FHA Loans: 2022 GuideBy Michelle L. Black
If you want to buy a house but are concerned about your credit score, you might want to consider an FHA loan. The Federal Housing Administration has a focus on helping first-time, minority, low- and moderate-income homebuyers. And the lenders that issue FHA loans are willing to loosen approval standards since the loans are backed by the federal government.
Key stats and facts
- In 2020, FHA helped 817,847 homebuyers, with a high of 83.1% first-time homebuyers (33% of whom were minorities).  https://www.hud.gov/sites/dfiles/Housing/documents/2020FHAAnnualReportMMIFund.pdf
- In 2020, FHA loans accounted for 9.61% of home loans.  https://www.hud.gov/sites/dfiles/Housing/documents/2020FHAAnnualReportMMIFund.pdf
- FHA loans may be easier to qualify for and, therefore, are popular with homebuyers who might have a lower credit score and a smaller downpayment.  https://www.washingtonpost.com/business/2021/04/27/pros-cons-fha-loans-first-time-home-buyers/
- During the third quarter of 2021, the FHA endorsed 366,115 mortgage loans, the largest number since the fourth quarter of 2015.  https://www.hud.gov/sites/dfiles/Housing/images/MMIQtrlyQ32021.pdf
- In the third quarter of 2021, the percentage of loans originated for people with a credit score of less than 620 rose to 7.48% from 5.75% in the previous quarter.  https://www.hud.gov/sites/dfiles/Housing/images/MMIQtrlyQ32021.pdf
What is an FHA loan?
FHA loans are mortgage loans issued by lenders that are backed, or insured, by the federal government. Because these loans are insured, lenders are more willing to approve loans for homebuyers with lower credit scores who might not qualify for a conventional loan.
Lenders know there’s less risk involved with an FHA loan. If a borrower defaults on their debt, the lender can file an insurance claim with the Federal Housing Administration to collect the unpaid balance (principal only).
FHA loans have helped millions of people realize their dream of owning a home. If you want to buy a home with bad credit or other credit-related issues, an FHA loan might be a good fit for your situation.
How to apply for an FHA loan
Step One: Find an FHA lender.
The Federal Housing Administration itself doesn’t issue home loans. So, if you’re ready to buy a home and think that an FHA loan is your best option to make the dream of homeownership a reality, your first step is finding an FHA-approved lender.
If you are working with a real estate agent on your home purchase, the agent might have recommendations for an FHA lender. The U.S. Department of Housing and Urban Development (aka HUD) also provides a HUD lender tool you can use in your search efforts.
Step Two: Fill out a loan application.
Once you find your preferred lender, it’s time to fill out and submit a mortgage application. Depending on the lender you may be able to complete this step online, in person, via phone or email.
Be prepared for the loan officer to check your three credit reports and associated scores at this stage of the process. This information helps determine (a) if you’re eligible for financing and (b) the rate that the lender will offer you.
Aside from your credit details, you may also need to provide the loan officer with information such as:
- Personal identifying information (i.e., name, address, Social Security number, etc.)
- Employment history
- Income details
- Down payment size
If you already have a home picked out that you want to buy, you’ll need to supply details such as the sales price and property address.
Step Three: Compare multiple loan quotes.
Even with a recommendation from a trusted Realtor, it’s still important to shop around for the best mortgage offer. A 2018 study by Freddie Mac found that mortgage borrowers who searched for the best interest rate saved $1,500 on average by getting just one extra rate quote. Those who stepped up the rate shopping and got five quotes from different lenders saved an average of $3,000 on their mortgage.
