FHA Mortgage Loans: What Exactly Are They?

An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). The FHA program was created to help the housing market by making loans accessible to people that couldn’t afford a big down payment, or with below average credit scores. The federal government insures these loans for FHA-approved lenders, to reduce the lenders’ risk of loss should a borrower default on the loan.

FHA loans are frequently used by first-time home buyers because they allow low down payments even with a low credit score. For non-FHA loans, lenders usually require a down payment of 20% of the loan amount. For example, for a $300,000 home, a traditional loan requires a 20% down payment of $60,000, while the same $300,000 home with an FHA loan will only require $30,000 at 10% down payment, or $10,500 at 3.5% down payment. The actual down payment amount for an FHA loan depends on the borrower’s credit score but will never exceed 10%. Essentially, borrowers can borrow 90% or 96.5% of the total loan amount.

Borrowers can qualify for an FHA loan with a down payment of as little as 3.5% if their credit score is 580 or higher. The down payment is 10% for credit scores between 500–579. As with any loan, the lower the credit score, the higher the interest rate.  Unlike regular loans, borrowers of FHA loans must pay mortgage insurance premiums, which is what protects the lender if a borrower defaults on the loan payments. The mortgage insurance is typically a small amount paid monthly (added to mortgage/ escrow payments) and is required for 11 years or for the life of the loan, depending on the terms of that loan.

OTHER REQUIREMENTS FOR FHA LOAN

  • Steady employment history for the past two years
  • Borrower intends to use the home as a primary residence
  • Borrower has a minimum credit score of 500
  • No bankruptcy in the last 2 years (Lender can make an exception)
  • No foreclosure in the last 3 years (Lender can make an exception)
  • Borrower’s mortgage payment (plus HOA fees, Property taxes, Homeowners’ Insurance and Mortgage Insurance) must be less than 30% of borrower’s gross income (or 40% if Lender approves)
  • Borrower’s monthly debt (mortgage, credit card payment, car payment, student loans, etc.), must be less than 43% of borrower’s gross income (or 50% if Lender approves)
  • Property must pass FHA appraisal standards (if seller won’t make repairs requested by lender, borrower can opt to pay for required repairs at closing; the funds will be held in escrow until the repairs are complete)

If you believe an FHA loan is right for you, ask your realtor, loan officer or lender to help you find out whether you may qualify for an FHA loan. Keep in mind though that not all lenders are FHA approved.

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