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FHA Loans - FHA Financing, Home Loan

Everything You Need to Know About FHA Loans

Last Updated: March 15, 2016

In the wake of the housing bubble's collapse in 2008, FHA loans have taken on a renewed importance for today's mortgage borrowers. An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

Because of that insurance, lenders can offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements.

Seven Facts About FHA Loans

1. Less Than Perfect Credit is OK - A borrower needed a credit score of 580 or better to qualify for a loan.

2. Minimum Down Payment is 3.5 Percent - This is a fraction of what a typical loan would require. Borrowers can use their own savings or a gift from a family member.

3. Closing Costs May Be Covered - FHA allows home sellers, builders and lenders to pay some of the borrower's closing costs.

4. Lender Must Be FHA Approved - Because FHA is not a "lender," but rather an insurance fund, borrowers need to get their loan through an FHA-approved lenders.

5. Borrower Must Carry Mortgage Insurance - There are two mortgage insurance premiums required by FHA: 1) an upfront premium of 1.75 percent of the loan amount and 2) an annual premium based on the length of the loan.

6. Extra Cash Can Be Available For Repairs - FHA has a special loan product for borrowers who need extra cash to make repairs on their home.

7. Relief Allowed for Financial Hardship - If a borrower has suffered a serious financial hardship, an FHA-insured loan can offer some type of temporary relief to help the borrower make their payments.

Who Can Benefit From an FHA Loan?

By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, the FHA program allows individuals to qualify who may have been previously denied a home loan through conventional underwriting guidelines. FHA loans are designed for individuals who would like to purchase a home but may not have been able to save enough money for the purchase, such as recent college graduates, those still pursuing education, or a young couple starting out. It also allows individuals to qualify for a FHA loan whose credit has been marred by bankruptcy or foreclosure, as FICO (credit) scores can typically be lower than those for a conventional loan. At the current time, it is our understanding that the minimum FICO score for qualification for an FHA Loan is 580, but with extenuating circumstances variations to this limit may be possible- always discuss this with your mortgage professional.

FHA home loans

Underwriting Guidelines for FHA Loans

Credit guidelines have been revamped for FHA loans as well as most other types of loans, and even the minimum FHA credit standards are harder to meet in the current market.

  1. A stable 2-year employment record is required.
  2. Monthly debt-to-income has to fall within certain parameters. Your monthly mortgage payment cannot be more than 29 percent of your gross monthly income.
  3. Money for the downpayment should be yours and in your account for at least 6 months, but gift money is allowable.
  4. FHA mortgage loan underwriting guidelines require property appraisal and it must appraise for at least the purchase price.
  5. If you've had a foreclosure, you need to have re-established credit and it must be over 3 years since the date of foreclosure.
  6. If you've had a bankruptcy, you need to wait 2 years and have clean credit.
  7. The applicant cannot have any outstanding civil judgements or delinquencies on federal debts such as taxes or student loans.

Different Types of FHA Loans Available

FHA loans are available to anybody but are used most often by first-time home buyers and low- to moderate-income buyers. The decreased down payment and lack of set income limit qualifications makes this type of mortgage even more desirable for many people, particularly first-time homebuyers and those with blemished credit. For more information, visit the HUD website at http://www.hud.gov/.

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