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Reader question: “My husband and I want to use an FHA mortgage to buy a house, because we don’t have much saved up for a down payment. A lot of the information I read on this subject talks about first-time buyers specifically. We have owned a home before. Are we still eligible for an FHA loan? It’s not limited to first-time buyers, is it?”

This is one of the most common questions we get from our readers: Who is eligible for an FHA loan? It’s a popular topic for two reasons. (1) The FHA loan program has grown in popularity since the housing market crashed. (2) There’s a lot of conflicting and erroneous information published online. So let’s set the record straight.

No, you do not have to be a first-time home buyer. People who have owned homes in the past can still be eligible for an FHA loan, provided they meet the general guidelines outlined below.

Who Is Eligible for the FHA Loan Program?

The information below was adapted from HUD Handbook 4155.1, Chapter 4, entitled “Borrower Eligibility and Credit Analysis.” Chapter 4 of the handbook explains who is eligible for the FHA program. You can find the handbook online with a quick Google search.

  1. Applicants must meet the minimum age requirements for mortgage borrowers in the state where the property is located. In most states, the minimum age is 18 years old. Some states may have lower age minimums, so be sure to check your state’s specific requirements. There is no maximum age limit.
  2. You must have a credit score of 500 or higher to be eligible for an FHA mortgage loan. This is the absolute minimum score for basic eligibility. If you want to qualify for the 3.5% down payment (which is what attracts most people to this program in the first place), you must have a credit score of 580 or above.
  3. The credit-score cutoffs mentioned above were established by the Department of Housing and Urban Development (HUD), which manages the FHA loan program. Borrowers must also meet the lender’s guidelines for credit scores. Mortgage lenders can, and often do, set the bar higher than the government. These days, most lenders require scores of 600 or higher for FHA loans.
  4. If you are using a co-borrower, he or she must also be eligible for an FHA loan. Both the borrower and the co-borrower are required to sign all of the loan documents. They are both responsible for repaying the debt. As a result, both parties must meet basic eligibility requirements.
  5. Borrowers who have defaulted on government-backed home loans in the past might not be eligible for the FHA loan program. It depends on the amount of time that has passed since the default. Generally speaking, borrowers must wait at least three years before they can obtain another government-insured loan.
  6. It’s a common misconception that borrowers must be U.S. citizens to obtain an FHA loan. This is not true. Non-U.S. borrowers may obtain a government-insured mortgage through this program, as long as the lender can verify and document the applicant’s residency status.
  7. HUD also has specific guidelines for debt-to-income (DTI) ratios. These ratios are a comparison between the amount of money you earn each month and the amount you spend on your various debts. You have two DTI ratios – one that only considers your housing-related debt, and one that takes all of your debts into account. They are known as front-end and back-end debt ratios, respectively.
  8. According to HUD Handbook 4155.1, Chapter 4, Section F, borrowers must have a back-end or total debt ratio no higher than 43% to be eligible for an FHA loan. The back-end ratio considers all recurring monthly debts, including the mortgage-related expense.
  9. Front-end debt ratios are limited to 31%. According to the aforementioned handbook, “the relationship of the mortgage payment to income is considered acceptable if the mortgage payment does not exceed 31% of the gross effective income.”
  10. There are exceptions to the DTI rules and requirements mentioned above. Borrowers with debt levels higher than those stated above may still be eligible for the FHA loan program, if the lender can document certain “compensating factors.” An example of a compensating factor would be if the borrower has successfully paid mortgage payments equal to or greater than the estimated payments on the FHA loan. Other compensating factors include excellent credit scores, down payments of 10% or more, and significant cash reserves.

This list is not exhaustive. There are other FHA eligibility requirements, in addition to those listed above. In fact, there’s an entire series of handbooks, letters and fact sheets on this very subject.

The best way to find out if you’re eligible for an FHA loan is to apply for one. In some cases, you can do this with no money out of pocket. Many mortgage lenders will pre-approve borrowers without any expense on the borrower’s part. The fees are generally paid later on, if and when the loan closes. So borrowers have little or nothing to lose when applying for a mortgage.

Disclaimer: This article answers the question, Who is eligible for an FHA loan? Most of the information presented above was adapted from HUD Handbook 4155.1, Chapter 4. We encourage you to read through the handbook to learn more about these requirements. Please note the HUD changes the program guidelines on a regular basis. So there is a chance this article will become outdated with time.