FHA Loan Guide: Limits and Requirements

Buying a home is the biggest investment most people make in their lives. However, few can afford to pay cash, which is why most first-time homebuyers need a mortgage to buy a house.

Getting a mortgage isn’t cheap, but there are options. With Federal Housing Administration loans, qualified borrowers could get a mortgage with a down payment as low as 3.5%. FHA loans also are easier to get for borrowers with less-than-perfect credit — but they come with limits.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the U.S. government. Because FHA backing reduces the risk to lenders, FHA loans require lower minimum credit scores and smaller down payments than other types of loans.

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How Does an FHA Loan Work?

The FHA doesn’t lend money directly to borrowers. Instead, it works with private mortgage lenders, which issue the loans according to FHA guidelines. If a buyer defaults on the loan, the FHA insures the mortgage lender against losses, paying a claim on the unpaid loan balance.

The FHA has offered mortgage insurance since 1934. This program helps more people qualify for a mortgage and become homeowners because lenders are able to offer loans with less strict requirements.

On the borrower’s side, FHA loans work just like traditional mortgages. You get a loan and make monthly payments. The primary difference is that you must pay mortgage insurance, which is harder to avoid with FHA loans than with other types of loans.

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What Are the FHA Loan Limits?

The FHA sets limits on how large of a loan it will insure. These limits are based on the location of the property, as well as the number of units that it contains.

For 2022, the national conforming limit for a loan to buy a single-family home is $647,200. In high-cost areas of the United States, the limit is $970,800.

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Types of FHA Loans

There are several types of FHA loans, each tailored to specific needs and situations. The loans you are eligible for — and the loans that make the most sense for you — will depend on your homebuying goals.

Fixed-rate mortgage

The fixed-rate mortgage is the most common loan type. With a fixed-rate mortgage:

• The interest rate on the loan doesn’t change.
• The monthly payment for principal and interest doesn’t change. Other costs that you pay into an escrow account, such as property taxes or homeowners insurance, may change over time.
• You can choose the repayment term, which is usually 15 or 30 years.

Fixed-rate mortgages provide certainty, but you won’t have the opportunity to save money if interest rates drop. The only way to reduce the loan’s rate is to refinance your mortgage.

Adjustable-rate mortgage

The main difference between a fixed-rate versus an adjustable-rate mortgage is that the interest rate on an ARM typically starts out lower than on a fixed-rate mortgage, but will adjust based on a benchmark such as the federal funds rate. As your interest rate adjusts up or down, your monthly mortgage payment also goes up or down.

If interest rates are relatively stable or decrease, an ARM could help you save money on mortgage interest. But if rates increase, your payment also increases and could make your home less affordable.

Reverse mortgage

The FHA also insures reverse mortgages, sometimes known as home equity conversion mortgages. They allow qualified homeowners age 62 and older to convert the equity in their home into a source of income. Instead of making payments and reducing your loan balance, you receive cash and increase your balance.

There are no income or credit requirements, but you must own and live in the property as your primary residence. How much you can borrow with a reverse mortgage is based on:

• The amount of equity you’ve built in your home.
• The age of the youngest person on the loan.
• Current interest rates.

A reverse mortgage must be repaid in full when the borrower no longer lives in the home. Typically, the home is sold to repay the reverse mortgage, with FHA insurance kicking in to compensate the lender if the sale fails to cover the full amount owed.

Graduated payment mortgage

Graduated payment mortgages are designed for low-income borrowers who expect their income to increase substantially in the next five to 10 years. These FHA-insured loans have low closing costs and low initial payments that increase over time.

The monthly payment increases at a rate of either 2.5%, 5%, or 7.5% over the first five years of the loan, or at a rate of 2% or 3% over the first 10 years of the loan.

Graduated payment mortgages can result in negative amortization. That means your payments early on might not cover the interest that accrues, and you could at times owe more than your home is worth.

Growing equity mortgage

Growing equity mortgages are similar to graduated payment mortgages in that they’re designed for people who expect their income to increase in the future. The difference is that growing equity mortgages don’t allow negative amortization, so your loan balance will never increase as long as you make your monthly payments.

Energy-efficient mortgage

FHA energy-efficient mortgages are for current homeowners and for people who want to buy a home, and help pay for energy-efficient home improvements.

To qualify for an energy-efficient mortgage, you’ll need to get a home energy assessment to determine the cost and potential savings of any improvements you would make. Eligible improvements must be cost-effective, meaning they cost less than the energy they’ll save.

