- The borrower cannot have a credit score under 580, or 620 depending on the lenders’ guidelines
- The first mortgage to be refinanced must already be FHA insured and current
- The new FHA refinance must reduce the borrower’s monthly principal and interest rates with a cash-out no greater than 85% loan to the value of the home
- A bankruptcy must have been discharged for a minimum of 2 years and has not had a foreclosure for at least 3 with unblemished credit since
- Minor collection accounts do not need to be paid in full in order to qualify for the loan. Judgments, on the other hand, must be paid in full.
These are the latest FHA mortgage requirements from HUD as of the changes that were made in late 2009. If anything should change in the mean time, please let me know and I will update the requirements immediately.