What it Takes to Get Your FHA Loan Approved

FHA loan approval depends on a lender's review of three areas. Those areas are your credit history, your income, and the property itself.

The Federal Housing Administration insures these loans for participating lenders, allowing them to offer mortgages to borrowers who need more flexible credit and lower down payment requirements. The lender, not the FHA, makes the final credit decision.

Loan Limits and Lender Overlays

The FHA sets maximum loan limits that vary by county. You cannot borrow more than the FHA limit for your area without applying for a jumbo loan, which is typically harder to qualify for compared to a conforming FHA mortgage.

Loan approval depends on your loan meeting the lender's standards in this area.
Lenders may also impose their own rules, known as "overlays."

These are stricter guidelines than the FHA's minimum requirements. For example, the FHA may allow a credit score of 580, but a lender's overlay might require a score of 620. This is why you must check the specific requirements of the lender you choose.

The final approval rests with the lender's underwriter, who reviews your complete file to ensure it meets both FHA and lender standards.

Credit and Debt Requirements

Your credit history is the first item a lender will scrutinize. The FHA establishes minimum credit score guidelines for its programs.

To qualify for the 3.5% down payment, you need a credit score of 580 or higher. If your credit score is between 500 and 579, you may still be approved, but you will be required to provide a 10% down payment.

Lenders look beyond the score. They will review your full credit report for late payments, collections, or past bankruptcies. Lenders also analyze your debt-to-income ratio (DTI).

This ratio compares a person's monthly income to their monthly debt. FHA guidelines generally require a housing expense ratio (front-end) of 31% or less and a total debt ratio (back-end) of 43% or less.

Your total monthly debts, including the new mortgage payment, should generally not exceed 43% of your income. Lenders may approve higher ratios if you have compensating factors, such as significant cash reserves or a history of saving.

Income and Employment Verification

You must have a stable and reliable income. Lenders must verify that your income is likely to continue for at least the next three years. You will provide documents to prove your earnings.

These include recent pay stubs, W-2 forms for the past two years, and federal tax returns.

Gaps in employment must be explained. For self-employed borrowers, the requirements are more extensive. You must provide at least two years of tax returns, along with a profit-and-loss-statement, to prove your income is stable.

Down Payment and Cash to Close

The FHA requires a down payment of 3.5% of the home's purchase price for borrowers with a credit score of 580 or higher. 

FHA allows the down payment to be sourced from gift funds. A relative or employer can provide this money. If you use gift funds, you must provide a signed letter from the donor. This letter must state that the money is a gift, not a loan.

You also need cash for closing costs. These costs are in addition to the down payment. They cover fees for the appraisal, title search, and other loan processing expenses.

FHA Appraisal and Property Standards

The FHA requires every property to undergo an FHA appraisal. This is not the same as a standard home inspection. The appraiser confirms the home's value and also reviews its general condition.

The appraiser checks for any issues that affect the home's safety, security, or structural soundness.

This includes problems like a bad roof, peeling paint in homes built before 1978, or a non-functional heating system. If the appraiser identifies required repairs, the seller must complete them before the loan can close.

The FHA loan must also be used for your primary residence; it cannot be used to purchase an investment property or a vacation home.

Mortgage Insurance Premiums (MIP)

All FHA loans require Mortgage Insurance Premiums (MIP) to protect the lender in case you default on the FHA loan. You pay this in two parts. First, you pay an Upfront Mortgage Insurance Premium (UFMIP). This is a one-time charge, currently 1.75% of the loan amount.

Most borrowers roll this cost into their total mortgage balance. Second, you pay an annual MIP, which is collected in monthly installments as part of your mortgage payment.
If you put down less than 10%, you will likely pay this monthly MIP for the entire life of the loan