What is an FHA loan?
An FHA loan is a mortgage that is supported by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer low-interest loans with fewer credit requirements and low down payments (starting at just 3.5 percent).
FHA loans are popular with first-time home buyers, people with low or moderate incomes, and/or people with bad credit because they are flexible and have low rates.
But you don’t have to be a certain kind of buyer to get FHA financing. Anyone can apply.
Why use an FHA loan?
Since the 1930s, FHA loans have made it easier for people to buy their own homes.
The FHA allows you to purchase a home with a credit score of 580 and only 3.5 percent down. This is because it is made for people with bad credit.
But not only people who want to buy a home can benefit. An FHA refinance may allow homeowners with poor credit access to low rates and home equity.
Not sure if you can get a mortgage or not? Learn more about the FHA programme. You could be shocked.
FHA loan requirements
To get an FHA home loan, you must meet the following requirements:
If your credit score is 580 or higher, you only have to pay a 3.5% down payment.
Between 500 and 579, put down 10%.
A ratio of debt to income (DTI) of 50% or less.
steady, documented income and work history.
You’ll make the house your main place of residence.
You haven’t gone bankrupt in the last three years.
The rules for an FHA loan are a lot less strict than those for other types of mortgages.
For example, FHA lets people with credit scores as low as 500 get loans, while most other loan types require at least 620 or more.
Furthermore, FHA loans can have debt-to-income ratios as high as 50%, whereas conventional loans can only go up to 43%. This means that if you have a lot of debt right now, you’ll be more likely to get an FHA home loan.
Even if you have bad credit, an FHA refinance may give you affordable rates and home equity if you’re a homeowner.
FHA loan rates
Most FHA loans have interest rates that are lower than market rates. That means that, on average, they cost less than similar conventional loans.
For a borrower with good credit, the rates for a 30-year FHA loan start at 5.375 percent (5.804 percent APR) today. On the other hand, conventional mortgage rates for a similar loan start at 5% (5.038 % APR).
Keep in mind that the APR on an FHA loan is usually higher than the APR on a regular loan. FHA rate estimates incorporate mortgage insurance costs, while conventional rate estimates use a 20% down payment and no PMI.
FHA upfront and annual mortgage insurance could cost more than a conventional loan with a little higher interest rate, says Jon Meyer, a licensed MLO and lending specialist at The Mortgage Reports.
If a borrower put down 3% on a conventional loan, which is the same as the minimum down payment on an FHA loan (which is 3.5%), the APR would look a lot more like the APR for an FHA mortgage.
How FHA loans are made
First, you should know that the Federal Housing Administration doesn’t actually give you the money.
You can get an FHA mortgage loan from any bank or lender that is approved by the FHA, just like any other type of mortgage loan.
The FHA is responsible for insuring these mortgages, which protects lenders in case the borrowers can’t pay back their loans. In turn, this means that mortgage lenders can offer FHA loans with lower interest rates and fewer requirements to meet.
You have to pay for the FHA insurance that protects your mortgage lender if you want to call that a catch. This is called MIP, which stands for “mortgage insurance premium.” How does it work?
FHA mortgage insurance
The FHA programme is only possible because of the mortgage insurance premium (MIP) paid on FHA loans. Without the MIP, there wouldn’t be much reason for FHA-approved lenders to make FHA-insured loans.
An FHA loan needs two different kinds of MIP. One is paid all at once when the loan is closed, and the other is an annual premium that costs less each year as the loan balance is paid off:
The upfront mortgage insurance premium (UFMIP) for current FHA loans and refinances is 1.75 percent of the loan amount.
Most FHA loans and refinances have an annual mortgage insurance premium (MIP) that is equal to 0.85% of the loan amount.
The good news is that the mortgage insurance premiums on your FHA loan have gone down. FHA MIP costs are now up to 0.50 percent (50 basis points) lower than they were in 2014.
Also, there are ways to lower how much you have to pay for FHA MIP.
Depending on how much you put down and how long the loan is, you might only have to pay mortgage insurance for 11 years instead of the whole loan.
With rates so low, refinancing might cut your monthly mortgage payments and eliminate your mortgage insurance charge.
Pros of FHA home loans
The FHA home loan programme has a lot going for it. Here are some of the most important ones:
Low up-front costs
Gifted funds permitted
Higher DTIs were able to
Credit scores that were lower were
There’s no credit score needed.
Large amounts of money lent
Limits on loans can be raised.
Possible to refinance
Less money down: only 3.5 percent
There are only a few mortgage options for home buyers today that require a down payment of 5% or less. One of them is the FHA loan.
With an FHA mortgage, you can pay as little as 3.5% of the home’s price as a down payment. This helps people who don’t have a lot of money saved up for a down payment and people who would rather save money for moving costs, emergencies, or other needs.