Types of FHA loans
The FHA insures a variety of home loans, though single-family homes are its primary focus. Here's a list of five of the most popular FHA loans available:
- FHA Basic Home Mortgage loan: These loans are for single-family homes based on FHA guidelines. Borrowers can use the Basic Home Mortgage Loan 203(B) to purchase or refinance a primary residence.  https://www.hud.gov/program_offices/housing/sfh/ins/sfh203b
- FHA Rate-and-Term Refinance: You can pay off your mortgage and refinance with a more favorable rate or term with this kind of FHA loan. This loan type works for conventional loan borrowers who want to refinance to an FHA loan and for FHA borrowers who desire a new FHA loan with different terms.  https://www.hud.gov/sites/documents/08-40MLATCH.PDF
- FHA Cash-out Refinance: This FHA loan allows you to refinance your existing mortgage (FHA or conventional) for more than you owe and keep the difference after closing costs. There are no restrictions on how you can use the money. However, you can only borrow up to 95% of the value of your home. For loans over $417,000, your loan-to-value (LTV) ratio drops to 85%.  https://www.hud.gov/sites/documents/FY16_SFHB_MOD6_PROGRAM.PDF
- FHA 203(k) loan: The FHA 203(k) loan can help you buy a house and pay for renovations with a single loan. The initial portion of the loan goes to pay the seller and/or pay off any existing mortgage on the property. The remaining rehabilitation funds go into an escrow account. As you make repairs or improvements on the home, those funds can be released in increments.  https://www.hud.gov/program_offices/housing/sfh/203k/203k--df
- Home Equity Conversion Mortgage (HECM): The HECM is more commonly known as a reverse mortgage. This type of FHA loan allows seniors to work with an FHA-approved lender to withdraw a portion of their home equity. Eligible borrowers can even use the funds from an HECM to buy a new primary residence. However, the borrower must be able to pay the difference between the HECM funds and the cost of the new home in cash.  https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
FHA loans vs other loan types
For the first-time homebuyer or someone with less-than-stellar credit, an FHA loan can be an attractive option. But, is it the best choice for you? Here’s how an FHA loan stacks up against other home mortgage loans.
|2020 Home Purchases in the United States|
|Conventional Loans (Conforming)||2,591,000|
FHA loans vs conventional loans
The key difference between FHA and conventional loans is the level of risk that a lender has to accept when loaning money to a homebuyer. Unlike FHA loans, conventional home mortgage loans do not come with the backing of the U.S. government. Instead, they are issued and backed by private lenders, including banks and credit unions.
Lenders that issue conventional loans will want to work with borrowers who are more likely to repay their loans as promised. For this reason, credit score requirements tend to be tighter for conventional loans vs. FHA loans. Again, it all comes down to risk.
Below are a few other ways that FHA loans and conventional loans differ from each other.
- Credit requirements: If you have a large enough down payment (10%), you might qualify for an FHA loan with a credit score as low as 500. (Note: You still have to find an FHA-approved lender that’s willing to work with you, and that can be difficult.) However, you will need at least a score of 620 for a conventional loan.
- Loan amount: If you need to borrow a large amount to purchase a home, an FHA loan may not suit you. Conventional lenders make jumbo loans available to eligible borrowers who want to borrow a higher amount than standard conventional loan limits allow. Jumbo loans are a type of non-conforming conventional mortgage that doesn’t meet Fannie Mae and Freddie Mac lending guidelines. The lender cannot sell these loans to those government-sponsored entities (GSEs) after closing. The result? More risk for the lender, and potentially higher interest rates and stricter qualification standards for you as a borrower.
- Down payment: In addition to higher credit standards, conventional loans may also feature higher down payment requirements than FHA loans. But if you can put down at least 20% on a conventional mortgage, you can avoid the added cost of private mortgage insurance (PMI). There’s no way to avoid mortgage insurance costs up front with FHA loans. But if you put down 10% or more, you may be able to cancel FHA mortgage insurance after an 11-year period.
- Investment properties: You can use a conventional loan for investment properties or second homes. That is not the case with an FHA loan.
- Post-bankruptcy mortgage: You will have to wait at least seven years after bankruptcy to qualify for a conventional loan. FHA loans only require a three-year post-bankruptcy waiting period.
FHA loans vs USDA loan
As you explore your borrowing options, you might wonder: what’s the difference between FHA and USDA loans? Both loans are backed by the federal government, but they help solve different types of home-buying needs.
