FHA Basic Home Mortgage (Section 203(b))

Quick Facts

• Low down payment: Buyers with credit scores at or above 580 can qualify with as little as 3.5% down; scores between 500 and 579 require 10% down.
• Flexible underwriting: FHA allows higher debt-to-income ratios than many conventional lenders, especially when borrowers document compensating factors like strong savings or rental history.
• Property flexibility: One- to four-unit homes, certain condos, and manufactured homes on permanent foundations may qualify if they meet FHA property standards.
• Mortgage insurance: Upfront and annual mortgage insurance premiums apply, but they allow lenders to offer more flexible credit terms.
• Assumable loans: Future buyers can assume the FHA loan subject to lender approval, which can make the property more attractive if interest rates rise.

Program Overview

FHA’s flagship Section 203(b) program insures lenders against losses when financing primary residences. Because the government absorbs much of the risk, lenders can extend credit to buyers with modest savings or credit blemishes. Borrowers still work with private lenders, but FHA sets guidelines for credit, property condition, and loan limits. Completing required homebuyer education, locking in competitive rates, and preparing thorough documentation helps applicants move smoothly through underwriting.

Eligibility Requirements

1. Credit profile: Most lenders look for a credit score of at least 580, though FHA technically allows scores as low as 500 with higher down payments. Expect manual underwriting if your score is under 620.
2. Stable income: Provide two years of employment or income history. Self-employed borrowers need two years of tax returns; gig workers should document consistent deposits.
3. Debt-to-income ratios: FHA generally caps the front-end ratio at 31% and the back-end ratio at 43%, but compensating factors (high cash reserves, strong residual income) can allow approvals up to 50%.
4. Primary residence: The borrower must occupy the property within 60 days of closing and live there for at least one year.
5. Property standards: Homes must pass an FHA appraisal verifying market value and minimum property requirements like safety, soundness, and security. Repairs may be required before closing.

Application Steps

• Check FHA county loan limits: Use HUD’s online lookup tool to confirm the maximum insurable amount for your county and property type.
• Compare FHA-approved lenders: Shop multiple lenders for rates, fees, and service. Ask whether they process FHA loans in-house or outsource underwriting.
• Gather documentation: Expect to submit pay stubs, W-2s, tax returns, bank statements, proof of gift funds, and identification. Organize these documents in a secure folder for quick uploads.
• Complete homebuyer education: Some down payment assistance programs require HUD-approved counseling; even if optional, education helps you understand closing costs and post-purchase budgeting.
• Lock your rate and obtain conditional approval: Once under contract, lenders will order an FHA appraisal and verify credit, employment, and assets. Respond quickly to conditions like letters of explanation or updated statements.

Documentation Checklist

• Government-issued photo ID and Social Security number.
• Two months of bank statements for all accounts used in the transaction.
• Two years of W-2s and recent pay stubs; full tax returns for self-employed borrowers.
• Documentation for gift funds (donor letter, proof of transfer).
• Purchase contract and any addenda.
• Evidence of earnest money deposit and source of funds.
• Homeowners insurance quote and contact information.

Tips and Tricks to Strengthen Your Application

• Boost credit before applying: Pay down credit card balances to below 30% utilization and dispute errors on your credit report. Even a small score increase can unlock better rates.
• Demonstrate reserves: Maintain at least one to two months of mortgage payments in reserves, especially if your debt-to-income ratio is high.
• Negotiate seller-paid closing costs: FHA allows sellers to contribute up to 6% of the purchase price toward closing costs and prepaid items, reducing cash needed at closing.
• Consider energy-efficient improvements: FHA’s Energy Efficient Mortgage add-on lets borrowers finance certain upgrades into the loan without additional down payment.
• Plan for mortgage insurance removal: For loans with down payments under 10%, the annual premium lasts for the life of the loan. Strategize about refinancing into a conventional loan once you reach 20% equity.

Common Pitfalls and Solutions

• Appraisal repairs: If the appraiser lists health or safety issues (peeling paint, missing handrails), work with the seller quickly to make repairs. Document completion with photos and receipts.
• Gift fund documentation: Ensure gift donors provide bank statements and wire receipts. Undocumented cash deposits often trigger underwriting delays.
• Employment changes: Avoid changing jobs or income structures during underwriting. If unavoidable, gather offer letters and pay stubs to show continuity.
• Student loans: FHA counts student loan payments even if deferred. Use the income-driven repayment amount or 0.5% of the outstanding balance if no payment is reported. Adjust budgets accordingly.
• Rate lock expirations: Underwriting delays can push closings beyond the rate lock. Monitor timelines and extend locks before they expire to avoid costly re-pricing.

Frequently Asked Questions

Can I buy a fixer-upper with 203(b)? Minor repairs are acceptable, but extensive renovations often require an FHA 203(k) rehabilitation loan. Discuss with your lender whether escrow holdbacks are possible for small repairs.

Is there a minimum credit score? FHA guidelines allow 500, but most lenders set overlays at 580 or higher. Shop for lenders experienced with manual underwriting if your score is below 620.

Can I have more than one FHA loan? Generally no. Exceptions exist for relocation over 100 miles, growing families needing a larger home, or when a co-borrower vacates the property. Expect strict documentation if seeking an exception.