Moving into the year 2020, FHA loans are still an immensely popular choice among first time home buyers and repeat home buyers alike. The reason behind the popularity is because mortgages insured by the Federal Housing Administration still have some of the best loan terms in the industry, including a low down payment requirement of only 3.5%. FHA loans are also incredibly flexible when it comes to eligibility and credit score requirements, making them a perfect fit for almost anyone on the market for a new home.
Because of the popularity of FHA Loans, it’s important for home buyers to stay up to date on any changes to the FHA’s loan eligibility requirements. In 2020, a few updates have been made to the FHA program that home buyers should be aware of. To help you out, we’ve compiled the most up-to-date FHA loan eligibility criteria on this page. That way, you can stay ahead of the game and get the FHA home financing you need!
2020 FHA Loan Limits
The Most notable change to the FHA loan program for the year 2020 is to the allowable loan amount limitations. Due to the ever-increasing home prices of 2019, 2020 FHA loan limits have been increased in most low cost and high cost areas. This increase directly correlates with the recent Fannie and Freddie amendment to their conforming loan limit that increased the loan ceiling to $510,400 for the year 2020.
Low Cost Areas
The Federal Housing Administration recently announced that counties in most of the country represented as "low cost areas" would see loan limit increase of roughly $17,000. This would bring the limit up from 2019's $314,872 to $331,760 in 2020.
High Cost Areas
In parts of the country with higher cost home prices such as areas in California and New York, the FHA loan limit has been raised to the tune of $40,000. That would bring the loan ceiling for FHA financing up to $765,600 from 2019's $726,525.
2020 FHA Loan Eligibility Criteria
Qualifying for an FHA loan in 2020 means home buyers will have to meet the following eligibility requirements:
FICO credit score of at least 580 to be eligible for a 3.5% down payment (but depending on the lender, a credit score as low as 500 is acceptable with a down payment of at least 10%)
Debt-to-Income Ratio (DTI) of no higher than 50%
Mortgage insurance premium required
Must have an appraisal done by an FHA-approved appraiser
Must have proof of steady income
Required documentation includes W2s, pay stubs, and tax returns for no less than 2 years
Must have worked for the same company for at least 2 years
Must be at least 18 years of age
The home being purchased must be used as a primary residence
In addition to the information above, the FHA also allows non-occupying co-borrowers to apply for an FHA loan. However, they will also need to show proof of income and employment history in order to qualify.
Understanding the 2020 FHA Credit Score Requirement
Borrowers should ideally have a credit score of at least 580 in order to qualify for an FHA mortgage in 2020. That doesn’t mean that borrowers with lower credit scores can’t qualify for the loan, however, that’s just the credit score they’ll need in order to qualify for the low down payment requirement of 3.5% that FHA loans are known for.
If a borrower can make a down payment of at least 10%, then some lenders are willing to accept credit scores as low as 500. This allows many more potential home buyers the option of FHA-insured financing.
Your FICO credit score isn't the only thing that underwriters will scrutinize, however; they also pay close attention to a borrower’s payment history, foreclosures, and bankruptcies in order to determine eligibility. While this may seem strict, rest assured that they also look at any extenuating circumstances that may have kept applicants from making timely payments in the past.
Credit Issues that may Affect FHA Eligibility
Since underwriting for FHA loans look beyond simple credit scores and into a borrower's full financial situation, here are a few red flags potential borrowers need to be aware of:
Judgments, Collections, and Federal Debts - The FHA requires lenders to ensure that any judgments, collections, and debts are paid off before or at the closing of a borrower’s mortgage loan.
Bankruptcies - Bankruptcy is not a disqualifying factor for FHA loan eligibility.
In the case of Chapter 7 bankruptcy, a minimum of two years must have passed since filing, and the borrower should have no additional debt obligations or must have reestablished creditworthiness.
No Credit History - If a borrower has no credit history (especially if they are a first time home buyer), a lender will need to establish credit through other means or obtain a non-traditional merged credit report.
Foreclosure - Lenders are required to determine eligibility for borrowers with previous foreclosures on a case by case basis
Late Payments - It is highly recommended that borrowers establish a minimum of 12 months of on-time payments.
2020 FHA Credit Minimums
FHA-approved banks and lenders are not required to set credit score minimums for potential borrowers. As a matter of fact, the guidelines set by the FHA are just that: guidelines. Lenders are encouraged to set their own requirements (within reason) as well as a limit to the amount of FHA loans they are allowed to originate.
Because of this, lenders usually set tougher eligibility requirements for FHA financing in order to reduce the amount of FHA loans they sell. In fact, lenders are actually penalized by the FHA when borrowers default on FHA loans within a few years of the origination date, even when the FHA’s guidelines are followed exactly.
2020 FHA Loans Down Payment Assistance Programs
Down payment assistance programs are allowed with FHA financing and are meant to help borrowers who may not be able to save enough money to make a down payment on a home. Funding from down payment assistance programs usually comes as a non-payable grant, low-interest loan, or a forgivable loan.
To qualify for down payment assistance programs, the collateral property must be utilized as a primary residence, and cannot be an investment property. Down payment assistance programs are typically location based, and the property in question must fall within the area specified by the program. In many cases, down payment assistance programs have limits regarding the purchase price of the home in question. The most important thing to keep in mind is that there are usually household income limits that serve as a factor for determining eligibility, that takes into account all household members above the age of 18 with a source of income.
Gift Money for 2020 FHA Loans
FHA guidelines allow home buyers to be given monetary gifts from family members to put towards a down payment or closing costs. Gift money is widely accepted across most loan products, and FHA loans are no exception. Just like other loan types, FHA loans require that the source of the gift money be documented, and a gift letter that states that the donation is not meant to be repaid.
In addition, the FHA has ruled that gift money can only come from acceptable sources such as:
A family member of the borrower
An employer of the borrower
The borrower’s labor union
A charitable organization
A down payment assistance program
A close friend (with a documented interest in the borrower)
*Additionally, The seller is able to contribute to the closing costs of the loan, however the seller contribution must not exceed 6% of the total loan amount.
Mortgage Insurance Premiums (MIP) for 2020
Mortgage insurance premiums (MIP) are a requirement of FHA financing, for at least 11 years of the loan term. The calculation for annual MIP payments for loan terms over 15 years are as follows:
Loans Under $625,500
LTV of 95% or below - AMIP of .80% of the loan amount
LTV over 95% - AMIP of .85% of the loan amount
Loans over $625,500
LTV of 95% or below - AMIP of 1% of the loan amount
LTV over 95% - AMIP of 1.05% of the loan amount
FHA Loan "Compare Ratio"
Since 2018, the FHA has adopted a new method that they use to examine high-risk lenders. Stretching into 2020, the FHA uses the “compare ratio” method, which takes into account the lending practices of all local FHA-approved lenders in order to determine their risk status.
To do this, they look at the amount of late-payment FHA loans in each lender’s portfolio. While the method isn't particularly new, recent changes have made the scrutiny more meticulous.
The FHA now takes the credit scores of each late payment borrower into account as well. As of the update, late payment borrowers will be split into three groups:
Under 640
Between 640 and 680
Above 680
The grouping will help to better compare the performance of late-paying borrowers within their own credit groups in order to make a better decision regarding which lenders are of a higher risk. Lenders who are found to be of high risk will lose their FHA credentials and can no longer originate FHA loans.