FHA Guidelines
In this Guide, we will discuss and cover the FHA guidelines in a condensed form from the HUD 4000.1 Handbook for FHA loans. HUD, the U.S. Department of Housing and Urban Development, is the federal agency that is the parent of the Federal Housing Administration, commonly referred to as FHA. The Federal Housing Administration is the federal agency that administers the government-backed FHA mortgage loan program to banks and mortgage companies. Banks and private lenders are the financial institutions that originate, process, underwrite, and fund FHA loans.
What Are FHA Loans?
Most homebuyers are not too familiar with the mortgage loan options they have and what loan program is best for them. Homebuyers have heard of FHA loans but what does it mean is the question? Why is it called FHA loans and why is the difference between FHA versus other loan programs? Are FHA loans issued by the government? Why is it called FHA loans? Why are FHA loans called government-backed loans? How do I know FHA loans is the best home loan program for me and my family?
FHA Loan FAQs
Many homebuyers heard of FHA loans but frequently asked questions what is the benefit of FHA versus conventional loans? There are many different types of mortgage options so why FHA loans? What is the best mortgage loan program for first-time homebuyers? What is the best mortgage program for homebuyers with bad credit?
Another frequently asked question about FHA loans is can I qualify for a mortgage during and after bankruptcy? What credit score do you need to get an FHA loan? Do I need to pay outstanding unpaid debts to qualify for a home loan? What makes FHA loans better than other loan programs? How do I know FHA loans are the best home loan program for me? In the following paragraphs, we will be answering all of the above frequently asked questions.
What Is The Role of HUD On FHA Loans
FHA has nothing to do with the origination and funding of FHA loans. The Federal Housing Administration is a division of HUD and is primary purpose is to act as a federal mortgage insurance agency. FHA insures mortgage lenders on home loans from losses by homeowners who have defaulted on their FHA home loans.
As long as the lender has met all the criteria of the minimum FHA guidelines, HUD will insure and partially guarantee the loss the mortgage lender sustained due to the FHA loan being defaulted. Due to the government guarantee from the U.S. Department of Housing and Urban Development, HUD-Approved lenders are more than eager and willing to offer home loans to homebuyers with credit scores as low as 500 FICO.
What Is The Lowest Credit Score You Can Qualify For an FHA Loan?
To qualify for an FHA loan with credit scores below 580 credit score, HUD requires a 10% down payment on a home purchase. Borrowers with less than perfect credit can qualify for FHA loans with only a 3.5% down payment at competitive mortgage rates. FHA loans are the most popular mortgage loan program for first-time homebuyers, borrowers with credit scores down to 500 FICO, high debt-to-income ratio borrowers, bad credit borrowers, and homebuyers who cannot qualify for conventional loans.
What Are FHA Guidelines For FHA Home Loans?
FHA guidelines are the minimum agency guidelines and requirements by HUD on FHA loans. In order to qualify for an FHA loan, you need to meet the minimum HUD guidelines per HUD 4000.1 Handbook. Lenders must follow HUD Guidelines. The HUD 4000.1 Handbook consists of over 1,000 pages of the list of HUD agency guidelines mortgage lenders need to follow.
Mortgage lenders need to make sure borrowers meet the minimum agency FHA guidelines in order for HUD to insure and partially guarantee the loss from the homeowner defaulting on their home loan. HUD will insure the lender in the event the borrower defaults and/or forecloses on their FHA home loan.
What Are Lender Overlays on FHA Loans
Individual mortgage lenders can have their own FHA home loan requirements that are higher than the minimum agency HUD guidelines from the U.S. Departments of Housing and Urban Development. The higher lending requirements from mortgage lenders higher than the minimum HUD guidelines are called lender overlays.
Due to lender overlays, not all mortgage lenders have the same FHA lending requirements. Typical common mortgage overlays imposed by lenders are overlays on credit scores, debt-to-income ratio, collections, charged-off accounts, manual underwriting, income and employment, and other derogatory credit. Just because HUD guidelines say YES does not mean a lender will also say yes.
Do Lenders Have Different FHA Loan Requirements?
No two mortgage lenders have the same mortgage lending requirements on FHA loans. FHA lenders need to meet the minimum mortgage HUD guidelines. If a lender originates and funds a home loan that does not meet FHA guidelines, HUD will consider the loan not insurable. If HUD deems the FHA loan, not insurable, HUD will not guarantee the lender in the event the lender takes a loss due to borrower default.
Most lenders will require a higher lender requirement above and beyond the minimum agency FHA guidelines. The higher requirement above the minimum agency FHA guidelines is referred to as lender overlays. Lenders can have lender overlays on just about anything. Just because one lender denies a borrower an FHA loan does not mean they do not qualify with a different lender.
What Are The Minimum HUD Guidelines To Qualify For an FHA Loan
We will cover the minimum FHA guidelines by HUD throughout this guide on FHA guidelines. HUD has the most lenient mortgage agency guidelines out of any home loan program for borrowers with bad credit, home buyers with low credit scores, and borrowers with a high debt-to-income ratio. In the following paragraphs, we will cover the HUD agency guidelines for borrowers to meet the minimum mortgage guidelines on FHA loans:
What Is The Minimum Credit Scores For FHA Loans
The minimum credit score to qualify for a 3.5% down payment FHA home purchase loan is 580 FICO. The minimum credit score requirement to qualify for an FHA loan is 500 FICO. Homebuyers with under a 580 credit score and down to a 500 FICO are eligible to qualify for an FHA loan with a 10% down payment on a home purchase. As long as the borrower has been timely in the past 12 months, you should not have an issue getting an approve/eligible per automated underwriting system (AUS).
