What Are the FHA Loan Requirements in 2024?
Many lenders are excited about the how aggressive FHA guidelines have been for people with fair credit. 2024 FHA requirements appear to be unchanged for most of the refinance and purchase programs that are insured by the Federal Housing Administration.
As the market conditions change, so do FHA loan requirements for borrowers and lenders. For example, HUD implemented a minimum credit score for the first time this year.
Borrowers need to have at least a 500 fico score for most FHA finance programs. HUD raised the reserve requirements for FHA lenders significantly a few years ago. 2024 loan limits remain higher on FHA loans in most counties across the country.
When FHA loan requirements are altered it has a major impact across the whole mortgage industry, because FHA products are popular across the country for new home financing and equity challenged refinancing. We anticipate for certain programs, HUD will actually minimize FHA loan requirements.
Highlights of 2024 FHA Loan Rules and Standards
- 3.5% Down-Payment on Conforming Home Loans
- Low Credit Scores Allowed as Low as 500
- No Pre-Payment Penalties for Refinancing
- Streamlines Allow Quick Refinancing with Limited Documentation
- Reduced Premiums on Underwater Refinancing
- Low Interest Rates on FHA Mortgage Programs
In an effort to curb loan defaults, FHA loan requirements saw several changes to guidelines in the last year. The current FHA-mortgage rates broke records for low interest again last year, but will the minimum credit scores and increased equity requirements prevent the qualifications for too many struggling borrowers?
Many loan officers believe that FHA guidelines have been tightened too much, but the U.S. Congress and HUD do not want to jeopardize this great home finance program that has been helping new home buyers since 1934. Choose from affordable home purchase and FHA-refinance rates. Please complete this quick form below and we will connect you with a loan officer that specializes in FHA lending.
11 Things You Must Know About FHA Loan Requirements
The Federal Housing Administration (FHA) loan program is designed to make homeownership more accessible, especially for first-time buyers or those with less-than-perfect credit. FHA loans offer lower down payment requirements and more lenient credit standards compared to conventional loans. However, it’s essential to understand the specific requirements before applying. Here are 11 things you must know about FHA loan requirements.
1. Minimum Credit Score Requirements
FHA loans are more flexible when it comes to credit scores. To qualify for an FHA loan with a 3.5% down payment, you’ll need a minimum credit score of 580. If your credit score falls between 500 and 579, you may still qualify, but you’ll be required to make a 10% down payment. Keep in mind that while the FHA sets these minimums, individual lenders may have higher credit score requirements.
2. Low Down Payment
One of the most appealing aspects of an FHA loan is the low down payment requirement. You can qualify for an FHA loan with as little as 3.5% down, provided your credit score is 580 or higher. This makes it easier for first-time homebuyers or those without substantial savings to enter the housing market.
3. Debt-to-Income Ratio (DTI)
Your debt-to-income (DTI) ratio plays a significant role in determining your eligibility for an FHA loan. The FHA typically allows a DTI of up to 43%, meaning your total monthly debt payments (including the new mortgage) should not exceed 43% of your gross monthly income. However, some lenders may approve applicants with a higher DTI if they have other compensating factors, such as a higher credit score or significant savings.
4. FHA Loan Limits
FHA loans have maximum borrowing limits, which vary by location and are based on the median home prices in the area. In high-cost areas, the loan limits are higher to accommodate more expensive homes. For example, in 2023, the FHA loan limit in low-cost areas is $472,030, while in high-cost areas, it can go up to $1,089,300. Make sure to check the loan limits in your area to determine if an FHA loan can cover the cost of the home you’re interested in.
5. Mortgage Insurance Premium (MIP)
FHA loans require mortgage insurance, which protects the lender in case you default on the loan. You’ll need to pay two types of mortgage insurance: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The upfront MIP is typically 1.75% of the loan amount, paid at closing, while the annual MIP is paid monthly and ranges from 0.45% to 1.05% of the loan amount, depending on the loan term and loan-to-value ratio.
6. Owner Occupancy Requirement
FHA loans are intended for people buying a primary residence, not for investment properties or vacation homes. You must occupy the home as your primary residence within 60 days of closing the loan. The FHA requires you to live in the home for at least one year before considering renting it out.
7. Property Standards and Appraisal
The property you are purchasing with an FHA loan must meet specific health and safety standards set by the FHA. The home will undergo an FHA appraisal to determine its value and to ensure it meets the Minimum Property Standards (MPS). These standards are designed to ensure the home is safe, sound, and sanitary. Any necessary repairs to bring the home up to FHA standards must be completed before the loan can close.
8. FHA 203(k) Loan for Home Repairs
If you’re buying a home that needs significant repairs, the FHA 203(k) loan may be a good option. This loan allows you to finance both the purchase price of the home and the cost of repairs into one mortgage. There are two types of 203(k) loans: a streamlined version for repairs up to $35,000 and a standard version for larger projects.
9. Employment and Income Verification
To qualify for an FHA loan, you’ll need to provide proof of steady employment and income. Most lenders require two years of consistent work history in the same field, and they’ll verify your income through pay stubs, W-2s, and tax returns. Self-employed individuals will need to provide additional documentation, such as two years of tax returns and a year-to-date profit and loss statement.
10. Gift Funds for Down Payment
One of the benefits of an FHA loan is that the down payment doesn’t have to come solely from your savings. FHA guidelines allow borrowers to use gift funds from a family member, close friend, or even an employer. However, there are specific rules for using gift funds, including providing a letter from the donor stating that the money is a gift and not a loan that needs to be repaid.
11. FHA Streamline Refinance
Once you have an FHA loan, you may be eligible for an FHA Streamline Refinance. This program allows homeowners to refinance their existing FHA loan to a lower interest rate with less paperwork and no appraisal. It’s a quick and easy way to reduce your monthly mortgage payments or switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan.
Does the Federal Housing Administration have the ability to change FHA credit standards?
HUD oversees FHA, but they have given them the ability to implement changes to FHA loan requirements. There are still FHA loans for people with bad credit scores.
FHA products, guidelines and FHA loan requirements are subject to change by the Department of Housing and Urban Development and the Federal Housing Administration at any time. The FHA interest rates can change without notice.
FHA loans offer many advantages for first-time buyers, individuals with lower credit scores, or those who have limited savings for a down payment. However, it’s essential to understand the requirements and costs associated with this type of loan before applying. By knowing the minimum credit scores, down payment options, and property standards, you’ll be better prepared to navigate the FHA loan process and make informed decisions about your home purchase. If you’re considering an FHA loan, consult with a qualified lender who can help you understand whether this type of financing is right for your situation.