FHA Mortgage Necessities for 2021
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If you don’t fit the typical homebuyer profile, an FHA loan might be for you. These mortgages have looser qualifications and down payment requirements, making home ownership more accessible for first-time buyers and those with lower savings.
What is an FHA Loan?
FHA loans are mortgages secured by the Federal Housing Administration (FHA), an agency of the United States Department of Housing and Urban Development (HUD). Unlike traditional mortgages, they don’t require a high credit rating or large down payment. These loans with a term of 15 and 30 years can be used to buy single-family houses as well as multiplexes with two to four units and individual condominiums.
The FHA itself does not provide the loans – you have to go through a lender – but they insure the loans in the event of default. This allows FHA-approved lenders to relax their standards and allow people to purchase homes that they might not otherwise be able to lend to.
FHA loans are popular with people who are new to home buying. “We’re seeing first-time home buyers using them at a higher level because the lower down payment requirement may be more accessible,” said Bill Banfield, executive vice president of capital markets at Rocket Mortgage. For an FHA loan, the minimum down payment is 3.5% or 10%, depending on your FICO credit rating.
However, you must meet certain borrower and real estate requirements in order to qualify for an FHA loan. The FHA publishes new guidelines every year and increased the maximum loan amounts for both low and high cost areas in 2021. We have summarized the qualifications you need to meet below. For more detailed answers, see the 1,139-page FTA Single-Family Housing Policy Handbook released on November 18, 2020. Note that while the FHA outlines these minimum requirements, the lender has leeway to raise and tighten these standards.
How the pandemic impacted FHA loans
Over the past year, the credit industry has become more risk averse as unemployment climbs to historic highs. The combination of low FHA interest rates and the urgent need for cheap credit has resulted in increased demand for FHA loans, which in turn has led lenders to raise their eligibility requirements. According to a report from the Urban Institute, the average credit score on a completed mortgage (both conventional and federally subsidized) rose from 741 in February to 764 in October – and is not expected to deteriorate anytime soon.
Homeowners on FHA loans are disproportionately affected by the pandemic compared to those on traditional loans. In a survey conducted by the Mortgage Bankers Association, 10.76% of FHA borrowers surveyed had a loan that was either in foreclosure or 90 days or more past due.
As a result, you can find that the FHA loan market is much more competitive than usual. Potential borrowers with “fair” credit who would have qualified for an FHA loan prior to the pandemic can now find that their applications are denied or their interest rates are higher.
To increase your chances of success, we recommend that you look for the best deal as you may get more competitive deals from certain lenders. Those who are turned down for FHA loans want to take steps to rebuild their credit for the long term.
FHA loan requirements 2021
|Minimum deposit||3.5% with a credit score over 580; 10% with a credit score between 500 and 579.|
|Minimum Credit Score||500|
|Maximum debt-to-income ratio||Front-end DTI (mortgage payments only): 31% Back-end DTI (all debt payments): 43%|
|Minimum and maximum income||None|
|Documentation required||-Social Security Number
– Proof of employment (e.g. original pay slips, W-2s, 1099s)
– Permanent address and proof of residence
– Federal income tax returns for the past two years
– For refinancing: promissory notes and certificates from other mortgages, property tax bill, home insurance, property tax bill, rental agreements (if applicable)
|Credit limits||Low cost area
– Single: $ 356,362
– Duplex: $ 456,275
– Triplex: $ 551,500
– Quadruple: $ 685,400
For credit limits by state and county, visit FHA.com.
* All information as of December 15, 2020.
FHA down payment request
The FHA requires different down payments, depending on your FICO credit score. With a credit rating of over 580 (classified as “fair”) the minimum deposit is 3.5%. If your credit score is between 500 and 579, you need to deposit 10%.
FHA debt-to-income ratio requirement
The debt-to-income ratio (DTI) is your monthly debt payments (which can include student loans, credit cards, mortgages, and other types of credit) divided by your monthly pre-tax income. For example, if you make $ 2,000 per month and spend $ 450 per month on various debt, your DTI is 22.5%. This measurement is used by lenders to assess whether you are likely to be able to repay the loan you are applying for.
The FHA generally requires you to have a DTI of 43% or less, although this will vary based on your creditworthiness. More specifically, your front-end DTI (monthly mortgage payments only) should be 31% or less and your back-end DTI (all monthly debt payments) should be 43% or less.
Individual lenders may also have more stringent qualifications. During the application process, you must disclose all debts and open lines of credit to the FHA.
FHA income requirement
There is no minimum or maximum income requirement for an FHA loan.
FHA loan documentation
Unfortunately, if you thought filling out an application was a hassle, there’s more to come. “Everything that the FHA considers to be a qualifier must be proven by the customer through documentation,” says Banfield. Lenders require you to produce these documents to confirm that you are a creditworthy borrower. The documents you need to share depend on the lender, but in general you should be ready to hand over:
- Proof of social security number
- Driver’s license
- Proof of employment (e.g. original pay slips, W-2s, 1099s)
- Permanent residence and proof of residence
- Federal income tax returns for the past two years
- Bank statements
- For refinancing: promissory notes and certificates from other mortgages, property tax accounting, home insurance, property tax accounting, rental agreements (if applicable)
FHA property requirements
Not every property will be eligible for an FHA-covered mortgage. Here are the requirements the property must meet in order to qualify for an FHA loan:
- The loan must be a primary residence and not an investment property. To prove this, at least one borrower must be living in the home within 60 days of taking out the loan.
- The property cannot be purchased within 90 days of a previous sale, therefore no relocation is allowed.
- The title of title must be in your name or in the name of a living trust upon liquidation.
- All properties must go through the FHA assessment process, including a HUD-approved inspection review to determine whether or not the home is safe, healthy, and secure.
FHA credit limits for 2021
The FHA announced higher credit limits in 2021 – a move that’s great for first-time buyers, says Banfield. “This will help offset the rapid acceleration in home prices we saw in 2020 with inventory shortages across the country.”
The maximum loan amount the FHA insures depends on where you live in the US. In urban areas with higher cost of living, the limits tend to be higher. You can use the HUD website to determine what restrictions apply to your area.
|Housing type||Low cost area||High-cost area|
|single||$ 356,362||$ 822,375|
|Duplex||$ 456,275||$ 1,053,000|
|Triplex||$ 551,500||$ 1,272,750|
|Four-plex||$ 685,400||$ 1,581,750|