What Is a Federal Housing Administration Loan (FHA Loan)?
FHA loans are federally backed mortgages designed for low-to-moderate-income borrowers who may have lower than average credit scores.
FHA loans require a lower minimum down payment and credit scores than many conventional loans.
FHA loans are issued by approved banks and lending institutions, who will evaluate your qualifications for the loan.
These loans come with certain restrictions and loan limits not found in conventional mortgages.
There are different types of FHA Loans that you can get depending on what you need. Here are some types of FHA Loans:
Basic Home Mortgage Loan 203(b)
Fixed or adjustable rates.
Several types of homes are eligible
203(k) Rehab Mortgage
Finances purchase and renovation with one loan
Purchase or refi options available.
Construction to Permanent (CP) Loan
Finances the construction of a home as well as the land which it will be built.
Title I Property Improvement Loan
Used to purchase a manufactured home or repair an existing home.
Energy Efficient Mortgage
Finances energy-efficient upgrades during a home purchase or refinance.
Available for new or existing homes
There’s a lot to love about the FHA home loan. Here are some of the biggest benefits.
Lower down payment: FHA allows a 3.5% down payment
With an FHA mortgage, you can make a down payment as small as 3.5%. This benefits home buyers who don’t have a lot of money saved up for down payment; and, home buyers who would rather save money for moving costs, emergency funds, or other needs.
FHA loans allow higher debt-to-income ratios
Officially, FHA maximum DTIs are as follows.
31% of gross income for housing costs
43% of gross income for housing costs plus other monthly obligations like credit cards, student loans, auto loans, etc.
FHA loans accept lower credit scores
Officially, the following credit score minimums for FHA are:
580 or higher for 3.5% down
500-579 for 10% down
FHA loans can be up to $331,760 in most of the U.S.
Most mortgage programs limit their loan sizes, and many of these limits are tied to local housing prices.
FHA also allows extended loan sizes
As another FHA benefit, FHA loan limits can be extended where home prices are more expensive. This lets buyers finance their home using FHA even though home prices have skyrocketed in certain metros.
How to get an FHA loan
FHA mortgages aren’t restricted to single-family homes or 30-year loans. In fact, most lenders offer FHA home loans in a variety of forms. Here’s what you need to know about getting an FHA loan.
There are many FHA-approved lenders
FHA loans can be funded by any FHA-approved lender. This includes mortgage lender, savings-and-loans institutions, and credit unions. The marketplace for FHA loans is giant, which creates competitive pressure among lenders to offer low FHA rates and low FHA fees.
It pays to “shop around” on an FHA loan. Furthermore, because different banks use different methods to underwrite, your FHA loan can be declined by Bank A but approved by Bank B. If you meet the rules of the FHA, you can apply until your loan get approved!