An FHA loan is a type of mortgage backed by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development. It’s designed to help make homeownership more accessible, especially for first-time buyers or those with limited savings or lower credit scores. Borrowers with a credit score of 580 or above can qualify with as little as 3.5% down.
Even if you’ve faced financial setbacks like bankruptcy or don’t qualify for a conventional loan, you may still be eligible for an FHA loan. While the federal government doesn’t issue these loans directly, it does insure them giving lenders peace of mind and allowing them to offer more flexible terms to borrowers.
FHA loans are available through FHA-approved lenders, such as banks, credit unions, and non-bank lending institutions. You can use an FHA loan to purchase or refinance a variety of properties, including: single-family homes, two- to four-unit multifamily properties, condominiums and certain manufactured homes (if attached to a permanent foundation)
There are also specific FHA loan programs for new construction or home renovations. Regardless of the property type, it must pass an FHA appraisal to ensure it meets the required standards before the loan can be approved.
While the FHA sets baseline eligibility criteria for its loans, individual FHA-approved lenders can impose their own underwriting standards, as long as they align with FHA’s minimum guidelines. For example, one lender might require a credit score of at least 600, while another could set the bar at 620.
Here are the general credit score requirements to expect when applying for an FHA loan:
The FHA requires a minimum credit score of 500. If your score falls between 500 and 579, you’ll need to make a down payment of at least 10%.
If your score is 580 or higher, you may qualify with as little as a 3.5% down payment.
Lenders also have Debt to Income ratio requirements for approval of your FHA mortgage. Your debt-to-income ratio (DTI) measures how much of your monthly pretax income goes toward debt payments. This includes your rent or mortgage, as well as expenses like car loans, student loans, and credit card balances. Generally, lenders prefer a lower DTI, as it indicates a stronger ability to manage additional debt.
For FHA loans, DTI requirements vary based on your credit score and other financial factors, such as your available savings. If your credit score falls between 500 and 579, the FHA typically requires a DTI of 43% or lower.
In some cases, you may still qualify for an FHA loan with a DTI above 50%, but you’ll need to meet additional criteria, such as having significant cash reserves or other compensating factors.
FHA mortgages have more flexible down payment requirements compared to conventional loans. If your credit score is 580 or higher, you’ll need a minimum down payment of 3.5%. For credit scores between 500 and 579, a 10% down payment is required.
The best part? Your down payment doesn’t have to come entirely from your own savings. FHA loans allow you to use gift funds, as long as the donor provides a letter including their contact information, relationship to you, the gifted amount, and a statement confirming no repayment is required.
If covering the down payment is a challenge and gift funds aren’t an option, down payment assistance programs may help. Many states, counties, and cities offer grants or no-interest loans to assist with both down payments and closing costs. These programs are often managed by state housing finance agencies, but funding can also come from local governments, nonprofits, lenders, and even employers.
In many cases, down payment and closing cost assistance programs are bundled with mortgage options designed for first-time home buyers. By combining multiple programs, you can make homeownership even more affordable.
While many down payment assistance programs are designed specifically for first-time home buyers, some local initiatives focus on specific professions, such as teachers, police officers, emergency responders, and government employees.
However, assistance isn’t just for first-time buyers. According to Down Payment Resource, which tracks over 2,000 programs, 39% of homeownership assistance programs are available to eligible repeat buyers as well.
Keep in mind that these are FHA guidelines, many lenders choose to set higher minimum qualification requirements based on their own risk preferences.
Lenders also decide their own interest rates and fees, so it’s a smart move to shop around. Comparing offers from multiple FHA-approved lenders can help you find the most favorable rate and loan terms.
**Quality Direct Funding is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA or the Federal Government.