Here are some key differences between these two loan options.
- Location: USDA loans seek to increase homeownership of those who have low to moderate incomes in eligible rural or suburban areas. You can use the property lookup tool on the USDA website to find out if the home you’re interested in buying might be eligible for USDA financing.
- Credit requirements: The U.S. Department of Agriculture does not impose a minimum credit score requirement. But many lenders will want to see a minimum FICO® Score of 640 to approve you for a USDA loan. You might be approved with a lower score through alternate credit or a manual underwriting process. FHA loans require a FICO Score of at least 500 to qualify (with a 10% down payment). You can put down just 3.5%, but you’ll need a credit score of 580 or higher.
FHA loans vs VA loan
VA loans are government-backed loans guaranteed by the U.S. Department of Veterans Affairs. With VA vs. FHA loans, the primary way they differ is in the fact that VA loans are only available to service members, veterans, or surviving spouses.
These two loan types differ in a few different ways, including:
- Credit requirements: There is no minimum credit score requirement for VA loans. Individual lenders, on the other hand, like to see a FICO Score of 580 or even 620 when you apply for a VA loan. You need a FICO Score of 500 or higher for an FHA loan if you’re providing a 10% down payment. Most borrowers have a credit score of 580 or higher, and have the option to put down just 3.5% as a result. Some lenders may require higher scores for FHA loans as well.
- Debt-to-income (DTI) ratio: The relationship between your income and your debts matters with both FHA and VA loans. With FHA loans, your maximum DTI ratio is 57% (43% or less is better). However, your lender may impose stricter requirements. VA loans don’t have a maximum DTI ratio. But your lender will require you to show “compensating factors” with any DTI ratio above 41%. These factors may include excellent credit, liquid assets, or other details that could decrease your perceived risk level as a borrower.
FHA loan credit score
You can qualify for an FHA loan with a credit score of 500 with a down payment of at least 10%. If you opt to make a down payment as low as 3.5%, you will need a credit score of 580 or higher.
In reality, however, you need to check with your lender to learn the minimum credit score requirement for an FHA loan. Lenders are allowed to require higher credit scores from borrowers if they desire to do so.
How different credit scores compare
When you apply for a mortgage — FHA or otherwise — the lender will check your FICO Scores from Equifax, TransUnion, and Experian as part of the application process. FICO Scores range from 300 to 850.
Here’s a look at how different FICO Score ranges stack up in the eyes of a lender.
- 300 - 579 (Very Poor)
- 580 - 669 (Fair)
- 670 - 739 (Good)
- 740 - 799 (Very Good)
- 800 - 850 (Exceptional)
The lower your credit score falls on the scale above, the more difficult it may be to qualify for a mortgage. Lower credit scores can also lead to higher interest rates and less desirable loan terms.
If you have time, it’s in your best interest to make sure your credit scores are in good shape before you apply for a mortgage. The best way to start this process is by reviewing your credit reports from all three major credit bureaus.
FHA income requirements
What’s the income requirement for FHA loans?
There are no income requirements to be approved for an FHA loan. However, you will need to demonstrate you can afford the monthly payments.
One way to predict your ability to repay the loan is to look at your debt-to-income ratio and your payment-to-income ratio.
- Your monthly mortgage payments should not be more than 31% of your monthly gross income.
- Your debt-to-income ratio ideally shouldn’t exceed 43%. If it does, a lender will have to manually underwrite your loan, and you’ll likely have to jump through some additional hoops to qualify.  https://www.rocketmortgage.com/learn/fha-loans
Is there an income limit or maximum?
Just as there are no minimum income level requirements for FHA loans, there is no maximum income cap for this type of mortgage either. But you will need to verify that you have a stable income when you apply for financing.
Be prepared to produce appropriate documents that prove your income to the lender. These may include:
- Paycheck stubs
- W-2 forms
- Federal tax forms
- Bank statements
Refinancing FHA loans
Because FHA loans focus on first-time homebuyers who might not have stellar credit, they can be more expensive. Higher interest rates and monthly mortgage insurance payments can both increase the cost of your home loan.
