If you’re looking up “FHA loan requirements,” you are very likely wondering if you qualify for an FHA loan. These mortgages, which are insured by the Federal Housing Administration, help home buyers secure financing to buy a home despite their low income, lack of savings, or poor credit scores—the kind of things that often prevent people from getting a conventional loan.
“FHA loans are a great option for a lot of home buyers, particularly if they’re buying their first home,” says Todd Sheinin, mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD. And while not all lenders offer FHA loans, many do, because their government backing guarantees that lenders won’t lose their money if the buyer defaults. So it’s win-win all round!
Yet although FHA loans have looser qualification requirements than traditional mortgages, that doesn’t mean they have none at all. While the exact rules and thresholds will vary a bit by lender, here’s a ballpark guide to what you can expect you’ll need to qualify for an FHA loan.
1. A minimum down payment of 3.5%
With conventional loans, it’s generally recommended that you make a 20% down payment, which would amount to a whopping $50,000 on a $250,000 home. FHA loans lower the bar to a far more realistic level, requiring as little as 3.5%. So, on a $250,000 house, you would only need to plunk down $8,750 to qualify for an FHA loan.
This is a boon, particularly for first-time home buyers, who tend to have less money socked away to put toward their dream of home ownership. In fact, a recent study from Apartment List found that more than two-thirds of millennials don’t even have $1,000 saved up for a down payment. And millennials are now the largest group of home buyers.
2. A minimum credit score of 500
To qualify for an FHA loan, your credit score—the numerical representation of your track record paying past debts—will need to be at least 500—although if your score is indeed in this low range, you’ll have to make a slightly larger down payment, of 10%. To take advantage of that teeny weeny 3.5% down, you’ll need a credit score that’s slightly higher, at 580 or above. All that said, keep in mind that credit requirements may fluctuate not only by lender but based on changes in the housing market.
3. You’ll have to pay mortgage insurance
Because the federal government insures these loans, borrowers must pay an upfront mortgage insurance premium (MIP). Currently, the fee is 1.75%—that’s $4,375 on a $250,000 home loan. However, once you’ve accrued 20% equity in the home, the MIP should drop off from your mortgage payments. (Note: You’ll want to follow up with your lender at that point, to make sure the insurance premium has been removed.)
Borrowers will also have to pay annual mortgage insurance, currently around 0.85% of the borrowed loan amount—or $2,125 more per year. For most loans, this mortgage insurance remains throughout the life of the loan, or until you refinance out of an FHA loan to get rid of it, says Jordan Dobbs, a loan officer at Washington First Mortgage in Rockville, MD.