HUD Guidelines on Home Purchase on FHA Loans

This guide covers HUD guidelines on home purchase on FHA loans. FHA loans are still the most popular mortgage loan program in this country. FHA allows first-time home buyers, as well as seasoned home buyers, to qualify for FHA loans with the following:

• little or no credit
• low credit score
• little down payment
• prior bad credit
• higher debt-to-income ratios
• prior bankruptcy
• prior foreclosures
• prior deed in lieu of foreclosure
• prior short sale
• charge-offs
• unpaid collection accounts
• short-term on the job
• gaps in employment

In this article, we will discuss and cover FHA loan requirements and guidelines on home purchase. As of March 26, 2025, I have provided a full summary of the FHA Home Purchase Guidelines set by HUD, FHA, and USC Federal Policies. This update clarifies the borrower qualification criteria, property requirements, and loan conditions associated with an FHA-insured mortgage for borrowers willing to buy a house.

HUD Guidelines on home purchase: What Is An FHA Loan?

In other words, an FHA loan includes a mortgage insured by the Federal Housing Administration for first-time buyers struggling with low-to-moderate income and bad credit. Lenders offer These loans at much lower qualification requirements because they are insured against default by the FHA, greatly reducing the lender’s risk.

hUD Guidelines on Home Purchase: Borrower Eligibility Guidelines

To qualify for an FHA loan to purchase a home, a borrower needs to provide proof of meeting the requirements set by HUD and FHA:

HUD Guidelines on Home Purchase: Credit Score Requirements

Minimum 580 With a 3.5% Downpayment

• A 10% downpayment is required for scores in the 500-579 range.
• Stricter lending overlays apply (some cap at 620+), but the baseline set by the FHA is 500.
• Debt-to-Income (DTI) Ratio: Ideally, the Front-end DTI (housing costs vs. income) is lower than 31%.
• Back-end DTI (Total Debt vs. Income): Considered 43% maximum, but may go as high as 50% with other strengths (e.g., good credit or cash on hand).

HUD Guidelines on Home Purchase: Down Payment Requirements on FHA Loans

• 3.5% of the purchase price if the credit score is 580 or higher.
• 10% if the credit score is 500 to 579.
• Funds can come from savings, gifts (from family, friends, or employers), or approved down payment assistance programs.

Employment and Income

• Continuous two-year employment history (gaps must be reasonable).
• Employable income (must have paystub or tax documents). Self-employed must provide two years of tax returns.

Residency

• Require US citizenship, permanent resident alien status, or non-permanent resident status with permission to work (e.g., EAD).
• Note: As of May 25, 2025, non-permanent residents, including DACA, will no longer qualify per updated HUD guidance that favors US citizens.

HUD Guidelines on home purchase: Primary Residence

• The house must be the borrower’s primary residence and occupied within 60 days of closing; there must be no investment properties or second homes.

hUD Guidelines on Home purchase: fHA Loans after Bankruptcy / Foreclosure

• Bankruptcy: Two years after Chapter 7 discharge or one year into a Chapter 13 plan with court approval.
• Foreclosure: Three years following the incident, though exceptions may apply with extenuating circumstances.

hUD Guidelines on home purchae: Mortgage Insurance Premium (MIP)

• Upfront MIP: 1.75 percent of the loan amount payable at closing or rolled into the loan.
• Annual MIP: 0.45-0.55% of the loan balance (varies by term and LTV), paid monthly for the life of the loan if the down payment is less than 10%.
• 11 years if 10% or more.

hUD Guidelines on home purchase: Property Requirements

FHA loans have strict guidelines to ensure the home is safe, secure, and structurally sound. These are known as Minimum Property Standards (MPS):

hUD Guidelines on home purchase-Eligible Property Types

• Single-family homes, 2-4 unit properties, condos (FHA approved), townhouses, and manufactured homes (must meet specific HUD standards, e.g., permanent foundation).
• No commercial properties or homes are used solely for investment.