With an energy-efficient mortgage, you can borrow the lesser of:

• The cost of the improvements.
• Or the lesser of 5% of:
  • The property’s adjusted value.
  • 115% of the median area price of a single-family home.
  • 150% of the national conforming loan limit, which is set by the Federal Housing Finance Agency.

Manufactured home loan

The FHA offers fixed-rate loans for the purchase of manufactured homes. Borrowers can be lent up to $92,904 to finance a manufactured home and a lot.

These loans typically have a term of 20 years, but there’s a 15-year term limit for purchasing only a lot, and a 25-year term option for the purchase of both a multisection manufactured home and a lot.

You don’t need to own a lot for your manufactured home, but you must be able to show that you’ve secured a location to place it after the purchase.

Condominium loan

You can apply for an FHA loan to buy an eligible condominium. Eligible condominium projects must consist only of single-family units and be primarily residential in nature. They also must be in full compliance with local and federal housing laws, ready for occupancy, and approved by a local jurisdiction.

These loans come with terms of up to 30 years and require a down payment of at least 3.5%.

The FHA website allows you to check which condo projects are eligible for a loan.

Home improvement and refurbishment loans

FHA 203(k) loans are designed to help qualified homeowners and homebuyers buy a fixer-upper and rehabilitate the property. Homeowners can get these as stand-alone loans, while homebuyers can add them to their purchase mortgage.

With a 203(k) loan, homeowners can borrow a minimum of $5,000, and up to the lesser of:

• The value of the property plus the cost of the improvements.
• 110% of the value of the property after the improvements are completed.

Eligible improvements include:

• Structural alterations and reconstruction.
• Modernization.
• Elimination of hazards.
• Appearance changes.
• Plumbing and septic systems.
• Roofing and gutters.
• Flooring.
• Landscaping.
• Accessibility for people with disabilities.
• Energy efficiency.

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How Do You Qualify For an FHA Loan?

There are specific FHA loan requirements that potential borrowers must meet to qualify for a loan.

Credit score requirements

Borrowers must have a FICO credit score of at least 500 to get an FHA loan. However, borrowers with credit scores of 580 or higher get better terms, such as a lower interest rate and a lower minimum down payment.

Keep in mind that these minimums are set by the FHA. Lenders may set their own credit score minimums for borrowers.

Down payment minimums

The minimum down payment for an FHA loan depends on the borrower’s credit score. Borrowers with credit scores between 500 and 579 must make a down payment of at least 10% of the home’s value. Those with scores of 580 or higher can qualify for a loan with a minimum down payment of 3.5%.

Debt-to-income ratio

Your debt-to-income ratio shows lenders how much of your income is earmarked to pay your debts. It’s calculated by adding up your minimum monthly debt payments and dividing the total by your gross income. Our free DTI ratio calculator can help you with this.

The FHA generally requires borrowers to have a DTI ratio of less than 43%, and no higher than 50% when including the impact that the mortgage payment will have on your finances.  

FHA standards also consider the size of the mortgage payment compared to the borrower’s income. The loan is generally only acceptable if the monthly payment is no more than 31% of the borrower’s monthly income. Energy-efficient homes may allow payments as high as 33% of the borrower’s income, and certain compensating factors may push the limit higher.

Property requirements

The FHA only offers loans for properties that meet its requirements. The property can’t have more than four units, and the borrower must plan to live in the home. The FHA also has specific and strict safety requirements for the properties for which it will insure loans.

FHA loans require an approved appraiser to examine the home. In addition to setting a fair market value for the home, the appraiser will look for structural issues, as well as the presence of hazardous or toxic materials, mold, lead paint, and insulation problems. The FHA won’t insure loans for homes that are too close to power lines or large tanks containing flammable or explosive materials.

The appraiser can hold up a loan if the home doesn’t meet FHA standards, and request repairs before the sale can close.

The Department of Housing and Urban Development also maintains building codes describing the construction standards for new homes purchased with FHA loans. These standards supplement local codes and include basics such as adequate numbers of bathrooms and handrails for stairs.

Mortgage insurance premiums

All FHA loans include mortgage insurance, paid by the borrower. These payments include an upfront premium of 1.75% of the loan amount, and an annual premium that ranges from 0.45% to 1.05% of the loan amount, depending on how much you borrow, your loan term, and the down payment.

Unlike private mortgage insurance, FHA mortgage insurance cannot be removed from the loan by building equity. Instead, how long you’ll pay mortgage insurance varies from 11 years to the full term of the mortgage, depending on the loan amount, loan term, and down payment.

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Is an FHA Loan Right for You?