Thankfully, you can refinance your FHA loan. And if your credit has improved or if other factors have reduced your risk as a borrower, you may be able to qualify for lower interest rates.
What are the requirements for refinancing?
There are multiple ways to refinance an FHA loan. Your specific qualification requirements will depend on (a) the type of new mortgage you are seeking and (b) your lender.
With an FHA Cash-out Refinance, for example, you’ll need enough equity in your home for refinancing and take out additional funds for yourself. Most lenders also require at least 12 months of timely payments on the home (which is your primary residence).  https://www.chase.com/personal/mortgage/education/financing-a-home/how-to-refinance-fha-loan
When you feel your credit is in better shape, it may be a good time to seek a better mortgage. Your lender can let you know the requirements you need to meet to refinance your home.
What options are there for refinancing?
There are multiple ways to refinance an FHA loan. Here are three popular options you may want to consider.
- FHA Streamline Refinance loan: You must already be an FHA borrower and have made six or more payments to qualify for this loan. In some cases, you don’t have to go through a new credit check or appraisal to qualify.
- FHA Simple Refinance loan: Again, you need to be an existing FHA borrower to qualify for this loan. FHA Simple may work well for people who want to replace an adjustable-rate mortgage (ARM) with a fixed-rate mortgage.
- FHA Cash-out Refinance loan: You don’t have to have an existing FHA loan to qualify for a new FHA Cash-out Refinance loan. However, you do need sufficient home equity to qualify, and you must have made your last 12 monthly payments on time.
When to refinance?
There are a number of factors that can help you determine whether it’s wise to refinance your mortgage. In general, you want to secure a lower interest rate and be sure that you’ll stay in the home long enough to recover any new closing costs you incur when you refinance.
If you secured an FHA loan due to a lower credit score, it may be beneficial to consider refinancing when your credit report improves. In some cases, taking out a new FHA loan might be wise. But transitioning to a conventional loan sometimes makes sense as well.
With FHA loans you need to carry mortgage insurance. If your down payment was 10% or more, you will pay mortgage insurance premiums for at least 11 years. If your down payment was less than 10%, you’ll pay the premiums for the life of the loan.
With a conventional loan, it’s easier to eliminate mortgage insurance requirements. If your down payment or equity in the house is at least 20%, you can avoid this cost.
Keep in mind that refinancing a home loan can affect your credit too. It could also restart your loan term, and potentially result in more interest paid overall in some cases.
FHA loan pros and cons
FHA loans can be great for first-time homebuyers, but they might not be the best solution for everyone.
Main benefits of an FHA loan
- FHA loans can be easier to qualify for because they are backed by the government.
- You can pay a lower down payment with an FHA loan, as low as 3.5% of the purchase price.
- You may qualify for an FHA loan even after filing for bankruptcy or with other credit issues.
- FHA loans may help you purchase a condo or manufactured home.
- You can seek a 15- or 30-year fixed-rate or adjustable-rate mortgage.
Downside to FHA loans
- You may pay a higher interest rate compared with other types of mortgages.
- You will need to pay a mortgage insurance premium, which will include an upfront fee and a monthly fee.
- FHA loans have limits based on the county where the house is located.
- The property will have to meet minimum property standards established by the Federal Housing Administration.
- FHA loans are for primary residences, not investment properties. You can purchase a multi-family home, but you will have to live in one of the units.
FHA limits per state
The FHA imposes loan limits based on where the property you wish to buy is located. For 2021, FHA nationwide loan limits range between $356,362 and $822,375.
In some high cost-of-living-areas, like San Francisco, homebuyers can borrow more. But if you’re buying a home in a low-cost-of-living area, your maximum loan limit will be lower.
Below are the current FHA mortgage limit ranges by state. You can use an online tool from HUD.gov to look up the loan limits of your specific area.
|Single-Family Home Limits|
|District of Columbia||$822,375||$822,375|
Modifying an FHA loan
When you’re unable to make mortgage payments and the account becomes overdue, some lenders will allow for a loan modification. A modification may change the terms of your loan in several potential ways, such as:
- The overdue amount could be added to your balance.
