Buy A House With An FHA Loan - NEW FHA LOAN Requirements 2025

How to buy a house with an FHA loan. I'm talking about FHA loans today because they are a powerful tool for home buyers. In this video, I'm going to go over the FHA loan limits, the FHA requirements and some basics about the FHA loan. And then I'm going to show you how you can calculate your monthly payment on an FHA loan. So if you didn't already know, the main reason FHA loans are such a powerful tool for home buyers is because you can put just three and a half percent down and they have more flexible guidelines. So maybe if you don't have the best credit score, an FHA loan could be your best option to purchase home. My name's Darren Tsai and I'm a licensed real estate agent and loan officer in California. My channel is dedicated to helping home buyers just like you get educated. And I'm a huge believer that home ownership brings stability and helps families grow their wealth. Now, before you go on with this video, I'd need to say, don't just buy a home to buy a home. Make sure that buying a home aligns with you and your family's long-term financial goals. Okay. Now I'm going to share the most common myths that people believe about FHA loans. The first is that FHA loans are just for first-time buyers. That's false. And the second is that FHA loans are only for people with bad credit and no down payment. That is also false. And I've personally helped multiple families buy homes using an FHA loan, even though they had great credit scores and they had a big down payment, they still opted to use the FHA loan because they got a better interest rate, a lower monthly payment, and it kept more cash in their pocket. And one of my main goals with this channel is to educate home buyers. So they know what all their options are when it comes to financing and purchasing a home. Going back to the beginning of the video, I said FHA loans can be a powerful tool for home buyers. And the reason why is because they have more flexible guidelines. They offer a three and a half percent down payment. You can qualify with a lower credit score and you can typically have a higher debt to income ratio and still qualify for a home. And because of these flexible guidelines, some buyers can actually qualify for a little bit more home. And this leads me right into FHA requirements. So we're going to start with credit score. FHA loans allow as low as a 500 credit score. But the thing is, if you have a 500 credit score, you're going to need a 10% down payment and not three and a half percent down payment. If you want to just put three and a half percent down, then you're going to need a five 80 or better credit score. And regardless of what loan you decide to use, when you buy your house, the lower your credit score typically means more points and fees and a higher interest rate. Now let me share a quick table of what a three and a half percent down payment looks like for different purchase prices. So I'm going to start with a million dollar purchase. Three and a half percent down means you could own a million dollar home with $35,000 down. That's a pretty unique scenario. We don't see that all the time. Is it recommended? It just depends. If you have super high income, but you don't have a ton of cash, maybe this is the move. A more common scenario that we see is a $500,000 purchase price at three and a half percent down, which is $17,500. That's a pretty common scenario that we see where people using an FHA loan going down. Even more common is a $400,000 purchase, which at three and a half percent is a $14,000 down payment at 300 K it's 10,500. And for a $200,000 purchase, you're looking at $7,000 down payment. It's kind of crazy to think on a hundred thousand dollar home, $3,500 would be your down payment to put this table in perspective. The median sales price of homes in the United States is $425,000, which means using an FHA loan, you would need about $14,000 as your down payment. So if you don't think homeownership is possible, I want you to take a look at this table and look at these down payments and look at the median purchase price of homes in your area. And then you can gauge how much down payment you might need. Now that we've talked about down payment and credit score, let's talk about loan limits. The loan limit is just the highest amount the loan could be for your home. And these limits actually vary by County and the type of property that you're looking to purchase. On top of that, these limits typically change every year. The past couple of years, the loan limits have increased every year because the cost of living has increased as well. If you're wondering what the FHA loan limit is where you live, there's a link in my description. Go ahead and click on it and you can search by zip code and it'll tell you exactly what your loan limit is. So I personally live in orange County and here's just a screenshot of our FHA loan limits. So in orange County, the FHA loan limit is $806,000 and then there's also what's called a high balance loan limit. And that goes up to 1.2 million. The high balance FHA loans are going to actually have a higher interest rate because they're considered riskier. On top of that, you can