How to qualify for an FHA loan: A checklist

Many lenders look for good credit and a substantial down payment when considering applicants for a mortgage, requirements that can make the task of obtaining a loan harder for many first-time homebuyers.

But not all is lost. The Federal Housing Administration, or FHA, insures loans for homebuyers with lower credit scores or little cash — and requires a smaller down payment than many conventional mortgages.

There are restrictions, so these loans may not be suitable for everyone.

Here's a look at how to qualify for an FHA loan:

Buyers applying for FHA loans typically face more favorable terms than for a traditional loan.

• Down payments can be as low as 3.5%, smaller than the 20% down payment that many conventional lenders require to waive private mortgage insurance, or PMI.
• A minimum credit score of 580 is required to obtain a loan with a 3.5% down payment, although homebuyers can choose to put down more.
• The FHA insures loans for applicants with a credit score of 500 to 579, requiring a 10% down payment.
• Borrowers can use gift funds for down payments.
• Closing costs can be rolled into the loan.
• Bankruptcy doesn't disqualify applicants.
  

The borrower must live in the home for at least a year. Their debt-to-income ratio must be below 43% (monthly debt payments divided by monthly pre-tax income).

• The loans are limited to a certain amount, varying by county.
• The home must meet minimum FHA requirements for safety — be in a safe and healthy environment, provide protection from weather and crime and be without structural defects.
• Applicants must have two years of employment history, not necessarily with the same employer. They must explain any gaps in their employment history.

FHA loans have more requirements, so they may not be suitable for everyone.

• Two types of mortgage insurance are required, sometimes exceeding the cost of private mortgage insurance for conventional loans. They include an upfront fee of 1.75% of the loan, followed by a monthly premium.
• The FHA's mortgage insurance is harder to drop than for conventional loans. In a conventional loan, a homeowner can discontinue mortgage insurance once they have more than 20% equity in the home. FHA mortgage insurance remains in effect for the entire mortgage term, requiring the homeowner to refinance to cancel the mortgage insurance.
• FHA has an exception that allows cancellation if homeowners put down an initial 10% and live in the home for 11 years.
• There's more paperwork to fill out.
• There may be a longer timeframe to close due to the FHA's safety and documentation requirements.
• There are special requirements for condominium purchases.

More on this topic:

How credit scores affect your ability to get a mortgage

How to save for a down payment