Minimum Requirements to Qualify for an FHA Loan in California

Note: This article was originally published in 2022 but was fully updated in 2024 to reflect current guidelines and requirements.

In California, many home buyers rely on the FHA loan program to finance their purchases. First-time buyers in particular are drawn to this program, because it allows for a down payment as low as 3.5% of the purchase price.

FHA loans are insured by the government. Because of this, they have specific requirements when it comes to things like credit scores, debt ratios, and down payments.

This guide explains the minimum requirements for an FHA loan in California, along with other important features home buyers should know about.

A Popular Loan Program for California Home Buyers

FHA loans are the second most popular type of mortgage product used by home buyers in California, and elsewhere across the U.S. The standard conventional loan is the most popular.

Last year alone, 732,319 home buyers nationwide used the FHA loan program when buying a house. Here in California, more than 100,000 of these loans were originated last year.

And while this program is not limited to first-time buyers, they account for the majority of FHA loan activity. According to the Federal Housing Administration’s annual report to Congress, 82% of FHA loans last year went to first-time home buyers in particular.

Here are some of the benefits that account for this program’s popularity:

• Lower Down Payments: FHA loans often require a down payment as low as 3.5% of the purchase price, an important feature in a high-cost market like California.
• Flexible Credit Requirements: They are available to borrowers with lower credit scores.
• Competitive Rates: FHA loans often have lower interest rates than conventional loans.
• Assumable Loans: Future buyers can take over the FHA loan under certain conditions.
• Higher Debt Limits: This program allows for higher debt-to-income ratios when compared to conventional (non-government-backed) mortgages.
• Closing Cost Assistance: Sellers or lenders can cover some closing costs. Gift money from a family member can also be used toward the closing costs and down payment.
• Refinancing Options: This program offers streamline refinancing options for homeowners with existing FHA loans, greatly simplifying the process.

FHA Loan Requirements Come From HUD

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). So it’s HUD that establishes the minimum requirements for FHA loans in California.

Here’s an in-depth look at the minimum guidelines:

1. A Down Payment of at Least 3.5%

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, typically whichever is less.

This means that the loan-to-value (LTV) ratio cannot exceed 96.5%.

HUD Handbook 4000.1 (the official FHA handbook for mortgage lenders) refers to the down payment as the “Borrower’s Minimum Required Investment (MRI).” Here’s what that handbook says about the MRI:

“In order for FHA to insure this maximum mortgage amount, the Borrower must make a Minimum Required Investment (MRI) of at least 3.5 percent of the Adjusted Value.”

Here’s what the minimum down payment for an FHA loan would be at different home price thresholds. The median price in California is currently around $790,000.

The FHA loan program allows for down payment funds from a wide variety of sources. Acceptable sources include personal savings, checking accounts, investments, retirement accounts, gift funds from relatives, employer assistance programs, and even sweat equity in some cases.

2. A Credit Score of at Least 580 for the Low Down Payment

In California, FHA loans tend to be more flexible than conventional mortgages when it comes to the borrower’s credit score. But the Federal Housing Administration does have some specific requirements.

There are two important numbers you should know about: 500 and 580.

Borrowers need to have a minimum “decision credit score” of 500 or higher just to be eligible for this program. But if you want to take advantage of the attractively low 3.5% down payment option (as most borrowers do), you’ll need a score of 580 or higher.

The table below shows the minimum credit score for basic FHA eligibility and maximum financing. This table was adapted from HUD Handbook 4000.1, the Single Family Housing Policy Handbook.

Translation: Borrowers with scores of 580 or higher can buy a house with only 3.5% down. Borrowers with scores between 500 and 579 can still qualify, but have to make a down payment of at least 10%. And those borrowers with scores below 500 are typically not eligible for an FHA loan.

3. DTI Ratio No Higher Than 43% (With Exceptions)

When applying for a mortgage in California (whether it’s FHA, VA or conventional), you’ll 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.

When it comes to FHA loan requirements, there are two ratios you should know about:

• The front-end DTI ratio only considers your housing-related expenses. This includes the monthly mortgage payment, homeowners insurance, and property taxes. Lenders calculate it by dividing your total monthly housing expenses by your gross monthly income.
• The back-end DTI ratio uses all of your monthly debt obligations, including credit card payments, car loans, house payments, and any other recurring debts. To calculate it, lenders divide the total monthly debts by the gross monthly income.

This flexibility benefits borrowers with existing debt obligations, such as student loans or car payments, who may have a higher DTI ratio but are still able to afford the mortgage payments.

By accommodating higher DTI ratios, FHA loans open doors to homeownership for individuals who might not qualify for conventional financing.

The table below shows the minimum DTI requirements for FHA loans in California:

As you can see here, mortgage lenders have some flexibility when it comes to the debt-to-income ratios. They can consider certain “compensating factors” when evaluating a person’s debt situation, to approve borrowers with higher DTIs.

The debt-to-income ratio serves as a protective measure to reduce risk. The goal is to ensure that you, the borrower, are not assuming too much additional debt by taking out a mortgage loan.

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 particular county.

These limits represent the maximum amount you can borrow with an FHA loan.

Loan limits can vary from one county to the next, because they are based on median home values. In 2024, the FHA loan limits for California counties range from $498,257 to $1,149,825.

Counties with lower median home prices tend to have lower FHA limits. At the other end of the spectrum, pricier real estate markets like the Bay Area and Los Angeles have higher caps.

FHA Requirements Can Be More Forgiving

FHA loans tend to have more flexible requirements for borrowers, when compared to conventional or regular mortgage loans. This is true for credit scores, debt-to-income ratios, and the other criteria mentioned in this article.

These loans receive government backing. As a result, lenders can be a bit more flexible when offering FHA-insured mortgage loans to borrowers. In fact, the program was designed to help home buyers who might not qualify for other financing programs.

The Federal Housing Administration prides itself on helping underserved borrowers who might not qualify for a traditional / conventional mortgage loan.

In their most recent annual report to Congress, the agency wrote:

“FHA worked to expand sustainable access to credit, remove barriers to homeownership for first-time homebuyers, borrowers of color, and others underserved by the conventional mortgage market, and address long-standing challenges related to housing supply and affordability.”

Disclaimer: This article explains the minimum requirements to qualify for an FHA loan in California. But it does not cover every aspect of the program. If you wish to use this program when buying a house in California and have additional questions, please contact our staff.