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FHA Program Structure and Guidelines Overview

The FHA program provides government mortgage insurance through HUD that enables approved lenders to offer loans with lower down payments (3.5%), more flexible credit requirements (scores as low as 500), and higher allowable DTI ratios (up to 50% with compensating factors). FHA loans require upfront and annual mortgage insurance premiums, with annual MIP remaining for the life of the loan on most FHA mortgages. The program is governed by HUD Handbook 4000.1 and includes specific property condition requirements enforced through the FHA appraisal process.

Key Takeaways

  • FHA insures loans made by approved lenders — it does not make loans directly to borrowers.
  • The upfront MIP is 1.75% of the loan amount (typically financed), and the annual MIP rate is 0.50-0.55% depending on LTV.
  • For loans with original LTV above 90%, annual MIP remains for the life of the loan and cannot be removed.
  • Borrowers with 580+ credit scores qualify for 3.5% down; scores of 500-579 require 10% down.
  • FHA allows DTI ratios up to 50% or higher with documented compensating factors, versus the standard 43% guideline.
  • FHA appraisals evaluate both market value and property condition, with specific health and safety requirements that can trigger mandatory repairs.
  • FHA streamline refinance offers simplified refinancing with no appraisal or income verification for existing FHA borrowers.
  • Individual lenders may impose overlays above FHA minimums, so the FHA-published guidelines represent floors, not guaranteed approval criteria.

How It Works

FHA Mortgage Insurance Premium (MIP) Structure

FHA loans require two forms of mortgage insurance: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium. The UFMIP is 1.75% of the base loan amount and is typically financed into the loan balance. For a $300,000 loan, the UFMIP is $5,250, bringing the total loan amount to $305,250 .

The annual MIP is paid monthly as part of the mortgage payment. The rate depends on the loan term, loan amount, and LTV ratio. For most 30-year loans with an LTV above 95%, the annual MIP rate is 0.55% of the outstanding loan balance. For LTVs at or below 95%, the rate is 0.50%. On a $300,000 loan at 0.55%, the monthly MIP payment is approximately $137.50 .

A critical distinction from conventional PMI: for FHA loans with an original LTV above 90%, the annual MIP remains for the life of the loan. It cannot be removed regardless of how much equity the borrower builds. For loans with an original LTV of 90% or below, the MIP is removed after 11 years. This lifetime MIP requirement is a significant cost factor that borrowers should weigh when comparing FHA to conventional financing .

FHA Loan Limits

FHA loan limits are set by county and updated annually based on median home prices. The floor (minimum limit in any area) for 2024 is $498,257, and the ceiling (maximum in high-cost areas) is $1,149,825 for single-family properties. Alaska, Hawaii, Guam, and the U.S. Virgin Islands have higher limits. Borrowers can look up their county’s specific limit on HUD’s website .

Credit Score Requirements

FHA establishes two credit score tiers for eligibility. Borrowers with a credit score of 580 or above qualify for the minimum down payment of 3.5%. Borrowers with scores between 500 and 579 must make a minimum down payment of 10%. Scores below 500 are not eligible for FHA insurance. Note that individual lenders may impose overlays requiring higher scores — many FHA-approved lenders set a minimum of 620 or 640 even though FHA’s floor is 500 .

Debt-to-Income Ratio Guidelines

FHA’s standard DTI limits are 31% for the housing ratio (front-end) and 43% for the total DTI (back-end). However, FHA allows DTI ratios up to 50% or even higher with documented compensating factors. Compensating factors include verified cash reserves equal to at least three months of mortgage payments, minimal discretionary debt, significant residual income, or a housing payment history demonstrating the ability to carry a comparable payment. The automated underwriting system (FHA TOTAL Scorecard, run through DU) may approve DTIs above 43% based on the overall strength of the file .