actually use an FHA loan to buy multifamily. And so the FHA loan limit for a duplex in orange County is a $1,548,975. For a triplex, it goes up to $1,872,225. For a four plex, it goes up to $2,326,875. So like I said before, depending on your County and the type of property, this will change the FHA loan limit. Also keep in mind, if you're purchasing a home and your FHA loan is actually higher than the loan limit, you have the option to still purchase that home, but you're going to need to bring a bigger down payment in that specific scenario. It's probably not recommended to buy that home. And maybe it's still fits within your long-term financial goals. So now that you understand some basic FHA requirements and what the loan limits are, I'm going to talk about mortgage insurance. Mortgage insurance is a word that everyone despises. When we talk about buying a home, most people get caught up on I don't want to pay mortgage insurance and they think it's a huge cost. But in reality, if you don't have a 20% down payment, you're going to pay mortgage insurance on a conventional loan or an FHA loan. In some situations, the mortgage insurance is actually higher on a conventional loan than an FHA loan. And later in this video, I'm actually going to show you how to calculate the mortgage insurance on an FHA loan. Another note about mortgage insurance with FHA loans is that if you decide to put three and a half percent down, you will have mortgage insurance for the life of your loan for all 30 years. If you decide to have a 30 year mortgage, but a common strategy that many people use is they buy their home, putting three and a half percent down with the FHA loan. And then in the future they refinance out of the FHA loan into a conventional loan. And ideally when they refinance into that conventional loan, they already have 20% equity in their home. So they don't have mortgage insurance anymore. Anyways. Now if you decide to put 10% down using an FHA loan, your mortgage insurance automatically falls off after 11 years. Now that we've talked about mortgage insurance, I'm going to actually cover why FHA guidelines are more flexible than other loan programs. And to do that, I need you to understand debt to income ratio, also known as DTI. This is basically the way lenders can check how much money you make versus how much money you spend on debt each month. And why would they want to know that? They want to make sure that you can pay back the mortgage. And so there are two types of DTI front end and back end. Now get your mind out of the gutter. We're talking about debt and income, not anything else. Now your front end DTI just takes into account your housing expense. So that means it's just going to look at your monthly mortgage payment made of principal and interest, your property taxes, your HOA, and your homeowner's insurance. The back end DTI has all of your debts. So it has the front end DTI and then it has your car payment, your student loan. If you have a personal loan, that would be in there to alimony as well, but it will not include your regular bills like a utility or childcare. And so now I'm just going to give an easy example of this. If your total debt payments, including your housing are $2,000 a month, and you make $4,000 a month, your back end DTI is 2000 divided by 4,000 50%. So this means that 50% of your income is used to pay all of your monthly debts. Speaking of income, let's talk about why we use the gross monthly income. Although we all know what we make is not exactly what we take home. And you might be wondering why do lenders use the gross income? Well, it's because everyone has a different situation. Everyone's expenses are calculated differently. They could have different withholdings. They could have their 401k. They could have garnishments, bunch of different scenarios. So lenders just use that gross number. Now, if you're self-employed, it's going to be a little bit different in this scenario. I'm talking about a W2 employee and I'm just going to use a really simple example of this. If someone makes $180,000 salary annually, their gross monthly income would be 15,000 a month. Now, super important before you buy a home, highly recommend you take a look at your personal budget and you take a look at what's a comfortable monthly payment for housing for you and your family. Now that we've covered the income piece of the debt to income calculation, let's cover the debt piece. So the debt piece can be a little bit tricky if you don't have a credit report handy, or if you're not too sure what installment debts you have, but I'm just going to give an example here. We're going to use a $600 car payment, $150 a month in student loans, $250 in minimum credit card payments, which equals a thousand dollars a month in debt. So if this was a little bit confusing for you, I'm going to walk through how to figure out your full housing expense. And just a disclaimer, this is just an example. It's just for educational purposes, but here's a calculation for $800,000 purchase, assuming a three and a half percent down and a 6% interest rate. And I'm going to use the same income as before $180,000 annually, 15 K a month. And so these numbers are just estimates, but