HUD Guidelines on home purchase: property Condition

Must meet MPS for safety, security, and soundness:

• Safety: No hazards (exposed wiring; lead paint in pre-1978 homes unless remediated).
• Security: Functional locks, windows, and doors.
• Soundness: No major structural issues (leaking roof, foundation cracks).

Cosmetic issues are okay if they don’t affect livability (peeling paint, worn carpet).

hUD Guidelines on home purchase: property Appraisal

• Verifying value and adherence to MPS requires an FHA-approved appraiser for the property.
• The borrower covers the appraisal cost, which averages between $300 and $500.

HUD Guidelines on Home Purchase: Loan-to-Value (LTV)

• If the FICO score is 580 and above, the value is appraised at 96.5% ($3.5K down).
• If the FICO score is 500-579, the appraised value is capped at 90% ($10k down).

FHA Loan Limits

Depending on the county’s median home price, the floor for 2025 is $524,225 (low-cost areas), and the ceiling is $1,209,750 (high-cost areas, including parts of CA and NY). Special exceptions (like Alaska and Hawaii) go higher.

HUD Guidelines on home purchase: 90-Day Flip Rule

Properties sold within 90 days from the prior sale are deemed ineligible unless exemptions apply (e.g., inherited homes).

Special FHA Loan Programs for Home Purchase

Tailored FHA options can consider special features for home purchase:

FHA 203(k) Rehabilitation Loan

This loan is made for buyers needing a house that they can modernize. The loan covers both the purchasing price and the renovation.

Comes in Two Types

• FHA Limited 203(k): Non-structural repairs under $35,000, like flooring or HVAC.
• FHA Standard 203(k): Major structural changes to the house, such as foundation or additions, trail a HUD Consultant.

FHA $100 Down Program

For HUD-owned foreclosures (HUD Homes), Buyers may only have to pay a down payment of $100 instead of 3.5%. However, the home must meet MPS requirements or be serviced by a 203(k) loan for repairs.

Good Neighbor Next Door

Teachers, law enforcement agencies, firefighters, and EMTs who work in revitalization areas get a 50% discount on HUD Homes. The area requires them to live there for 3 years.

Energy Efficient Mortgage (EEM)

Allows the inclusion of costs related to energy-saving upgrades like insulation or solar panels in the loan amount.

Steps to Obtain an FHA Mortgage

• Pre-approval: Get a pre-approval from the lender to get a budget estimate.
• Get a Home: Contact a realtor for a suitable, eligible property.
• Contract and offer: Make an offer. Once the offer is accepted, sign a purchase agreement.
• Inspection/Appraisal: The lender requests an FHA appraisal and a separate home inspection (recommended but not mandatory).
• Underwriting Process: The lender crosschecks income, credit from the banks, and other details regarding the property.
• Closing: Sign relevant documents, pay closing costs (negotiable between 2% and 5% of the loan), and claim the property within 60 days.

HUD Guidelines on home purchase: Other Considerations

• Benefits: The amount paid on deposit is small, accompanied by lower credit criteria and even lower rates on interest estimations, e.g., from 6.2% to 5.8% in March 2025.- Drawbacks: The lifetime of MIP for lower-down payment loans, greater property requirements, and cost region loan limits might restrict choices in expensive areas.
• Recent Updates: With noncitizens (DACA, for example) losing eligibility on May 25, 2025, the focus should shift toward US Citizens, which aligns with HUD policy changes.

HUD Guidelines on home purchase: What Are FHA Loan Requirements

The Department of Housing and Urban Development is the parent of the Federal Housing Administration.