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Key Factors

Factors relevant to FHA Program Structure and Guidelines Overview
Factor Description Typical Range
Credit Score Tier
Loan-to-Value Ratio
Property Condition
Compensating Factors for High DTI

Examples

Scenario: First-time homebuyer with 620 credit score using FHA with 3.5% down
Outcome: Monthly payment breakdown: principal and interest $1,865 (at 6.75%), MIP $112, taxes $250, insurance $125 = total PITI of $2,352. The MIP of $112/month will remain for the life of the loan because the original LTV exceeds 90%. The borrower would need to refinance to a conventional loan to eliminate MI once they reach 20% equity.

Scenario: Borrower with 47% DTI approved with compensating factors
Outcome: The FHA TOTAL Scorecard approves the application despite the 47% DTI because the significant reserves and housing payment history demonstrate the borrower's ability to handle the proposed payment. The minimal increase from current rent ($1,750) to proposed PITI ($1,900) is a positive compensating factor.

Scenario: FHA appraisal identifying health and safety deficiencies
Outcome: The seller must repair the peeling paint (lead paint concern on pre-1978 home), install the handrail, and either repair or replace the roof before closing. If the seller refuses, the borrower must either pay for repairs, negotiate, or walk away. The loan cannot close until the FHA appraiser re-inspects and clears the deficiencies.

Common Mistakes to Avoid

  • Comparing FHA and conventional loans based solely on monthly payment without considering lifetime MIP costs
  • Assuming FHA loan limits are the same in every county
  • Not preparing the property for FHA appraisal requirements
  • Believing that FHA's 500 minimum credit score means all lenders accept 500 scores
  • Overlooking the FHA streamline refinance when rates drop

Documents You May Need

  • Loan application (Form 1003) submitted to an FHA-approved lender
  • Two years of W-2s and federal tax returns (or business returns for self-employed borrowers)
  • Most recent 30 days of pay stubs
  • Two months of bank statements for all accounts used for down payment and closing costs
  • Gift letter and documentation of gift fund transfer (if using gift funds)
  • Government-issued photo identification
  • FHA case number assignment (obtained by the lender from FHA Connection)
  • Evidence of homeowners insurance with adequate coverage
  • Proof of Social Security Number

Frequently Asked Questions

Is FHA only for first-time homebuyers?
No. FHA loans are available to any eligible borrower, including repeat buyers. There is no first-time homebuyer requirement for FHA financing. However, FHA's lower down payment and flexible credit guidelines make it particularly popular with first-time buyers.
Can I remove FHA mortgage insurance?
For loans with an original LTV above 90% (the vast majority of FHA loans), annual MIP remains for the life of the loan. The only way to eliminate it is to refinance to a conventional loan. For loans with an original LTV of 90% or below, MIP is removed after 11 years.
What credit score do I need for an FHA loan?
FHA's minimum is 580 for 3.5% down or 500 for 10% down. However, most lenders impose overlays requiring 620-640 or higher. Shop multiple FHA-approved lenders to find one that matches your credit profile.
How much is the FHA upfront mortgage insurance premium?
The UFMIP is 1.75% of the base loan amount and is typically financed into the loan. On a $300,000 loan, this adds $5,250 to the balance, making the total loan $305,250.
Can I use FHA for an investment property?
FHA requires owner occupancy — the property must be the borrower's primary residence. Investment properties and vacation homes are not eligible for FHA financing. However, FHA does allow financing of 2-4 unit properties if the borrower occupies one unit.
What is an FHA streamline refinance?
A streamline refinance is a simplified FHA-to-FHA refinance that requires no appraisal and no income verification. The main requirement is a net tangible benefit (typically a lower payment). It is only available to borrowers who currently have an FHA loan.
Why do some sellers not accept FHA offers?
FHA appraisals include health and safety property requirements that conventional appraisals do not. Sellers in competitive markets may prefer conventional buyers to avoid the risk of FHA appraisal-related repair requirements or delays.
What is the maximum DTI ratio for FHA loans?
The standard guidelines are 31% front-end and 43% back-end, but FHA's automated underwriting system frequently approves DTIs of 45-50% or higher when the borrower has strong compensating factors such as reserves, stable employment, or minimal payment shock.
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