FHA loans are a popular option for home buyers because they usually require smaller down payments than other types of mortgage loans, they are available for many types of properties, and they are accessible to people with lower incomes or less than desirable credit. FHA loans are federally backed loans geared towards people with financial hurdles that may prevent them from otherwise owning a home. FHA loans are guaranteed by the Federal Housing Administration. 

FHA loans have a variety of requirements and stipulations, and each lender may add their own conditions as well. Many people mistakenly assume all FHA loans are the same; while each FHA loan is guaranteed federally, you will still need to get approved by your lending institution. FHA loans require Federal Mortgage Insurance, which can add quite a bit of money over the lifetime of the loan. In order to qualify, you must be a United States citizen.

FHA Loans for Very Poor Credit (500 to 579)

FHA loans are available for people with credit scores as low as 500, however, if your credit score is under 580 the required down payment goes up significantly. If you can find a lender, you will need at least 10% down, rather than 3.5%. Your interest rates will be higher, and it will be harder to get pre-approved. However, you are able to use gift money for the down payment, which is a relief to many. 

FHA Loans for Poor Credit (580 - 619) 

Once your credit score hits 580, your required down payment drops to 3.5%. You will still be required to have FHA mortgage insurance, and the home must be inspected and approved. It can still be difficult to find a lender willing to work with you, since many financial institutions require credit scores of at least 620 in order to qualify for a home loan. If you have poor credit, you may want to work on improving your credit score until it reaches at least 620, in order to get better rates. 

FHA Loans for Fair Credit (620 - 700) 

People with fair credit but not much in savings are considered the best candidates for FHA loans. The flexibility, low interest rates, and smaller down payment are some significant pros to getting an FHA loan, even when you qualify for a traditional loan. When your credit score is in this range, many lenders will offer you better rates, and you may be able to shop around to save even more money. 

FHA Loans for Good to Excellent Credit (700+)

FHA loans are available for good to excellent credit, but there may be other mortgage options that would be a better fit, since FHA loans require Federal Mortgage Insurance, typically over the life of the loan, which may cost you more than other options. FHA loans may also be a good idea for people who want a low down payment, but plan to refinance once they have enough equity in their home. 

Other Qualifications 

FHA loans come with a laundry list of requirements, which is one of the reasons why most people with high credit scores choose other types of mortgages. Your debt to income ratio must be under 57%, and the home must be inspected and approved by an FHA appraiser. In competitive housing markets, the extra time required can be a huge downside. 

You will need to move into your home within 60 days, since FHA loans can only be used for a primary residence. Depending on the type of FHA loan, you may need to meet different types of requirements. For instance, if you choose an energy efficient mortgage, you can finance the costs of things like new, insulated windows simply by adding it to your mortgage. 

FHA Property Requirements 

FHA loans are designed for people who wouldn’t otherwise be able to own a home. Since the goal is to create upward mobility, FHA property requirements are designed to make sure each home is safe, as well as a good investment. You will need to have your home inspected by an FHA appraiser, in addition to your normal home inspection. These can be nerve wracking, since something as simple as a missing railing or low water pressure can prevent a home from being approved. After a report is made, the seller has the opportunity to make needed improvements in order to be compliant, however, not all sellers are willing to make repairs, especially in competitive markets. 

FHA Loan Limits 

FHA loans are capped, with limits varying based on the cost of living and typical housing prices in each area. In counties that have lower housing costs, the limit may be as low as $330,000, while the loan limit in the most expensive areas upwards of $750,000. Most areas will see loan limits somewhere in between these two numbers. FHA loan limits also have 4 tiers for each area, based on how many units a home is (multi-family homes qualify for FHA loans). 

FHA Loan Types 

FHA loans are not limited to basic home mortgage loans. There are many different types of FHA loans available to fit your needs. From financing a rehab along with your home in a single loan, to choosing the urban renewal loan option for multifamily properties in designated areas, each type of loan is fairly specific and has its own pros and cons. Make sure that you understand the different types of loans and requirements, before you have your property inspected. 

Are FHA Loans Worth It? 

Whether an FHA loan is right for you is very dependent on your situation. While you can qualify with low credit scores and a smaller down payment, you could wind up paying much more due to the Federal mortgage insurance that is required for FHA loans. If you want to finance significant updates to your new home, an FHA loan might be a good idea as well, since there are many options for adding home improvements into your mortgage.