on 800 K home, we would be looking at $4,710 for principal and interest, $820 a month for property tax, $360 a month for mortgage insurance, $200 a month for home insurance. Your front end housing expense is $6,090 a month. And assuming that you had $15,000 a month of income, we're looking at 40.6%, which is less than the front end 47% requirement for FHA loans. Now on the back end, we're just going to take that housing expense that we calculated the 60, 90 a month. And then we're going to add a thousand dollars from the same example before, which was $600 a month for car payments, $150 a month for student loans, $250 a month in minimum credit card debt for a thousand dollars a month. When you add those two up, you get $7,090 a month. You divide that by the 15,000 and you're looking at 47.26%. Now FHA loans allow up to 57% on the backend. So this would also meet the requirements later in the video. I'm actually going to share a tool that I made that will help you calculate your FHA monthly payment and keep in mind, you don't have to do this all yourself, right? You can reach out to a licensed professional. If you don't know how to find one, you can email me directly. Here's my email. And I highly recommend you talk to multiple people because you might be surprised in what one lender says, or your bank says as different lenders have different guidelines. And speaking of guidelines, let's talk about the basic FHA property guidelines. Now, first, if you're using an FHA loan to buy a home, it needs to be your primary residence. That means this must be the home that you live in most of the time. What common question I get asked though, is how long do I have to live there before I can turn it into a rental? And typically you're allowed to turn your home into a rental after a year. Now, obviously if there are different life circumstances, then it could be sooner. The next guideline is that the home needs to be safe and livable condition. On top of that, FHA loans could be for a condo, single family home, or even multifamily up to four units. And keep in mind, if you decide to buy a condo using an FHA loan, that condo complex does need to be approved by the FHA. If you need help looking up, if it's approved, you can email me directly. And as mentioned before, FHA loans can be used to buy up to four units. You can buy a two unit, three unit or four unit property using an FHA loan. And the loan limits actually increase for the number of units as well. I personally think using an FHA loan to buy a duplex is a great strategy to start your real estate portfolio. You can live in one side and rent out the other while building equity. And on top of that, you can use up to 75% of that rental income to help you qualify regarding your DTI. But there is something called the self-sufficiency test for three and four unit properties. And that rule is to make sure the property can pay for itself through the rent and generates. So what they're going to do is they're going to take a look at the market rent, right? FHA will estimate how much rent you could get for each unit based on similar rentals in the area. And if 75% of the total rent from all the units is enough to cover your mortgage, then the property is considered self-sufficient and you can use it to buy an FHA loan. Now, while I think that's a great strategy and it's a great idea, I haven't seen many people actually do it because that self-sufficiency test is pretty hard to pass in most markets. Not saying it's impossible, but in my market, I haven't seen anyone successfully do it. And that's actually why I think using an FHA loan to buy a duplex is a better strategy. Another common misconception people have around FHA property guidelines is that agents won't accept offers if there's an FHA loan. And that is not true. I've personally helped countless families use FHA loans to buy their homes and uneducated agents may be a little bit afraid of an FHA loan, but the ones that are familiar with them, they know there's not going to be any issues as long as everyone is educated. So last year I helped a family with their loan to purchase a condo in San Diego. Both agents had been in the industry for 20 plus years, and they both had concerns about FHA loans. Both of them said they didn't really see a lot of FHA loans and they were worried about the potential stricter property guidelines. And to help my clients get their offer accepted in a multiple offer situation, I just hopped on a three-way call with both agents. I asked them the condition of the home and they said the condition of the home was great. There was no chip paint, no evidence of termite damage. It was a newer condo. Everything was fairly new. The property was turnkey. And once they told me that I said, there would be no issues with the FHA property guidelines, but they were both just uneducated on the guidelines. So after the listing agent had that call with me and she was comfortable, my client's offer got accepted and escrow went smoothly. There was no issues. Everyone was happy. And my clients were super happy because they actually qualified for a conventional loan, but they ended up saving about $500 a month going with an FHA loan. So if you do decide to