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FHA Loans: 2022 Guide

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

Table of contents

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: 

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 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
FHA Loans 796,000
Conventional Loans (Conforming) 2,591,000
VA Loans 426,000
USDA Loans 124,000

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. 

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.  

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: 

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. 

FICO® Score

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. 

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:

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). [12] 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. 

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

Downside to FHA loans

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
State From Up to
Alabama $356,362 $356,362
Alaska $356,362 $545,100
Arizona $356,362 $389,850
Arkansas $356,362 $356,362
California $356,362 $822,375
Colorado $356,362 $822,375
Connecticut $356,362 $601,450
Delaware $356,362 $431,250
District of Columbia $822,375 $822,375
Florida $356,362 $608,350
Georgia $356,362 $515,200
Hawaii $408,250 $723,350
Idaho $356,362 $822,375
Illinois $356,362 $379,500
Indiana $356,362 $379,500
Iowa $356,362 $356,362
Kansas $356,362 $389,850
Kentucky $356,362 $356,362
Louisiana $356,362 $356,362
Maine $356,362 $403,650
Maryland $356,362 $822,375
Massachusetts $356,362 $822,375
Michigan $356,362 $356,362
Minnesota $356,362 $402,500
Mississippi $356,362 $356,362
Missouri $356,362 $389,850
Montana $356,362 $478,400
Nebraska $356,362 $433,550
Nevada $356,362 $500,250
New Hampshire $356,362 $724,500
New Jersey $356,362 $822,375
New Mexico $356,362 $495,650
New York $356,362 $822,375
North Carolina $356,362 $805,000
North Dakota $356,362 $356,362
Ohio $356,362 $397,900
Oklahoma $356,362 $356,362
Oregon $356,362 $517,500
Pennsylvania $356,362 $822,375
Rhode Island $506,000 $506,000
South Carolina $356,362 $414,000
South Dakota $356,362 $356,362
Tennessee $356,362 $586,500
Texas $356,362 $416,300
Utah $356,362 $817,650
Vermont $356,362 $379,500
Virginia $356,362 $822,375
Washington $356,362 $776,250
West Virginia $356,362 $822,375
Wisconsin $356,362 $402,500
Wyoming $356,362 $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: 

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%. [13] 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. [14] 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. [15] 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:

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.) 

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