• The Federal Housing Administration is known as FHA
• FHA is not a mortgage company and has nothing to do with originating and funding residential mortgage loans
• FHA’s role is to insure mortgage loans that FHA-approved private banks and mortgage lenders originate and fund
• If an FHA-insured mortgage loan defaults and goes into foreclosure, FHA will partially insure the lender against loss
• In order for FHA to be able to insure lenders, the lender needs to follow FHA mortgage guidelines
• If the lender does not follow HUD Guidelines, the loan is not insurable by the Federal Housing Administration
• HUD created FHA in 1934
• Role of FHA is to make homeownership possible to tens of millions of Americans
• This is by making it possible for homebuyers to purchase homes with 3.5% down payment requirement and lax in credit and income qualification requirements

FHA offers only owner-occupant properties.

HUD Guidelines on Home purchase: Types Of FHA Loans

There are various FHA loan programs, such as the following:

• Purchase loans
• FHA refinance loans
• Streamline Refinance
• 203k Loans
• Reverse Mortgages
• Cash-out refinance mortgages

What Is The Minimum Credit Score FHA Loan Requirement?

The minimum credit score required for a 3.5% down payment home purchase FHA loan is 580 unless lenders have overlays on credit scores.

• Borrowers with scores between 500 and 579 can qualify but need 10% down payment
• FHA minimum credit scores to qualify for a 3.5% down payment home loan is 580.
• FHA also allows non-occupant co-borrowers to be added on the loan if the main borrower does not income qualify on the home loan
• FHA also allows down payment to be gifted 100% by family members or close relatives

FHA has a very aggressive debt-to-income ratio cap at 56.9%, whereas the maximum debt-to-income ratio cap on a conventional loan is 50% DTI.

How Can I Qualify for an FHA Loan?

There are minimum FHA lending guidelines that must be met in order to qualify for an FHA-insured mortgage loan.

Here are the basic qualification criteria to qualify for an FHA loan:

• The property must be an owner-occupied unit
• Second-home financing and investment home loans cannot qualify for FHA loans
• FHA loans are available for 1-4 units houses, including single-family residence, homes, condominiums, as well as manufactured homes
• Manufactured home financing requires higher credit scores by most FHA lenders
• Condominiums need to have the condominium complex to be FHA-approved condos
• A minimum down payment of 3.5% is required
• 100% of down payment and/or closing costs can be gifted by family members related to the main borrower by blood, marriage, law
• Escrow account for property taxes and insurance is mandatory
• Lenders will escrow property taxes and insurance and pay it to the appropriate parties when payment is due

Two years of employment history and two years of residential history are required.

HUD Guidelines on Home Purchase: Debt-to-Income Ratio Guidelines

Debt-to-income ratios:

• Front-end debt-to-income ratios are capped at 46.9%
• back-end debt-to-income ratios are capped at 56.9% to get Automated Underwriting System Approval
• Upfront mortgage insurance (UFMIP) of 1.75% and annual mortgage insurance of 0.45 to 0.55% is required on FHA loan

FHA offers both adjustable-rate mortgages and fixed-rate mortgages.

HUD Guidelines on home purchase: Bad Credit Mortgage Loans

Borrowers can qualify for FHA home loans with prior bad credit. However, to get an automated underwriting system approval, timely payments in the past 12 months are required. Outstanding collections and charged-off accounts do not have to be paid off. There is a mandatory waiting period after a housing event and/or bankruptcy to qualify for government and conventional loans.

HUD Guidelines on Home Purchase: Waiting Period After Bankruptcy and Housing Events

Here are HUD’s waiting period requirements after a housing event and/or bankruptcy:

• 2-year waiting period after Chapter 7 Bankruptcy discharged date
• Borrowers can qualify one year into a Chapter 13 Bankruptcy Repayment Plan with Trustee Approval
• There is no waiting period after Chapter 13 Bankruptcy discharged date
• Three-year waiting period after foreclosure, deed in lieu, short sale

Homebuyers who need to get qualified for FHA loans with a lender with no overlays on government and conventional loans, please contact us at Mortgage Lenders for Bad Credit Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Mortgage Lenders for Bad Credit is available 7 days a week, evenings, weekends, and holidays.