use an FHA loan to purchase your home, make sure you work with the right team, an agent that knows FHA loans and a lender that knows FHA loans. Now that we've gone over an FHA success story, let's talk about the income and employment guidelines. And this income guideline is actually not for just FHA loans. It's for most loans. You need to have at least a two year work history in the same line of work, right? So that means you can actually change jobs, but they don't want to see you changing jobs every three months. They want to see that you have the ability to repay back the loan. And when I said same line of work, that means if you're a teacher and you move schools, that's great. That's totally fine. So the same thing applies if you are a self-employed person. So let's say you're a barber and you run your own barber business. What they're going to look at is two years of tax returns, but they're going to look at your net income on that. So it's okay if you're self-employed, you can still qualify for an FHA loan. You just have to provide two years of tax returns. So we've covered a good amount of FHA basics and requirements. Now I want to dive into how to calculate your monthly payment using an FHA loan. And we've gone over income. We've gone over debt. We do need to actually talk about mortgage insurance premium. So with an FHA loan, there's actually two parts of mortgage insurance, the monthly piece, and there's what's called the upfront mortgage insurance premium. So the upfront mortgage insurance premium is 1.75% of the loan amount. You can pay that up front or you can finance it. Almost everyone finances it. So they add that to their loan balance. And then the monthly mortgage insurance piece is 0.55% of the loan amount annually. And we'll actually go through an example of this calculation. Once again, the numbers in this video are for educational purposes. They're not a quote, and you can just Google FHA interest rate to get a ballpark when you're doing your own calculations. And in this spreadsheet that I made, it's going to put everything together and it'll actually tell you if you qualify or not as well. So we're just going to, we're just going to go through it here. 800 K purchase price, like we mentioned three and a half percent down $28,000 is the down payment required. Loan amount, $772,000 upfront mortgage insurance premium, $13,510 total loan amount, $785,510 interest rate, 6% we're looking at a 30 year mortgage here. The property taxes are estimated the mortgage insurance. I just went over how to calculate that with you, but in this spreadsheet, don't change any of the white cells only change the blue cells. The white cells are auto-programmed to calculate for you. Homeowner's insurance. I put a $200 estimate here. And earlier in this video, I used $180,000 annual salary. That ends up being $15,000 a month. If you have bonus or overtime, I highly recommend you reach out to a licensed professional to help you make these calculations because those will vary and they will likely ask you for your previous two year end pay stubs showing what your overtime and bonus pay was. And they're going to probably take the average of those two years. In this specific scenario, I used a salary to keep it simple. And then on top of that, I included the same debts. As we mentioned before, car payment, $600 a month, student loans, $150 a month, credit card $250 a month for a total monthly debt of $1,000. If you see here, this actually tells you if you qualify for the front end and back end DTI. Now you need to pass both of those to qualify. And so in this example, we have a total housing expense of $6,090 a month and a total monthly income of $15,000. So we're looking at a 40.6% front end DTI well below the 46.99%. And for the back end DTI, we're looking at 47.26%, which is also well below the 57% max. So in this specific scenario on an $800,000 purchase, three and a half percent down 6% interest rate, a family that has an annual income of $180,000 qualifies. And like I said before in the video, make sure you know your take home numbers. So you know what's a comfortable monthly housing expense. Once again, if you need help figuring out this calculation or you have any questions about an FHA loan, you can contact me directly. And I'd be happy to chat with you. Now, if you want to just ballpark your own FHA monthly payment, there's a link to the spreadsheet that you just saw and you can download it for free. Hopefully after watching this video, you have a great understanding of FHA loans and you can make an educated decision on what's the best loan for you. And the biggest things that I want you to take away from this video are if you don't have a 20% down payment saved up and you don't have amazing credit, explore the FHA loan as an option to purchase home. Also make sure you know your take home income and your monthly debts. That way you can figure out what's a comfortable monthly housing expense. And just a disclaimer, all the numbers in this video were just for educational purposes, but if you want the actual numbers, I highly recommend you reach out to a licensed professional as always. Thank you so much for watching my video and I'll see you on the next one.