FHA Loans

Loan Process

Check your credit

Lenders use your credit scores and the information on your credit report to determine whether you qualify for a loan and what interest rate to offer you.

Check your own credit reports early on to prevent unpleasant surprises and correct any mistakes. You’ll also need a good idea of your credit scores to make the most of our budgeting and planning tools.

Assess your spending

Before you start home shopping, take a close look at your current spending. For most people, buying a new home means taking on new expenses — whether you are currently renting or already own a home.

You need a clear understanding of how much you’re currently spending to decide what you can comfortably afford to spend on a new home.

Budget for new expenses

Now that you have a clear picture of your current spending habits, you can develop a forward-looking budget for how you’ll spend your money once you’ve bought a new home. This lets you decide on a target monthly home payment.

Determine your down payment

Now that you have a good sense of what you can comfortably afford on a monthly basis, it’s time to look at your savings and determine how much you can afford for a down payment.

Decide how much you want to spend

Once you know your estimated down payment amount, one of your credit scores, and a few other details, you can use our tools to figure out what interest rate you might expect to pay for a mortgage. This lets you get a realistic estimate of the home price range that you can comfortably afford.

Consider whether it's right time to buy

Buying a home is a big financial decision. Now that you’ve looked at your finances and estimated how much you can afford to pay for a home, consider whether now is the right time for you to buy.

Build a network of advisors

Buying a home and choosing a mortgage can be complicated. It helps to have people you can talk things over with. People tend to do best when they rely on a network of trusted advisors – not just one person – to help them through the process.

Your friends, relatives, and co-workers can all serve as advisors in this process – they don’t have to be professionals.

Create a loan application packet

In the Explore loan choices phase, you will talk with several lenders to get acquainted. You’ll need to give these lenders some information about your finances. It’s best to gather this information now, so you’ll have it ready at your fingertips.

FHA stands for Federal Housing Administration, and the FHA is a government agency that insures mortgages. It was created just after the Great Depression, at a time when homeownership was prohibitively expensive and difficult to achieve because so many Americans lacked the savings and credit history to qualify for a loan. The government stepped in and began backing mortgages with more accessible terms. Approved lenders began funding FHA loans, which offered more reasonable down payment and credit score standards.

Today, government-backed mortgages still offer a safety net to lenders—because a federal entity (in this case, the FHA) is guaranteeing the loans, there’s less financial risk if a borrower defaults on their payments. Lenders are then able to loosen their qualifying guidelines, making mortgages available to middle and low income borrowers who might not otherwise be approved under conventional standards.

How to qualify for an FHA loan

Qualifying for an FHA loan is generally easier than qualifying for a conventional loan, but you’ll still need to meet some basic minimum standards set by the FHA. While the government insures these loans, the funding itself comes through FHA-approved lenders (like Ellie Mortgage) and each lending institution may have slightly different qualifying guidelines for its borrowers. Keep in mind that, while these FHA standards offer a basic framework, you’ll need to confirm the individual qualifying rules with your specific lender.

Credit Score Minimum of 500

Your exact credit score will play a big role in determining your down payment minimum; typically, the higher your credit score, the lower your down payment and the more favorable your interest rate.

Debt-to-income ratio at or below 43%.

DTI is a standard way of comparing the amount of money you earn to the amount you spend paying off other debts, and FHA loans are more lax on this number.

Steady Income and Proof of Employment

Being able to provide at least 2 years of income and employment records is a standard requirement for all loans.

Down Payment as Low as 3.5%

The down payment minimum for an FHA loan is typically lower than conventional loan and can be as little as 3.5% depending on your credit score and lender.

Property Standards Apply

You won’t qualify for an FHA loan if the house you want to buy doesn’t pass the appraisal process, which is stricter with this type of loan than conventional mortgages.

Maximum FHA Loan Amount

The amount of money you borrow cannot exceed the FHA loan limits; this number changes based on your county and is determined by how expensive the local market is (check HUD resources to confirm latest limits).

Are you ready to apply?

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Frequently Ask Questions

What’s the difference between FHA and conventional loans?

A conventional loan is any mortgage that is not insured by a federal entity. Because private lenders assume all the risk in funding conventional loans, the requirements to qualify for these loans are stricter. FHA loans might be a good fit if you have less money set aside to fund your down payment and/or you have a below-average credit score. While low down payment minimums and competitive interest rates are still possible with a conventional loan, you’ll need to show a strong credit score to qualify for those advantages.

Each loan type has advantages and disadvantages—including different mortgage insurance requirements, loan limits, and property appraisal guidelines—so choosing the one that works best for you really depends on your financial profile and your homebuying priorities.

What Are the Advantages and Disadvantages of an FHA Loan?

FHA loans are meant to make homeownership more accessible to people with fewer savings set aside and lower credit scores. They can be a great fit for some borrowers, particularly first-time homebuyers who often need lower down payment options, but you should weigh the costs and benefits of any mortgage before committing. Here’s a breakdown of the key pros and cons when it comes to FHA loans:

Pros:

Low down payment: Down payments make up the majority of cash to close on any purchase loan and saving up for one can be a significant barrier for some borrowers. FHA loans make it possible to put down as little as 3.5% upfront and still get competitive rates.
Lower credit score: Credit scores can be a major hurdle when it comes to conventional loans, but borrowers with credit scores starting at 500 can qualify for FHA loans.
Higher DTI accepted: Your debt-to-income (DTI) ratio gives lenders an understanding of other major financial obligations in your life. This ratio is a key factor in any loan application because it indicates your ability to afford a mortgage based on current household income and existing debt. Again, FHA loans offer more leniency here and borrowers at or below 43% DTI can qualify.
No income limitations: It’s a common misconception that FHA loans are only available to first-time homebuyers or borrowers with limited income—but they’re not. There’s no maximum income limit that would disqualify you from this type of loan.

Cons:

Mandatory MIP payments: FHA loans are more lenient, but they also come with insurance costs to mitigate risk to the lender. You’ll have to pay Mortgage Insurance Premiums (MIP) no matter what—either for 11 years or for the life of your loan, depending on your down payment.
Less competitive: Sometimes sellers can be more hesitant to accept FHA loans. In a competitive market, you might not win out against conventional loan bids.
Stricter property standards: To offset risk and further protect lenders, FHA loans have strict criteria when it comes to assessing the condition of any property being purchased with an FHA loan. The downside? The house you want to buy might not qualify for an FHA loan. The upside? You’re less likely to be financially burdened by a home that requires expensive repairs or updates.
Loan limits: : FHA loan limits are typically lower than conventional loan limits, which means you might not be able to get funding for more expensive houses. This isn’t necessarily a bad thing, since it helps ensure that borrowers get loans they can afford to repay.