The Federal Housing Administration’s mortgage insurance program encourages lenders to make home loans to creditworthy buyers with a modest income or blemished credit. Operating under the U.S. Department of Housing and Urban Development, the FHA sets rules for the loans it insures. Keep reading to learn about FHA loan requirements for 2018 and find out how to qualify.
What Is an FHA Loan?
An FHA loan is a home loan issued by an FHA-approved lender and insured by the FHA. The insurance reimburses the lender if the buyer defaults on the loan, which reduces the lender’s risk. Read on to learn about FHA loan qualifications.
2018 FHA Loan Requirements
You can use an FHA loan to purchase a one- to four-family home, a condominium or an eligible manufactured home. The home must be your principal residence. For 2018 loan requirements include the following:
- Residency: FHA borrowers must be permanent residents with Social Security numbers.
- Down Payment: An FHA loan requires the borrower to have a down payment of at least 3.5 percent of the home’s purchase price.
- Credit Score: The 3.5 percent down payment requirement applies to borrowers with credit scores of at least 580. You’ll need at least 10 percent down if your credit score is 500 to 579. Borrowers with scores below 500 typically don’t qualify for FHA loans.
- Buyer Income: There is no minimum FHA loan income requirement or maximum income limit, but you will need at least a two-year work history in the same line of work or for the same employer.
- Debt-to-Income Ratio: Your home payment, including your mortgage loan, homeowners association fees, property tax and homeowners insurance, can’t total more than 31 percent of your gross income in most cases. Total debt payments, including your home payment, credit cards and other loans, typically can’t total more than 43 percent of your gross income. The FHA makes some exceptions for borrowers with cash reserves and no debt if their credit scores are at least 580.
- Loan Limits: The FHA loan limit depends on whether the home is in a low-cost or high-cost area. The FHA loan limits 2018 for a single-family home are $294,515 in a low-cost area and $679,560 in a high-cost area is $679,650. The maximum for a single-family home in Alaska, Hawaii and U.S. territories is $1,009,475.
- Mortgage Insurance: Mortgage insurance is required for an FHA loan. The 2018 premium for a 30-year loan is 1.75 percent of the loan amount up front, plus 0.8 percent to 1.05 percent annually, depending on your down payment amount. You can pay the upfront premium at closing or roll it into your loan. Premiums expire automatically after 11 years on 30-year loans with down payments of 10 percent or more, but you’ll pay the premium for the duration of the loan if your down payment is less than 10 percent.
- Home Appraisal: Your FHA lender will order an FHA appraisal to make sure the home meets the agency’s standards. Whereas a typical appraisal determines a home’s market value, the FHA appraisal also verifies that the home is safe and secure. The FHA appraiser will check for defects, and if necessary, make their repair a condition for approving the loan.
- Bankruptcy or Foreclosure: Following a bankruptcy, you must wait at least two years after the bankruptcy is discharged from your record before applying for an FHA loan. In the case of a foreclosure or short sale, the FHA requires you to wait at least three years after the property is transferred out of your name.
Tips for Qualifying for an FHA Loan
Similar to the qualifying process for other mortgage loans, an FHA-approved lender will look at your creditworthiness and your ability to repay the loan, and then determine whether the home qualifies for FHA backing. Consider the following steps before you apply for an FHA loan.
1. Check Your Credit Report
Order copies of your Equifax, TransUnion and Experian credit reports — you can get one free report per year from each credit bureau at AnnualCreditReport.com. Check for errors or any other negative information that could affect your chance of being approved. If you have negative information, consider credit counseling.
2. Know Your Credit Score
Since FHA loans have credit score requirements, it is important to know your score before you start the application process, particularly if you have ever had a bankruptcy or foreclosure. Some credit card companies provide your credit score for free as a perk for cardholders, or you can pay a small fee to obtain your score from myFICO.
3. Shore Up Your Budget
Before you begin your home search, calculate how much debt you currently have to understand what size mortgage you can afford. Create a household budget to track your spending and identify ways to increase your savings. Start saving your down payment and reserve funds to show lenders you’re ready for homeownership.
4. Assemble Your Documents
Try to assemble the FHA loan documents ahead of time. Here are some of the documents you will be required to include with your FHA loan application:
- Most recent pay stub showing year-to-date earnings
- Two most recent W-2 forms
- Two years of tax returns
- Bank statements from the last few months
- Documentation for non-salary income such as disability payments, alimony, child support, retirement income, gifts and public assistance
- Proof of date of bankruptcy discharge or foreclosure sale, if applicable
An FHA loan is a good option for buyers who might not qualify for a conventional mortgage. The better prepared you are for your FHA loan application, the easier the process will be. They also have lower down payment requirements, and the FHA allows the down payment money to come from gifts. Lenders, not the FHA, set mortgage rates on FHA loans, but the rates are usually competitive.