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Federal Housing Administration (FHA) Loan

Because of their many benefits, FHA loans are popular with first-time homebuyers.

A Federal Housing Administration (FHA) loan is a mortgage that is insured by the Federal Housing Administration (FHA) and issued by an FHA-approved lender. FHA loans are designed for low-to-moderate-income borrowers; they require a lower minimum down payment and lower credit scores than many conventional loans.

In 2020, you can borrow up to 96.5% of the value of a home with an FHA loan. This means you’ll need to make a down payment of 3.5%. You’ll need a credit score of at least 580 to qualify. If your credit score falls between 500 and 579, you can still get an FHA loan as long as you can make a 10% down payment.1 With FHA loans, your down payment can come from savings, a financial gift from a family member, or a grant for down-payment assistance.

Get financing for whatever you need now

An FHA loan is a mortgage insured by the Federal Housing Administration. Allowing down payments as low as 3.5% with a 580 FICO, FHA loans are helpful for buyers with limited savings or lower credit scores.

Home Equity Conversion Mortgage (HECM)

This is a reverse mortgage program that helps seniors aged 62 and older convert the equity in their homes to cash while retaining title to the home. You choose how to withdraw the funds, either as a fixed monthly amount or a line of credit (or a combination of both).

FHA 203(k) Improvement Loan

This loan factors in the cost of certain repairs and renovations into the loan. This one loan allows you to borrow money for both home purchase and home improvements, which can make a big difference if you don’t have a lot of cash on hand after making a down payment.

FHA Energy Efficient Mortgage

This program is a similar concept to the FHA 203(k) Improvement Loan program, but it’s aimed at upgrades that can lower your utility bills, such as new insulation or the installation of new solar or wind energy systems. The idea is that energy-efficient homes have lower operating costs, which lower bills and make more income available for mortgage payments.

Section 245(a) Loan

This is a program for borrowers who expect their incomes to increase. Under the Section 245(a) program, the Graduated Payment Mortgage starts with lower initial monthly payments that gradually increase over time, and the Growing Equity Mortgage has scheduled increases in monthly principal payments that result in shorter loan terms

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Key Takeaways in an FHA Loan

An FHA home loan can be used to buy or refinance single-family houses, two- to four-unit multifamily homes, condominiums and certain manufactured and mobile homes. Specific types of FHA loans can also be used for new construction or for renovating an existing home.

Designed for You

Federal Housing Administration (FHA) loans are federally-backed mortgages designed for low-to-moderate-income borrowers who may have lower than average credit scores.

Lower Downpayment

Federal Housing Administration (FHA) loans require a lower minimum down payment and a lower credit score than many conventional loans.

Secured Evaluation

Federal Housing Administration (FHA) loans are issued by FHA-approved banks and lending institutions; these institutions will evaluate your qualifications for the loan.

Protected by Mortgage Insurance

In order to secure the guarantee of the FHA, borrowers that qualify for an FHA loan are also required to purchase mortgage insurance, and premium payments are made to FHA.

How to qualify for an FHA loan

You’ll need to satisfy a number of requirements to qualify for an FHA loan. It’s important to note that these are the FHA’s minimum requirements and lenders may have additional stipulations. To make sure you get the best FHA mortgage rate and loan terms, shop more than one FHA-approved lender and compare offers.

Downpayment

If you’ve got a credit score of 580 or higher, your FHA down payment can be as low as 3.5%. A credit score that’s between 500 and 579 means you’ll have to plunk down 10% of the purchase price.

Debt-to-income ratio (DTI)

The FHA requires a DTI of less than 50, meaning that your total monthly debt payments can’t be more than 50% of your pretax income. This includes debts that you aren’t actively paying. For student loans in deferment, your FHA loan underwriter will include 1% of the loan’s total as the monthly payment amount. For other types of loans that you aren’t currently repaying, underwriters will use 5% of the loan’s total to calculate your DTI.

Property approval

The property you’re trying to buy with an FHA loan, whether it’s a house, a condo, a manufactured home or a multifamily home, has to meet FHA minimum property requirements. The FHA requires an appraisal that’s separate (and different from) a home inspection. They want to be sure the home is a good investment — in other words, worth what you’re paying for it — and ensure that it meets basic safety and livability standards.

For an FHA 203(k) loan, the property may undergo two separate appraisals: An “as is” appraisal that assesses its current state, and an “after improved” appraisal estimating the value once the work is completed.

Credit Rating

The minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can still qualify for an FHA loan, but you’ll need to make a larger down payment. Again, these are FHA guidelines — individual lenders can opt to require a higher minimum credit score.

Mortgage insurance

FHA mortgage insurance is built into every loan. When you get an FHA mortgage, you’ll make an upfront mortgage insurance payment (which can be rolled into the total amount of the loan), and make monthly payments thereafter. If you start with a down payment of less than 10%, you’ll continue to pay mortgage insurance for the life of the loan. Those with 10% down payments will pay FHA mortgage insurance for 11 years.

Frequently Ask Questions

If you have a question that deals with clients, customers or the public in general, there is bound to be a need for the FAQ page.

Applying for an FHA loan will require personal and financial documents, including but not limited to:

  • A valid Social Security number.
  • Proof of U.S. citizenship, legal permanent residency or eligibility to work in the U.S.
  • Bank statements for, at a minimum, the last 30 days. You’ll also need to provide documentation for any deposits made during that time (usually pay stubs).

Your lender may be able to automatically retrieve some required documentation, like credit reports, tax returns and employment records. Special circumstances — like if you’re a student, or you don’t have a credit score — may require additional paperwork.

Even if your credit score and monthly budget leave you without other choices, be aware that FHA loans involve some trade-offs.

Benefits of FHA loans:

  • Lower minimum credit scores than conventional loans.
  • Down payments as low as 3.5%.
  • Debt-to-income ratios as high as 50% allowed.

Disadvantages of FHA loans:

  • FHA mortgage insurance lasts the full term of the loan with a down payment of less than 10%.
  • Property must meet strict health and safety standards.
  • No jumbo loans: The loan amount cannot exceed the conforming limit for the area.

Even though the FHA sets standard requirements, FHA-approved lenders’ requirements may be different. FHA interest rates and fees also vary by lender, so it’s important to comparison shop. Getting a mortgage preapproval from more than one lender can help you compare the total cost of the loan.