FHA loan disqualifications often stem from poor credit (below 580), high debt-to-income (DTI) ratio, significant federal debt (like delinquent student loans or taxes), recent bankruptcy/foreclosure without rehabilitation, unstable employment, insufficient funds for down payment/closing costs, or issues with the property itself (safety, structural problems, or certain hazards). You must also use it as a primary residence and not have another active FHA mortgage generally.
FHA loans aren't suitable for everyone, and the requirements may be more stringent than conventional mortgages for some buyers. They're also not ideal for buyers with good to excellent credit, as these buyers may be able to secure better rates and terms with a conventional mortgage.
FHA Loan: Cons
The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA. Interest rates are higher than with conventional loans (based on relaxed borrower eligibility requirements)
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan. The FHA prioritizes the well-being of borrowers and aims to ensure that the homes they finance are safe and healthy environments for residents.
Because of the strict appraisal requirements and potential for longer closing times, an FHA loan may make your offer less competitive to sellers compared to buyers with conventional loans. This typically occurs in competitive real estate markets where sellers are reviewing multiple offers at once.
The FHA 85% rule refers to a past guideline for cash-out refinances limiting the loan to 85% Loan-to-Value (LTV) and a specific rule for identity-of-interest transactions (like buying from family) where borrowers couldn't finance more than 85% of the home's value unless exceptions applied, such as renting from the family member for at least six months prior. While the general cash-out LTV is now 80%, the 85% rule still applies to certain related-party sales, requiring a 15% down payment unless an exception is met, notes FHA.com.
FHA loans will not insure mortgages for properties that are being sold within 90 days of the previous sale date. If a seller bought the home and is trying to resell it within that window, FHA financing cannot be used by the new buyer — no exceptions.
There are a variety of reasons why an HOA may choose not to seek FHA community approval. The FHA has strict guidelines regarding unit ownership and ratios that the HOA may decide they do not want to adhere to. The FHA also requires HOAs to oversee certain aspects of the community to be certified for FHA mortgages.
FHA loans are designed to help make homeownership more affordable for Americans with moderate incomes or lower credit scores. But like any mortgage, FHA loans require the borrower (or seller) to pay closing costs, even though they're backed by the U.S. Federal Housing Administration (FHA).
Cracks in the foundation, signs of water damage, or evidence of settling can raise red flags. These issues often require a structural engineer's inspection, which can add time and cost.
Neither loan is universally "better"—it depends on your financial situation, but conventional loans are often better for those with good credit needing flexibility (investment properties, canceling insurance), while FHA loans are better for borrowers with lower credit scores or small down payments, as they offer easier qualification but come with stricter rules and perpetual mortgage insurance. Conventional loans can be cheaper long-term if you avoid mortgage insurance by putting 20% down; FHA loans have easier entry but ongoing costs (MIP).
You're disqualified as a first-time homebuyer if you've owned a home in the last three years, have a low credit score (usually <620), a high debt-to-income (DTI) ratio (over ~43%), unstable employment (less than 2 years steady), insufficient income, or if the property itself has major issues, while income limits for some programs can also disqualify high earners, with specific definitions varying by loan type (like FHA vs. Conventional).
Mandatory MIP payments – To mitigate risk to lenders, you will have to pay Mortgage Insurance Premiums (MIP) for either 11 years or the life of your loan depending on your down payment amount. Less competitive – FHA loans could make the sellers hesitant to accept your offer compared to a higher cash offer.
What is the FHA 6-month employment rule? The 6-month employment rule says that if you have a gap in your employment of 6 months or more, you have to be employed in your current job for at least 6 months. In addition, there has to be 2 years' continuous work history prior to the gap.
You can buy a foreclosure with an FHA loan, but the home must be in good enough shape to pass an FHA appraisal. Foreclosed homes are typically more affordable than homes on the market, but they can be in any condition and may require repairs to qualify for FHA financing.
Yes, you can refinance out of an FHA loan. To qualify for a conventional loan, you'll need a credit score of 620 or higher and have anywhere between 5% – 25% equity in your home.
Denial rates vary by loan type, though. FHA loans had a higher denial rate at 13.6%, while conventional conforming loans had the lowest at 7.9%, showing some variation depending on the program you choose. Refinance applications tend to have higher denials, with an overall rate of 32.7% in 2023.
Closed-end debts do not have to be included if they will be paid off within 10 months from the date of closing and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower's gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.
Uninsurable property is a home that is not eligible for insurance through the Federal Housing Administration (FHA) because it needs extensive repairs. An uninsurable property is typically ineligible for a mortgage through the FHA.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.