Can You Qualify For an FHA Loan With Recent Late Payments?
FHA loans have the most lenient mortgage guidelines when it comes to recent late payments. There is no other mortgage loan program that is more lenient with late payments in the past 12 months. Mortgage lenders do not frown upon derogatory credit tradelines that are older than 12 months. Most loan programs are deal killers when it comes to borrowers having late payments in the past 12 months. However, this may also be the case with FHA loans.
How To Get an Automated Approval With Multiple Recent Late Payments on FHA Loans?
If you put a larger down payment versus the standard 3.5% down, HUD may render an approve/eligible for borrowers with late payments in the past 12 months. It is next impossible to get an approve/eligible per automated underwriting system in the past 12 months on VA loans. However, if you put a 20% down payment on a home purchase and have multiple late payments in the past twelve months, you will get an automated underwriting system. Many VA-eligible homebuyers who cannot qualify for FHA loans due to late payments in the past 12 months opt for FHA loans due to the more lenient credit guidelines on recent late payments.
FHA Guidelines on Collection Accounts
HUD Guidelines on collection accounts state homebuyers can qualify for an FHA loan with outstanding collections. Borrowers do not have to pay outstanding collections to qualify for an FHA loan. This holds true no matter how large the collection loan balance is. If the borrower has an outstanding collection account balance larger than $2,000, HUD requires the lender to use 5% of the outstanding collection account balance as a monthly hypothetical debt for the borrower’s debt-to-income ratio calculations only on non-medical collection accounts.
HUD Guidelines on Medical Collections
Medical collection accounts are exempt from the 5% hypothetical DTI rule. You can have a large medical collection account balance and it will not affect your debt-to-income ratio. Credit disputes on derogatory credit tradelines are not allowed during the mortgage process. You cannot have credit disputes on non-medical collection accounts. Credit disputes on medical collections are exempt.
Frequently Asked Questions (FAQs)
1. What is an FHA Loan?
It is a mortgage that is backed by the Federal Housing Administration. It is designed to help low-to-moderate-income borrowers with less-than-perfect credit.
2. What are the basic eligibility requirements for an FHA loan?
Credit Score: Minimum of 580 for maximum financing; scores between 500-579 require a 10% down payment.
Down Payment: 3.5% for a credit rating of 580 and above.
Income: Steady employment history or proof of stable income.
Debt-to-Income Ratio: Typically, a maximum of 43%, though other lenders may allow up to 50% with compensating factors.
Property: It must be your main home and comply with FHA property requirements.
3. What kinds of properties qualify for FHA loans?
It can be used for single-family homes, multifamily properties (up to 4 units), condos, and manufactured homes as long as they meet FHA property standards.
4. What are FHA property standards?
FHA requires the property to be safe, sound, and secure. This includes:
No structural issues.
Functioning electrical, plumbing, and heating systems.
No hazardous materials.
Proper roofing and foundation.
Adequate access and egress.
5. How much can I borrow with an FHA loan?
The loan limit varies by county and is adjusted annually. In 2024, the base limit for single-family homes is $472,030, but it can be higher in high-cost areas.
6. What is the FHA Mortgage Insurance Premium?
FHA loans need two kinds of mortgage insurance premiums:
Upfront MIP (UFMIP): 1.75% of the loan amount, settled at closing or rolled into the loan amount.
Annual MIP: Paid monthly, varies based on loan term, loan amount, and loan-to-value (LTV) ratio.
7. Can I use an FHA loan to refinance my existing mortgage?
Yes, FHA offers several refinancing options:
FHA Streamline Refinance: Simplified process for existing FHA borrowers, with reduced documentation and no appraisal required.
FHA Cash-Out Refinance: This option allows borrowers to take out equity from their homes. It requires a new appraisal and meets standard credit and income requirements.
8. What are the advantages of an FHA loan?
Lower credit score requirements.
Low down payment options.
Flexible qualification guidelines.
Assumable loan (can be transferred to a new buyer).
9. Are there any disadvantages to an FHA loan?
Mortgage insurance premiums (MIP) are required for the life of the loan if the down payment is less than 10%.
Loan limits may be lower than conventional loans.
Property must meet FHA standards, which may limit some home options.
10. How do I apply for an FHA loan?
Pre-Approval: Contact an FHA-approved lender to get pre-approved, which involves a credit assessment and income verification.
Find a Home: Work with a real estate agent to find a property that meets FHA standards.
Loan Application: Submit a complete loan application with all required documentation.
Appraisal: An appraiser will assess the property.
Underwriting: The lender will review all information and make a final decision.
Closing: You’ll sign the loan documents and finalize the purchase if approved.
11. Can I get an FHA loan after bankruptcy or foreclosure?
Bankruptcy: You may be eligible 2 years after a Chapter 7 discharge or 1 year after filing Chapter 13 if you have a good payment history and meet other credit and income requirements.
Foreclosure: You can be eligible for an FHA loan 3 years after a foreclosure, provided you have re-established good credit.
12. Are there any special FHA loan programs?
FHA 203(k) Rehab Loan: Provides funds for purchasing and renovating a home.
FHA Energy Efficient Mortgage (EEM): Helps borrowers finance energy-efficient improvements with their FHA loan.
FHA Back to Work Program: Allows borrowers to qualify for an FHA loan just one year after a foreclosure, short sale, or bankruptcy due to economic hardship.