2. FHA lets 100% of the down payment and closing costs come from gifts.
The FHA is flexible about how gifts can be used for a down payment. Not many loan programmes will let you get your whole down payment from a gift. The FHA has
The FHA allows you to get your entire 3.5 percent down payment from a gift from your parents or another family member, an employer, an approved charitable organization, or a government homebuyer program.
But if you are using a gift for a down payment, you will need to follow the steps for giving and receiving money.
3. FHA loans let you have more debt than income.
FHA loans also let you have more debt than income.
Your DTI, or debt-to-income ratio, is figured out by comparing your debt payments with your income before taxes.
For example, if you make $5,000 a month and have $2,000 in debt payments, your DTI is 40%.
Officially, these are the FHA’s maximum DTIs.
Rent or mortgage payments account for 31% of gross income.
Housing costs and other monthly bills such as credit cards, student loans, auto loans, and so on consume 43 percent of gross income.
However, for most FHA borrowers, a DTI of 43 percent is considered low.
A mortgage software company called ICE Mortgage Technology recently said that the average DTI for FHA purchases that closed in 2021 was about 44%.
And the FHA will let DTI ratios go up to 50%. To get approved with such a high ratio, you’ll probably need one or more compensating factors, like a great credit score, a lot of cash saved up, or a bigger down payment than the minimum.
In any case, the FHA is more flexible than other loan programmes when it comes to this.
Most conventional mortgage programmes, like those from Fannie Mae and Freddie Mac, only let you have a debt-to-income ratio of between 36% and 43%.
If your FICO score is 700 or higher and your down payment is less than 25%, Fannie Mae will allow you to borrow up to 43 percent DTI. But most people can’t get regular loans if they have that much debt.
ICE Mortgage Technology said that the average DTI for closed conventional purchases in 2021 was 35%, while the average DTI for closed FHA loans was 44%.
4. FHA loans let people with bad credit get them.
Officially, the following are the minimum credit scores needed for FHA home loans:
Down payment of 5.5%
500–579 with a down payment of 10%.
In reality, though, the average credit score of FHA buyers in 2021 was 678.
If you have a good credit score, that’s great. But it takes time to fix mistakes that were made in the past.
FHA loans can help you buy a home without having to wait a year or more for your good credit to become “excellent.”
When it comes to your credit score, other loan programmes are not as forgiving.
The agencies that set the rules for conventional loans, Fannie Mae and Freddie Mac, say they accept FICO scores as low as 620. In reality, though, some lenders have higher minimum credit scores than others.
Part of the reason why the average credit score for completed Fannie Mae and Freddie Mac home purchase loans was 757 in 2021, nearly 80 points higher than the average FHA score, was because of stricter minimum credit score requirements.
5. FHA lets people apply even if they have no credit score.
What if the person applying has never had credit? Their credit reports are, for the most part, empty.
FHA borrowers with no credit score may also be able to get a mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) says that FHA lenders can’t turn down a loan request just because the borrower doesn’t have a credit history.
The FHA lets borrowers build credit in ways other than the usual way, so they don’t have to have a standard credit history. This can be a huge help for people who have never had credit scores because they have never borrowed money or used credit cards.
Utility payments, cell phone bills, car insurance bills, and apartment rentals all be used to develop non-traditional credit.
Meyer warns, “Not all FHA-approved lenders offer these kinds of loans, so check with each lender individually.”
6. In most of the U.S., FHA loans can go up to $420,680.
Most mortgage programs have limits on how much you can borrow, and many of these limits depend on how much homes cost in your area.
In most of the country, FHA mortgage limits for single-family homes range from $420,680 to $970,800, depending on the county or MSA (Metropolitan Statistical Area).
Alaska, Hawaii, the U.S. Virgin Islands, Guam, and duplexes, triplexes, and four-plexes have higher limits.
7. FHA also lets loan terms be longer
As another benefit of the FHA, loan limits can be raised in areas where homes cost more. This means that buyers can still use FHA to finance their homes even though prices have gone through the roof in some high-cost areas.
For a mortgage on a single-family home, the FHA will cover up to $970,800 in Orange County, California, or New York City.
FHA loan limits are even higher for homes with two, three, or four units, going as high as $1,867,275.
If the FHA loan limits in your area are too low for the property you want to buy, you’ll probably need a regular or jumbo loan.
8. If you have an FHA loan, an FHA Streamline Refinance can help you lower your rate.
FHA-backed homeowners can also use the FHA Streamline Refinance, which is another benefit.
The FHA Streamline Refinance is an FHA-only program that gives homeowners one of the easiest, fastest, and cheapest ways to refinance.
With an FHA Streamline Refinance, there are no credit checks, no proofs of income, and no appraisals of the home.
Also, homeowners with a mortgage that started before June 2009 can get lower FHA mortgage insurance rates through the FHA Streamline Refinance.