If you’re looking for a mortgage with low down payment and credit score requirements, a great option is to apply for FHA-backed financing. FHA loans make the dream of homeownership a reality for millions of home buyers who may have trouble qualifying for conventional loans.
To get approved for FHA loans, you’ll need to meet specific criteria. You’ll also need to keep in mind the limit to how many FHA loans you can have at once, as well as the rules regarding whether or not you can refinance an FHA loan. To answer your questions about buying a home with FHA-backed financing, here’s the 2024 guide on how to apply for an FHA loan.
What Is an FHA Loan?
FHA loans are mortgages insured by the U.S. Federal Housing Administration and provided by FHA-approved lenders. If an FHA borrower fails to pay their lender, the FHA insurance protects the lender from financial loss.
FHA loans are popular among first-time homebuyers, as well as buyers with low credit scores or savings, because FHA loan requirements are generally lower than conventional loan requirements. Additionally, the FHA provides several programs to assist homeowners, including options for energy-efficient improvements and loans for home repairs and renovations.
FHA Loans vs. Conventional Loans
Compared to conventional loans, FHA loans allow you to have a lower credit score, lower down payment, and higher debt-to-income ratio. However, FHA borrowers must pay for mortgage insurance. Mortgage insurance protects the lender from financial loss if the borrower defaults on their payments.
Furthermore, FHA loans can only be used to purchase a primary residence–not an investment property or vacation home. This distinction ensures FHA loans are used to promote homeownership rather than property speculation.
FHA Loan Eligibility Requirements
FHA borrowers must have qualifying credit scores, debt-to-income ratios, and down payments. A home purchased with an FHA loan must be the primary residence of the borrower. These requirements are in place to ensure that borrowers do not overextend themselves financially, which helps maintain the integrity of the housing market.
In addition to buyer eligibility requirements, the property itself must be eligible for FHA-backed financing. For example, the purchase price cannot exceed the limit established by HUD for the county in which the home is located.
To check the purchase price limits in your county, use the online tool provided by HUD. The maximum allowable price for single-unit properties in low-cost areas is currently $498,257, while the maximum allowable price for single-unit properties in high-cost areas is currently $1,149,825.
Counties can have price limits that are between these two figures, so it is important to check HUD’s online tool. These limits are subject to change annually based on housing market trends and economic factors.
Minimum Credit Score
Borrowers must have a minimum credit score of 500 to qualify for an FHA loan. However, some lenders might require higher credit scores to minimize risks.
Borrowers with a credit score of at least 580 can qualify with a down payment of just 3.5%, whereas buyers with credit scores in the 500-579 range will need a 10% down payment. Maintaining a higher credit score can also potentially lead to better loan terms and lower interest rates.
Down Payment Assistance with FHA
The Federal Housing Administration does not provide down payment assistance directly to FHA borrowers. However, many state and local government agencies provide grants and loans to home buyers who need funds for a down payment. Some employers even provide down payment assistance for their employees.
To see if you qualify for down payment assistance, check with your state and local housing offices. Additionally, non-profit organizations sometimes offer assistance programs that could be beneficial.
Debt-to-Income Ratio Calculations
To qualify for an FHA loan, a borrower’s total monthly debt payments cannot exceed a certain percentage of their income. In other words, FHA loans have maximum debt-to-income (DTI) requirements. The maximum DTI is determined by the lender. There are lenders who provide FHA loans to borrowers with up to 43% or even 50% DTI. However, the exact numbers will vary.
It is therefore important to check with your lender regarding their DTI requirements. Understanding your DTI can help you manage your finances better and ensure that you can comfortably afford your mortgage payments.
FHA Loan Types: Fixed vs. Adjustable Rates
Borrowers can choose between fixed and adjustable mortgages. With a fixed-rate mortgage, your interest rate will stay the same for the lifetime of the loan. With an adjustable-rate mortgage, your interest rate will change periodically.
Fixed-rate loans are generally preferred by borrowers who value stability and predictability in their monthly payments, while adjustable-rate loans might be suitable for those who expect their income to increase in the future or plan to sell the property before the rate adjusts.
Can You Refinance an FHA Loan?
Home buyers often choose FHA loans because of their low down payment and credit score requirements. However, these loans may come with higher monthly payments compared to conventional mortgages.
Borrowers who want to stop paying for mortgage insurance, change their interest rate, or access capital may consider refinancing their FHA loan. To refinance your FHA loan, speak with your lender about the specific requirements in your situation. Refinancing can be a strategic move to reduce overall costs or to take advantage of lower interest rates.
How Do You Apply for an FHA Loan?
Prospective borrowers apply for mortgages through FHA-approved lenders, which include banks and credit unions. Required documents and information for the application generally include your government-issued ID, your Social Security Number (SSN), and two years of income history.
Your FHA-approved lender will confirm which documents you are required to present. It's advisable to gather all necessary documentation beforehand to streamline the application process and avoid any potential delays.
How Many FHA Loans Can You Have?
You can only have one FHA loan at a time. However, there is no limit to how many FHA loans you can have in your lifetime. The purpose of this rule is to prevent people from using FHA loans to finance investment properties and vacation homes.
FHA loans are intended to be for primary residences. This restriction ensures that FHA resources are directed towards helping individuals and families achieve homeownership for their primary living spaces.
What Are The Income Requirements for FHA Loans in 2024?
There are currently no minimum or maximum income requirements for FHA loans. However, borrowers must make sure their debt-to-income ratio does not exceed the limit set by their FHA-approved lender. Maintaining a healthy balance between income and debt can improve your overall financial health and increase your chances of loan approval.
Will FHA Loan Limits Increase in 2024?
FHA loan limits vary based on location, with higher limits in place for high-cost areas. To check the loan limit for your county, consult HUD’s online tool. Loan limits can change each year. Whenever the loan limits for a county change, the change is reflected in the online tool.
The loan limits for 2-4 unit properties will generally be higher than the loan limits for single-unit properties. This annual adjustment helps ensure that loan limits remain aligned with current housing market conditions.
What will FHA rates be in 2024?
Interest rates for FHA mortgages change constantly throughout the year. The Consumer Financial Protection Bureau offers information on the current (and constantly-evolving) mortgage interest rates. Monitoring interest rates regularly can help you identify the best time to apply for a loan or refinance an existing one to secure better terms.
Are FHA loans assumable in 2024?
FHA mortgages are assumable. Assumable mortgages allow buyers to take over the seller’s existing mortgage. This could be beneficial to buyers if the seller’s existing mortgage has favorable interest rates.
To learn more about assumable mortgages, speak with your lender. Assumable mortgages can offer significant advantages, particularly in a rising interest rate environment.
How To Apply for an FHA Loan
FHA loans can help buyers with low down payments and credit scores achieve their dream of homeownership. To apply for FHA-backed financing and get approved for an FHA loan, buyers must familiarize themselves with the requirements (such as how many FHA loans you can have at once and the requirements for refinancing an FHA loan).
With proper research and planning, an FHA loan can help you open the door to life as a homeowner. Additionally, working closely with a knowledgeable lender can streamline the process and provide you with valuable insights tailored to your specific financial situation.
It's also beneficial to attend homebuyer education courses, which can offer additional support and resources throughout your home buying journey. To learn more about FHA loans, check the resources provided by the U.S. Department of Housing and Urban Development.