- Your interest rate or monthly payments may be reduced.
- The length of your loan may be extended.
One type of mortgage modification is the FHA-Home Affordable Modification Program (HAMP). HAMP allows eligible borrowers to receive a second loan to (a) bring their mortgage current and (b) reduce their outstanding loan balance by as much as 30%.  https://www.hud.gov/sites/documents/2008-5FHA.PDF
This second loan is interest-free, and you don’t have to make payments on the balance until you pay off the first mortgage or sell the property. The remaining mortgage amount will have a reduced balance, and monthly payments are modified to a lower amount.
You will need to contact your lender and provide updated information about your income and expenses to see if you’re eligible for the FHA-HAMP. You might also need to make trial payments for three months or more to see if you can financially handle the modified loan.
FHA loan FAQ
Can you get an FHA loan after bankruptcy?
You may be able to qualify for an FHA loan three years after filing for bankruptcy.
How much is PMI on an FHA loan?
There is an upfront fee, usually of 1.75% for private mortgage insurance that you’ll have to pay at closing. The annual premium can be between 0.45% and 1.05% of your loan amount.  https://www.hud.gov/sites/documents/15-01MLATCH.PDF
What is the debt-to-income ratio for FHA loans?
FHA likes to see a debt-to-income ratio of no more than 43%, however, some lenders will allow for a higher DTI.
Are FHA loans assumable?
FHA loans are assumable. Mortgages approved before Dec. 1, 1986, generally do not have restrictions. Loans after that date might be subject to a creditworthiness review.  https://www.hud.gov/sites/documents/4155-1_7.PDF
How would you know if an existing loan is an FHA loan?
To determine if a loan is insured by the FHA, you can call your lender, real estate agent, or loan servicing company. Your original mortgage documents will have an HUD-1 Statement, and if the FHA box is checked, you have an FHA loan.
What documents do you need for an FHA loan?
Some of the most common documents you will need when you apply for an FHA loan include:
- A valid ID, like a driver's license, state-issued ID, or passport
- Social Security card
- Employment-related documents, like paycheck stubs
- Income-related documents, like federal tax returns
- Bank statements
What to do if you’re denied an FHA loan
If a lender denies your application for an FHA loan, you can ask questions to find out why. You may also receive a notice in the mail, called an adverse action letter, explaining the reasons for your declination.
Should you discover that a lender denied your application due to your credit, it’s important to take steps to fix those issues. (Note: If there are errors on your credit report, you can dispute them with the credit reporting agency involved in the issue.)
-  https://www.hud.gov/sites/dfiles/Housing/documents/2020FHAAnnualReportMMIFund.pdf
-  https://www.hud.gov/sites/dfiles/Housing/documents/2020FHAAnnualReportMMIFund.pdf
-  https://www.washingtonpost.com/business/2021/04/27/pros-cons-fha-loans-first-time-home-buyers/
-  https://www.hud.gov/sites/dfiles/Housing/images/MMIQtrlyQ32021.pdf
-  https://www.hud.gov/sites/dfiles/Housing/images/MMIQtrlyQ32021.pdf
-  https://www.hud.gov/program_offices/housing/sfh/ins/sfh203b
-  https://www.hud.gov/sites/documents/08-40MLATCH.PDF
-  https://www.hud.gov/sites/documents/FY16_SFHB_MOD6_PROGRAM.PDF
-  https://www.hud.gov/program_offices/housing/sfh/203k/203k--df
-  https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
-  https://www.rocketmortgage.com/learn/fha-loans
-  https://www.chase.com/personal/mortgage/education/financing-a-home/how-to-refinance-fha-loan
-  https://www.hud.gov/sites/documents/2008-5FHA.PDF
-  https://www.hud.gov/sites/documents/15-01MLATCH.PDF
-  https://www.hud.gov/sites/documents/4155-1_7.PDF