Requirements for a FHA Mortgage

FHA loan requirements assess the income and fixed expenses of applicants.

The Federal Housing Administration insures the loans of low- to moderate-income borrowers so FHA-approved lenders can offer lower down payments, lower closing costs and more flexible credit requirements. FHA loan down payments, for instance, can be as low as 3.5 percent of the property's selling price. The FHA enforces requirements to screen unreliable borrowers who can't afford to carry a mortgage.

Debt Ratios

The FHA requires borrowers to have a maximum debt-to-income ratio of 41 percent. This means that your fixed expenses such as credit card payments, car loans and insurance premiums cannot amount to more than 41 percent of your gross income.

Credit

FHA-approved lenders must assess the credit history of potential borrowers to determine if they are reliable borrowers. Although the FHA's credit requirements are more flexible than most lenders, it still requires borrowers to meet credit rating standards. Eligible borrowers must demonstrate a track record of timely payments. For example, according to the FHA's underwriting handbook, borrowers with credit scores lower than 500 do not qualify for an FHA loan. Borrowers who file for a Chapter 13 bankruptcy propose a repayment plan to satisfy creditors. Borrowers who file for a Chapter 7 bankruptcy, on the other hand, do not pay for unsecured loans and must liquidize nonexempt assets to pay for secured debts. Those who are paying off their debts through a Chapter 13 bankruptcy proceeding can apply for an FHA loan if they are current on their payments and have a written recommendation from the court's trustee. However, borrowers who have filed for Chapter 7 bankruptcy must wait two years from the discharge date to apply for an FHA mortgage.

Mortgage Insurance

The FHA requires all borrowers to purchase mortgage insurance, which costs an initial premium of 1.5 percent of the loan's total balance plus a 0.5 percent premium that is payable annually. Mortgage insurance covers the FHA from financial losses incurred when borrowers default on their mortgage payments.

Loan Limits

The FHA sets loan limits in different geographic areas that determine the maximum FHA loan amount for which borrowers can apply. For instance, the loan limit for an FHA mortgage in San Francisco is $729,750. You can find the FHA mortgage loan limit for your area at the Department of Housing and Urban Development website.