FHA loan requirements

FHA home loan requirements

The Great Depression changed how the United States operated. Many commissions were created to recover the American dream. The Federal Housing Administration (FHA) was one of those commissions.

Tasked with ensuring the working and middle class could secure a home loan, the FHA functions as an alternative to conventional home loans. The purpose of an FHA home loan is to replace a conventional mortgage that you would get through a major lender. These loans also make homeownership more attainable for those who could find it challenging to get a traditional mortgage. 

The requirements of an FHA home loan are less stringent than those of a bank-issued loan, except for requiring an appraisal by an FHA-certified inspector/appraiser. FHA loans are helpful for first-time homebuyers who don’t have enough credit or equity. These loans make up about 19% of all new home sales.

The home buying process can be stressful, with the ins and outs that most people are unfamiliar with. An FHA-secured home loan is no different. There are a couple of nuances with inspections and appraisals required to secure the loan. Below, we will shed some light on FHA home loan requirements, home inspections, and appraisals. 

What is an FHA loan?

An FHA loan is a mortgage insured by the FHA that allows for less money down and permits individuals with lower credit scores to apply. There are fewer underwriting standards specifically designed to help people qualify for mortgages. 

Borrowers who meet FHA loan requirements and secure the loan must pay FHA mortgage insurance. This protects the lender from borrower defaults. FHA loans require two mortgage insurance premiums:

  • Upfront mortgage insurance – 1.75% of the loan amount
  • Annual mortgage insurance – 0.45% – 1.05% (divided by 12 and made in monthly installments)

Qualify for an FHA loan

Here are the eligibility requirements for an FHA loan:

  • A FICO score between 500 to 580 with 10 percent down. A FICO score of 580 or higher with a lower down payment.
  • Have verifiable employment history for the last two years. A lender should be able to verify your income through pay stubs, tax returns, and bank statements.
  • The property you want to buy should be your primary house.
  • The property has to get appraised by an FHA-approved appraiser. This step ensures that you buy the property in sound condition.
  • Have a debt-to-income ratio (mortgage plus all monthly debt payments) of no more than 43 percent of gross monthly income.
  • Wait for one to two years before applying for the loan after bankruptcy or three years after a foreclosure.

FHA home inspections and appraisals

After qualifying for an FHA loan and finding a home, the FHA requires a home appraisal by a certified FHA appraiser. An appraiser’s job is to ensure the property meets the requirements for the FHA-backed mortgage.

An FHA appraisal does two things: It establishes the property’s market value and determines if the home meets the criteria established by the HUD.

The HUD’s page allows looking for home inspectors by location, ID, name, or status.

What’s the difference between an FHA inspection and an appraisal?

The main thing to know about the difference between an FHA inspection and an FHA appraisal is that the FHA does not require an inspection, nor do they have designated inspectors. Simply put, there is no such thing as an FHA inspection. 

However, getting a home inspection in addition to the FHA appraisal is a good idea, as it provides an extra level of safety.

FHA appraisal requirements


Requirements to secure an FHA home loan

After you have qualified for the FHA home loan, you will meet with a loan officer that will require more information. Be sure that you have the following to be completely prepared to expedite the FHA loan review process:

  • Residential addresses over the past two years
  • Social Security numbers
  • Employment information covering the previous two years
  • Two years of personal tax returns, or income statement and balance sheet if you are self-employed
  • Recent payment stubs
  • W-2 forms for the previous two years
  • Gross monthly salary 
  • Checking and savings account information
  • All current debt statements
  • Disclosure of personal property value including any current real estate.
  • Certificate of Eligibility and DD-214, if you are a veteran

Documentation needed at closing for an FHA home loan

Closing on a home that has been secured with an FHA home loan requires the following information:

  • You must have a valid ID
  • Title insurance to ensure the property is not under any claims or liens
  • Homeowners insurance documentation
  • Funds in the form of a cashier’s check or electronic wire

What does an FHA appraiser check?

An FHA appraiser looks at the interior and exterior of the property to ensure it meets the FHA’s Minimum Property Standards. They take photos and make notes based on their observations and any problems. 

A home appraiser evaluates the home’s value based on its condition. They will also look at comparable properties to determine how they stack up against similar ones.

An FHA appraiser’s job differs from a home inspector, who evaluates the home’s condition to give buyers a detailed look into potential issues. 

An appraiser may recommend repairs or extra inspections if the property doesn’t meet the FHA criteria. An FHA appraiser looks for any damage, hazards, and maintenance issues. 

