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Minimum FHA Loan Requirements in California: 2021 Update

FHA loans are a popular type of mortgage loan among home buyers in California and nationwide. This program appeals to first-time buyers in particular, including those who don’t have a lot of money saved for a down payment. It offer several big advantages, including a relatively low down payment of just 3.5%.

As with all mortgage programs, there are some specific guidelines and requirements for FHA loans in California. Below, we will examine some of the minimum requirements for this program, as of 2021.

FHA Loan Requirements in California: 2021 Update

Federal Housing Administration (FHA) home loans are generated by banks and lenders in the private sector, just like most other types of mortgage products.

The difference here has to do with insurance. The federal government partially insures FHA loans against default. That’s what sets this program apart from conventional or “regular” mortgage products.

The Federal Housing Administration falls under the Department of Housing and Urban Development (HUD), a cabinet-level department. So it is HUD that establishes the minimum guidelines for this program.

Here are the basic eligibility requirements for FHA loans in California, as of 2021:

Minimum Down Payment

Home buyers who use this program to purchase a house have to put down at least 3.5% of the appraised value or purchase price. That’s one of the primary advantages offered by the FHA loan program. It allows for a relatively small upfront investment, thereby reducing one of the hurdles to homeownership.

Even better, the down payment funds don’t all have to come out of your own pocket. When using an FHA loan to buy a home in California, you could obtain some of your down payment money from a third-party donor in the form of a gift. Family members and other approved sources can provide funds to help you meet the minimum required down payment.

But there are specific requirements here, as well. Down payment gift money must be thoroughly documented. The person providing the money has to submit a signed letter stating they do not expect any kind of repayment. In other words, it must truly be a gift.

More info on FHA down payments

Credit Score Requirements

Credit scores are another important requirement for California FHA loans in 2021. In essence, your credit score shows how you’ve borrowed and repaid money in the past. It’s generated by a complex scoring model, based on information contained within your credit reports.

These scores are largely based on a person’s payment history. As a result, people who usually pay their bills on time often have higher credit scores (on average). Those who have a habit of missing payments, on the other hand, tend to have lower numbers.

Regarding the credit-score requirements for California FHA loans in 2021, there are two important numbers you should know about — 500 and 580.

According to HUD, borrowers need to have a “decision credit score” of 500 or higher just to be eligible for this program. In order to take advantage of the 3.5% down payment mentioned earlier, you’ll need a score of 580 or higher.

Having a higher (better) score could help you in other ways, as well. Borrowers with higher credit scores can often qualify for lower interest rates, saving them money over the long term. But as far as the minimum requirements for an FHA loan in California, 500 and 580 are the two numbers you should know about.

More info on credit score requirements

Debt-to-Income (DTI) Ratios

When applying for a mortgage in California (whether it’s FHA, VA or conventional), you might encounter the term “debt-to-income ratio” or DTI. As you might have guessed, this number compares your monthly income to your recurring monthly debts.

Having a lower DTI ratio can improve your chances for qualifying for an FHA loan in California. A higher-than-average debt ratio could have the opposite effect, especially if it climbs well above the 50% mark. The DTI is a kind of protective measure. The goal is to ensure that you, the borrower, are not assuming too much additional debt by taking out a mortgage loan.

The debt-related guidelines and requirements for California FHA loans are fairly flexible. The Federal Housing Administration allows for higher debt ratios in cases where the borrower has “compensating factors,” like extra cash reserves in the bank.

The maximum qualifying ratio for some borrowers who use this program is 43%. But again, there are exceptions to this general rule. FHA allows for a DTI ratio up to 50% in some cases.

More info on debt requirements

FHA Loan Limits in California

Lastly, we have the official size limits for this mortgage program. When using an FHA-insured mortgage to buy a house in California, you’ll have to stay within the “loan limit” requirements for your area. These limits represent the maximum amount you can borrow with this program.

Loan limits can vary from one county to the next, because they’re based on median home values. In 2021, the FHA loan limits for California counties range from $356,362 to $822,375. Counties with lower median home prices tend to have lower FHA limits, while the more expensive real estate markets (like the Bay Area) typically have higher caps.

Note: The figures above apply to single-family home purchases, in particular. There are higher limits for multi-family properties, such as duplexes and triplexes with multiple residents.

Have questions? Bridgepoint Funding offers borrowers a wide variety of home loan options, including both government-backed and conventional products. Please contact us if you have questions about the FHA loan requirements in California, or other mortgage-related topics.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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