FHA Loan Requirements in Michigan: Everything You Need to Know

Getting an FHA loan in Michigan can be a great way for homebuyers to purchase a home with a low down payment FHA loans only require a 3.5% down payment, which makes them one of the most affordable mortgage options for buyers who don’t have a lot saved for a down payment

However, FHA loans do come with certain requirements that borrowers need to meet in order to qualify. In this comprehensive guide, we’ll walk through all the key FHA loan requirements in Michigan so you can determine if this type of mortgage is right for you.

Overview of FHA Loans

First, let’s start with a quick overview of what FHA loans are and how they work. FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA). This government insurance protects lenders from taking on too much risk, which allows them to offer FHA loans to borrowers with lower credit scores and smaller down payments.

Some key things to know about FHA loans:

• Down payments as low as 3.5%
• Requires mortgage insurance
• Credit score requirements start at 580
• Debt-to-income ratio limit of 50%
• Popular with first-time homebuyers

Now let’s take a closer look at the specific FHA loan requirements in Michigan that borrowers need to meet.

FHA Loan Requirements in Michigan

Down Payment

One of the biggest benefits of an FHA loan is the low down payment requirement Borrowers only need to put down 35% of the purchase price as a down payment. On a $200,000 home, that’s just $7,000.

FHA does allow down payments as low as 3.5% because they require borrowers to pay mortgage insurance. We’ll cover the mortgage insurance requirements next.

Mortgage Insurance

With an FHA loan, borrowers are required to pay both upfront and annual mortgage insurance premiums. This insurance protects the lender in case the borrower defaults on the loan.

The upfront mortgage insurance premium is 1.75% of the loan amount. On a $200,000 loan, this equals $3,500. Borrowers can finance this fee into their loan amount.

The annual mortgage insurance premium is 0.85% of the loan amount. On a $200,000 loan, this equals $1,700 per year. Borrowers pay this amount along with their monthly mortgage payment.

FHA mortgage insurance is required for the life of the loan or until you reach 78% loan-to-value ratio through payments and home appreciation. At that point, you may request cancellation of the mortgage insurance.

Credit Score Requirements

To qualify for an FHA loan, you’ll need a minimum credit score of 580. Borrowers with credit scores between 500-579 may still qualify but will need at least a 10% down payment.

In addition to your credit score, lenders will review your entire credit report to evaluate your creditworthiness. You’ll need to demonstrate a solid history of paying bills on time and keeping debt balances low. Bankruptcies and foreclosures in the last few years can make approval difficult.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is another key factor lenders look at. This ratio measures your monthly debt payments in relation to your monthly income.

FHA requires your DTI to be 50% or lower. This includes your estimated new mortgage payment, along with all other monthly debt obligations like credit cards, student loans, car loans, child support, and alimony. Staying under 50% shows lenders you can afford the new mortgage payment.

Steady Income and Job History

Lenders want to see you have a reliable source of income in order to repay the mortgage. Expect to provide W-2s, pay stubs, and tax returns to verify your income. Having consistent income from the same employer for the last 2 years is ideal.

Self-employed borrowers can qualify by providing 2 years of personal and business tax returns. FHA also allows non-traditional credit sources like rental payment history and utility bills to count toward credit requirements.

Homebuyer Education

First-time homebuyers in Michigan looking to get an FHA loan are required to complete a homebuyer education course. These courses cover topics like budgeting, credit, shopping for a home, obtaining a mortgage, and the home buying process. Taking a course shows lenders you understand the responsibilities of homeownership.

Primary Residence Requirement

FHA loans require borrowers to use the home as their primary residence. Second homes and investment properties don’t qualify. You’ll need to move into the home within 60 days of closing and occupy it as your principal residence.

Inspection Requirements

The property must meet FHA minimum property standards and be safe, sound, and secure. A general home inspection will identify any deficiencies that need repair prior to closing.

Loan Limits

There are maximum FHA loan limits that vary by county. In Michigan, the highest FHA loan limit for a single-family home is $498,257 in 2024. You can use the FHA loan limits lookup tool to check the limit in your county.

Cash to Close

In addition to your down payment and closing costs, you’ll need cash to pay for your upfront mortgage insurance premium and prepaid costs like homeowners insurance, property taxes, and interest. Plan for an estimated 2-5% of the purchase price.

Home Eligibility

The FHA has some limitations on the types of homes it will finance:

• Must be an existing or newly built home – condos, townhomes, and single-family homes allowed
• Manufactured homes must be permanently affixed to the property
• Home must not exceed 4 units – single-family, duplex, triplex, or fourplex
• Co-ops are generally not eligible

The home must also pass an appraisal to confirm its value is sufficient for the loan amount.

Seller Contributions

FHA allows sellers to contribute up to 6% of the purchase price to help cover the buyer’s closing costs and prepaid items. This can help make buying more affordable.

Gifts from family members are also allowed under certain conditions.

Finding an FHA Lender in Michigan

Once you’ve determined you meet the FHA requirements, the next step is finding a lender. We recommend getting mortgage rates from 3-5 different lenders so you can compare costs. Here are some good options for FHA loans in Michigan:

• Credit unions
• Community banks
• Online lenders like Rocket Mortgage
• Mortgage brokers
• Banks like Chase, Wells Fargo and Bank of America

Look for a lender that specializes in FHA loans. They will walk you through all the steps and guide you through the process.

The Bottom Line

FHA loans can be a great mortgage option for buyers in Michigan looking to purchase a home with a smaller down payment. Just be sure you understand all the requirements and can meet the minimum credit score, debt-to-income ratio, and down payment needed to qualify. Comparing quotes from multiple lenders will help you find the best FHA mortgage rates available.