The FHA requires that the property is: 

  • Safe: The property must be safe for living and don’t endanger the health of the buyer. 
  • Sound: The home’s structure and foundation must be sound.
  • Secure: The condition of the home shouldn’t put security into question. 

Here’s what an FHA appraiser does to determine whether a property is eligible for the FHA loan: 

  • Evaluates the property’s physical condition: The appraiser will document any areas of concern and hazards. They will also note any necessary repairs.
  • Assesses the property’s site: The appraiser will provide an analysis of the site, including the location’s topography and the adjacent areas.
  • Assesses the property’s longevity: The appraiser will estimate the property’s expected life, which has to warrant a long-term mortgage.
  • Estimates the property’s market value: The FHA uses the estimate to confirm that a property is worth the requested loan amount.

FHA appraisal checklist

An FHA appraiser examines the property to determine its condition. They will look at the structure, major systems, and foundation. They will also check for hazards like mold, pests, and any leaks. You have to fix these problems to meet FHA home loan requirements.

If these things come up, it doesn’t mean the property you want to buy will fail a home inspection. Your inspector can give your home a conditional pass. It means you’re good if the issues they find are fixed before the sale.

The HUD lists the FHA appraisal standards in Single-Family Housing Policy Handbook. But since it contains a lot of information, we put together a brief checklist:

  • The foundation must be in good condition
  • Attics and crawlspaces free of damage
  • Proper drainage so that water flows away from the property
  • No termites or other pests
  • Proper ventilation throughout the property
  • Windows and doors must close and open
  • Adequate water pressure 
  • Major systems like sewage, electricity, and HVAC are in working condition
  • Functioning appliances
  • Electrical outlets and switches are operational
  • The roof must be in sound condition and without leaks

How can I prepare for an FHA appraisal?

A buyer getting ready for an FHA appraisal can’t do much. But a seller preparing for an FHA appraisal could do some remodeling and fixing. If you are a seller, ensure that your property meets HUD requirements and is free from defects. 

Who pays for an FHA appraisal?

The buyer covers the cost of an FHA appraisal.

The price of the appraisal is included in the loan’s closing costs. Many lenders require applicants to pay the inspection fee when they apply for a loan. Closing costs can sometimes be as high as the down payment. They include fees like a property survey, title insurance, and processing fee. 

How much does an FHA appraisal cost?

The price of an FHA appraisal is usually between $300-600. The price range is based on factors like the size and condition of the home. If an appraiser has to travel an extra distance or the property has custom features, your FHA appraisal cost could be higher.

What issues can raise concerns for an FHA appraiser?

Certain issues could raise the appraiser’s concerns. If something requires a significant repair, the FHA could decline your loan as it would not meet the minimum requirements for the loan. These issues must be a significant fault with one of your home’s essential systems.

Here are some issues that would raise concerns for an FHA appraiser.

  • Damage to the foundation.
  • Evidence of a significant flood resulting in mold, mildew, or even rotting within the home.
  • Evidence of fire or electrical accidents that have caused significant damage.

What happens after an FHA appraisal?

An FHA appraiser will take notes during the appraisal process. Any issues arising during the process should be used as a guideline for a property to comply with the FHA home loan requirements.

The mortgage lender will review the results of an FHA appraisal. If the appraisal has uncovered problems, they must be addressed before closing. The seller is typically responsible for paying for repairs. 

What to do if an appraisal finds problems with the property?

If an FHA appraiser says that issues with the property, you can do a few things:

  • Ask the seller to make repairs
  • Continue looking for other properties that are compliant with the FHA requirements
  • Finance the repairs and purchase through the FHA 203k loan
  • Use a traditional mortgage, which has a less-stringent appraisal process

What if repairs cannot be made before closing?

If repairs cannot be made before closing, the lender can set up an escrow account for the repairs to be made afterward. The escrow account will include the cost of repairs, but borrower labor is not considered part of the costs. 

What if a seller is unwilling to make repairs after an FHA appraisal?

Not every seller will want to make repairs. In this case, a buyer can continue looking for a property that meets the FHA home loan requirements.

An FHA appraisal can be stressful since your loan depends on the outcome. Try not to worry too much. You do have options even if an appraiser discovers major issues.

Standard home and FHA-secured home inspections have similar requirements. 

Inspectors don’t want to fail a home — they are professionals looking out for your future. Their job is to verify the condition and safety of the home of your home so that you can make a good investment.