What is an FHA Loan?
If you’re interested in getting a government-insured loan, FHA loans are probably your best bet. As you’ll learn in this breakdown, the Federal Housing Administration’s program is one of the more popular loan options. The FHA loan helps first-time home buyers through generous terms, but also low-income buyers and other qualifying persons.
How FHA Loans Work
FHA loans have been around for nearly a century. They were designed with low—and moderate-income earners in mind, so FHA loan requirements are more forgiving. If you qualify for one of these loans, you’ll have lower interest rates than the current market rates on some conventional loans and even smaller closing costs. They can be used for first-time home purchases or renovations, as with the 203k loan.
Lenders consider FHA loans less risky than conventional loans because the FHA guarantees these loans. That means the administration has insured the loan if you default on mortgage payments.
One of the reasons FHA loans are so attractive is that you can purchase a home with a down payment as low as 3.5% of the purchase price. That makes the dream of homeownership more possible for first-time home buyers or lower-income earners. As with other types of government-insured loans, you will have to pay for mortgage insurance with any down payment under 20%. Known as private mortgage insurance, it will raise your monthly payments slightly.
Typically, you cannot use an FHA loan for an investment property or a secondary residence. You can purchase a wide variety of homes, including properties of one to four units. However, there are FHA loan limits. The maximum loan amount changes each year to adjust for housing prices, and it matters where you are in the country. Higher-priced markets may have higher loan limits.
When looking for your lender, you won’t be able to go with just anyone if you are looking for an FHA loan. You must choose an FHA-approved lender.
Qualifying for an FHA Loan
Expect different loan requirements based on the individual lender. You’ll typically need a credit score of at least 580. This is a much lower requirement compared to conventional loans. You will want a credit score of at least 600 to purchase a house with a smaller down payment.
If you’ve experienced bankruptcy or foreclosure in the past, that won’t stop you from qualifying for an FHA loan. However, you must be at least two years removed from declaring bankruptcy and at least three years removed from the foreclosure. Hopefully, you’ve spent your time since filing becoming more financially stable and building up your credit. You cannot be delinquent on your income taxes or federal student loans to get an FHA loan.
Employment history is an important part of qualifying for an FHA loan. You usually must have at least two years of steady work experience at the same employer. If you are self-employed, you must show that your business has been profitable for at least two years, using tax returns and profit and loss statements as evidence. Some of the other basic qualifications include being a US citizen or legal resident of the US, having a valid Social Security number, and being the appropriate age to sign a mortgage based on your state laws.
Learn More About FHA-Insured Loans
The FHA loan benefits thousands of home buyers with its generous terms and limits. Do you want to learn more about FHA loan eligibility and use it to finance your home purchase? Contact a local mortgage professional. They take pride in helping borrowers just like you understand the first-time homebuying process.
Updated April 2024
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Preston Guyton
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