FHA loans are a good fit for many homebuyers, but it’s important to understand the pros and cons before moving forward.

“The credit score requirements are typically lower for FHA borrowers,” says Jeff Shipwash, founder of Shipwash Properties in Knoxville, Tennessee. “If a homebuyer has less-than-stellar credit and little money to use towards closing, FHA loans are a great option.”

FHA loans are not the right choice for everyone, adds Shipwash.

“FHA loans should be avoided by someone who has great credit, and also someone who has funds to contribute towards buying a home,” he says. “FHA loans require mortgage insurance at closing and during the entire life of the loan. If you have an FHA mortgage, you would need to completely refinance it in order to eliminate the mortgage insurance.”

There also are market considerations when taking out an FHA loan.

“If you are placing an offer on a home that has a lot of interest, you will not be competitive if you are using an FHA loan to purchase,” Shipwash says. “FHA has very strict requirements on the properties they finance, and could be a hassle for the seller.”

Pros of FHA loans

• Low down payment requirement.
• Lower minimum credit scores.
• Multiple types of loans.
• Loans available for nontraditional properties.

Cons of FHA loans

• Loan amounts are limited.
• Requires mortgage insurance.
• The property must meet strict requirements.
• Buyers with FHA loans may not be as competitive in the market.

FHA loans vs. conventional loans

The vast majority of home loans in the United States are conventional loans, which aren’t backed by any government agency. Here’s how FHA loans match up against conventional loans:

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How To Apply For an FHA Loan

To apply for an FHA mortgage, follow these steps.

1. Find FHA-approved lenders

The FHA only works with approved lenders, which must meet strict requirements to offer FHA loans.

HUD maintains a searchable list of mortgage lenders, which you can use to narrow down your options. Our free mortgage calculator can help you estimate the cost of a loan before you apply.

2. Submit applications and documents

When you apply for a mortgage, you must fill out a detailed application. Lenders will ask for documentation to support the information you provide on the application form.

Some of the documents that mortgage applicants can expect to provide include:

• Addresses for the past two years.
• Social Security numbers.
• Employment history for the past two years.
• Gross monthly income.
• Information on financial accounts.
• Total approximate value of all assets.
• If an applicant is self-employed: two years of tax returns, income statements, and balance sheets for their business.

3. Compare loan estimates

Each lender will give you a loan estimate, which includes the interest rate, closing costs, and monthly payment. Make sure to apply for loans from multiple lenders, so you can compare mortgage offers and get the best deal for your situation.

4. Schedule a home inspection and an appraisal

Once you’ve made an offer on a home and it’s accepted, you need to schedule an inspection and FHA home appraisal to make sure the home is in good condition, and that it’s worth enough to secure the loan.

If the home appraises for too little, you may need to make a larger-than-expected down payment, or back out of buying the house.

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FHA Loan Assistance and Relief

FHA loans are a great way for people to buy their first home. However, it can be difficult to save money for a down payment, and borrowers sometimes run into issues with making payments.

Down payment assistance

Many states operate down payment assistance programs to help low-income and first-time homebuyers buy a home. These programs are typically run on a local basis by individual states, counties, cities, or towns. To find assistance programs, check local government agencies in the area you are looking to buy in.

Gifts

If your family is helping with your down payment by giving you money as a gift, it’s important to make sure you handle it properly.

For FHA loans, the government requires that gifts have no expectation of repayment. They also must come from:

• A relative.
• An employer or union.
• A close friend with a documented and defined interest in the borrower.
• A charity.
• A government agency.

Gifts cannot come from people with an interest in the sale of the property, such as the seller, a real estate agent, or a builder. The borrower must show that the gift is from an acceptable source.

Help with payments

Once you have your loan, you might find yourself struggling to make your monthly payments. The FHA offers several options for relief.

For example, the FHA has a forbearance program for people who lose their jobs, as well as informal forbearance options where borrowers can work with their lenders to get forbearance in other situations.

There also are loan modification programs that allow you to extend the term of your loan to lower your monthly payment, or to adjust the mortgage in other ways.

If you’re having problems affording your monthly payment, reach out to your lender before you start missing payments. Your lender may be able to work with you to find a solution.

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FHA Loan FAQ

Here are answers to some frequently asked questions about FHA loans.

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The Bottom Line on FHA Loans

Buying a home is a big undertaking, as well as a major, long-term financial commitment. For many people, the obstacles to affording a home would be nearly impossible to surmount without FHA loans. Low down payment requirements and generous terms make FHA loans a great option for those who need a little extra help to make their homeownership dreams a reality.