*Some of the requirements set by the Federal Housing Administration (FHA) to qualify for their home loans—favorable credit score, minimum down payment, and low debt-to-income (DTI) ratio—may not surprise you. But you should also be aware of some lesser-known nuances to FHA loan requirements, like mortgage overlays, employment history, and FHA loan limits.
Keeping some of these aspects of FHA eligibility in mind can help when shopping around for homes and mortgages. So, let’s examine some of the overlooked factors determining your FHA eligibility. That way, you can know whether an FHA-backed loan suits your situation.
FHA minimums vs. Mortgage overlays
The FHA sets minimum requirements for its loans, which are often more attractive to prospective homeowners than conventional mortgage requirements. However, individual lenders may establish their own requirements to feel more secure in lending you funds. These additional guidelines are known as mortgage overlays.
For example, according to the U.S. Department of Housing and Urban Development (HUD), the FHA typically requires at least 3.5% of your loan to be included in a down payment on certain properties, but a specific lender could require a higher down payment. Or, perhaps they’ll want you to have a better credit score than stated by FHA guidelines. Because lenders set their own eligibility criteria, it may be in your interest to research different lenders to see what you need to qualify.
Employment history & income
To qualify for an FHA loan, you generally need to provide your employment history to present a standard of income stability over the most recent two years.
However, what counts as steady income and employment can vary, and lenders typically prioritize income over employment. If you’ve changed jobs multiple times in the past few years but maintained a steady income, your income generally takes precedence over your employment.
Additionally, if you’re self-employed, the process may become more challenging. FHA lenders typically account for the success of your business and your income, but they may be more hesitant to approve you for a loan if you’re in the earlier stages of self-employment.
Ultimately, if you make enough money and have done so consistently, you should be able to prove your income stability. Depending on your situation, it just might take a few extra steps.
Credit Score vs. Down payment trade-offs
The FHA sets guidelines for credit scores and down payment qualifications, but those qualifications alone might not tell the complete picture. For example, you might be able to qualify for an FHA-backed loan with a sub-580 credit score, but you might end up having to make a bigger down payment than the 3.5% that the FHA lists as its base minimum down payment.
Likewise, while you might get approved with minimal financial qualifications, you may be able to access better rates and terms with a higher credit score and income. You might hear frequently that FHA loans are easier to qualify for, but you may still need to apply with stable finances to get ideal interest rates.
Use requirements
To qualify for an FHA-backed mortgage, you’re required to use your desired home as your primary residence. Additionally, you must occupy the home within a “reasonable time” of closing to remain the owner-occupier. If you’re considering taking out a mortgage for a vacation home, you might want to consider looking at conventional mortgage options.
Required mortgage insurance & its impact over time
When you take out an FHA-backed mortgage, you’ll always pay mortgage insurance premiums (MIPs), both upfront and at regular intervals thereafter. That said, there are some particulars about these premiums that may interest prospective homeowners.
One is that you can typically roll the upfront mortgage insurance premium into your loan, allowing you to pay it off over time, but also increasing your loan balance and total interest paid. That means that over the course of your mortgage, you’ll want to have enough funds to be able to cover the costs of your MIP.
Additionally, while most people who take out FHA loans pay regular MIPs for the duration of their loan, if you’re able to make a significant initial down payment, you may be able to halt your MIP payments after 11 years. This could help inform the amount you’d like to put down initially.
FHA loan limits & location
The FHA sets maximum amounts for the loans that change depending on which county your property sits in. Counties with a higher median property value typically will have larger loan limits. Before you buy your home, ensure that the home’s price aligns with or is lower than the maximum loan value for FHA backing in your county.
If the home you’re looking to purchase exceeds the maximum loan value set by the FHA for the property’s area, you may have to seek a jumbo or a conventional mortgage to cover the costs.
Waiting periods after bankruptcy or foreclosure
Some people may be familiar with the FHA’s policy of letting borrowers who have gone through bankruptcy take out a loan, but they might not know about its policy for waiting periods. For example, if you’ve gone bankrupt, you must wait two years before reapplying for an FHA-backed loan under normal terms.
Even after a waiting period, affected borrowers may still need to show reestablished credit and consistent income and might still need to make a higher down payment. So, while FHA mortgage lenders might permit borrowers who have gone bankrupt in the past, there are still some qualifications that they need to meet.
Your finances and FHA eligibility
After considering some of the commonly overlooked facts about FHA eligibility, you might decide that an FHA loan is right for you, or you might decide it’s not. If you’re still unsure whether you should seek an FHA-backed mortgage, you might want to reach out to a financial advisor for more assistance.
Disclaimer: Article content is intended for information only. It may not reflect the publisher’s or employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third-party websites.
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