FHA Loan Calculator
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). Many first-time homebuyers choose FHA loans because they can’t qualify for conventional financing due to credit issues or a lack of down payment savings.
The FHA has helped millions of renters become homeowners since 1934, by insuring mortgages offered by FHA-approved lenders. The insurance allows lenders to make loans to borrowers with less-than-perfect finances, and recoup the lenders’ losses if a borrower can’t repay the loan.
How to apply for an FHA loan
Here are six basic steps to follow to apply for an FHA loan:
- Shop around with FHA-approved lenders. Not all lenders offer the same types of FHA loans. Make sure you shop the rates and costs of at least three to five lenders, including mortgage brokers, mortgage bankers or institutional banks. Or you can input your basic financial information into an online rate comparison tool and let lenders call you with their best offers.
- Complete an FHA loan application. You’ll need basic information handy about your income, monthly debts and cash you’re using for a down payment as you fill out the application
- Give the lender permission to verify your credit scores. This is usually part of the online application process, and is required to verify you meet the minimum FHA credit score requirement.
- Provide two years of employment and income history. You’ll need current pay stubs for the last 30 days and the last two years of W-2s or federal tax returns, along with contact information for your employer.
- Document your source for a down payment. Lenders typically review two months’ worth of bank statements or a letter of explanation of where the funds for an FHA down payment and closing costs are coming from. Some lenders may want to see that you have a few months’ worth of mortgage payments in the bank if your credit scores are below 580 or your debt-to-income (DTI) ratio is high. These are known as cash or mortgage reserves.
- Explain and document any defaulted federal debt. FHA-approved lenders use the Credit Alert Interactive Verification Reporting System (CAIVRS) to check that you haven’t defaulted on student loans or other federal debts.
Who should apply for an FHA loan?
- Your credit score is below 620.
- Your total DTI ratio (a measure of your total debt compared to your income) is higher than the 50% conventional DTI ratio maximum.
- You don’t need a loan amount above the current FHA loan limit in the county you’re buying in.
- You want to buy and live in a two-to-four unit multifamily home with a 3.5% down payment.
- You want to buy a fixer-upper home with a 3.5% down payment and roll the renovation costs into your loan amount.
- You need the income of a co-borrower who won’t live in the home in order to qualify for a mortgage.
- You’ve had a bankruptcy two or more years ago.
- You’ve had a foreclosure in the past three or more years.
- You wouldn’t otherwise qualify for a conventional loan.
Who should apply for an FHA loan?
Before you fill out an FHA loan application, learn about some key FHA loan requirements so you can decide if an FHA loan is right for you.
- Occupancy. You need to live in the home you’re buying for at least 12 months as a primary residence.
- Credit score. The minimum FHA credit score is 580 with a 3.5% down payment or 500 to 579 with 10% down.
- Credit history. At least two years must have passed since a Chapter 7 bankruptcy, or three years since a foreclosure. Delinquent federal loans may prevent you from getting an FHA loan.
- Income. You should have stable income over the past two years. FHA guidelines allow you to co-borrow with someone who isn’t living in the home.
- Employment history. FHA approved-lenders review the last two years of employment. Be prepared to explain any gaps between jobs of more than 30 days.
- FHA down payment. Plan on a 3.5% down payment with a 580 score, with funds coming from savings, a gift or down payment assistance programs. A 10% down payment is required with a score of 500 to 579.
- DTI ratio. The FHA recommends a DTI ratio of no more than 43% of your gross monthly income, including your mortgage payment and all other debt. Your mortgage payment alone should account for 31% or less of your monthly income. Exceptions are possible if you have cash reserves or no debt outside of your new mortgage payment.
- Cash reserves. Cash reserves aren’t typically required on an FHA loan unless you have low credit scores, or are buying a two- to four-unit multifamily property.
- Home appraisal. FHA appraisal guidelines have stricter requirements to ensure a home is safe and habitable. As a result, FHA appraisal reports tend to be more expensive ($300 to $700) than conventional home appraisals ($300 to $400).
- FHA loan limits. The maximum FHA loan limit for most parts of the U.S. is $356,362 for a single-family home in 2021. Buyers in high-cost areas of the country may be able to borrow up to $822,375 for a single-family home in 2021. Limits are higher for multifamily homes and special exception areas, including Alaska, Hawaii, Guam and the U.S. Virgin Islands.
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