Learn About…
FHA (Federal Housing Administration) Home Loans
What is an FHA Home Loan?
FHA stands for Federal Housing Administration, and the FHA is a government agency that insures mortgages. It was created just after the Great Depression, at a time when homeownership was prohibitively expensive and difficult to achieve because so many Americans lacked the savings and credit history to qualify for a loan. The government stepped in and began backing mortgages with more accessible terms. Approved lenders began funding FHA loans, which offered more reasonable down payment and credit score standards loans do.
Pros and Cons
Low down payment. Down payments make up the majority of cash to close in any purchase loan, and saving up for one can be a significant barrier for some borrowers. FHA loans make it possible to put down as little as 3.5% upfront and still get competitive rates. Mandatory MIP payments. FHA loans are more lenient, but they also come with insurance costs to mitigate risk to the lender. You’ll have to pay Mortgage Insurance Premiums (MIP) no matter what—either for 11 years or for the life of your loan, depending on your down payment.
Lower credit score. Credit scores can be a major hurdle when it comes to conventional loans, but borrowers with credit scores starting at 620 can qualify for FHA loans. Less competitive. Sometimes sellers can be more hesitant to accept FHA loans. In a competitive market, you might not win out against conventional loan bids.
Higher DTI accepted. Your debt-to-income (DTI) ratio gives lenders an understanding of other major financial obligations in your life. This ratio is a key factor in any loan application because it indicates your ability to afford a mortgage based on current household income and existing debt. Stricter property standards. To offset risk and further protect lenders, FHA loans have strict criteria when it comes to assessing the condition of any property being purchased with an FHA loan. The downside? The house you want to buy might not qualify for an FHA loan. The upside? You’re less likely to be financially burdened by a home that requires expensive repairs or updates.
No income limitations. It’s a common misconception that FHA loans are only available to first-time homebuyers or borrowers with limited income—but they’re not. There’s no maximum income limit that would disqualify you from this type of loan. Loan limits: FHA loan limits are typically lower than conventional loan limits, which means you might not be able to get funding for more expensive houses. This isn’t necessarily a bad thing, since it helps ensure that borrowers get loans they can afford to repay.
KEY TAKEAWAYS
- Federal Housing Administration (FHA) loans are federally backed mortgages designed for homeowners who may have lower-than-average credit scores.
- FHA loans require a lower minimum down payment and a lower credit score than many conventional loans do. (620 is recommended by our Loan Officers here at Guild Mortgage. We’re here to help!)
- Federal Housing Administration loans are issued by FHA-approved banks and lending institutions; these institutions will evaluate your qualifications for the loan.
- In order to secure the guarantee of the FHA, borrowers that qualify for an FHA loan are also required to purchase mortgage insurance, and premium payments are made to FHA.
Common Questions and Answers:
How do I qualify for an FHA loan?
To qualify for this program, borrowers generally need to have good credit, a down payment of at least 3.5%, a manageable level of debt, and a steady income that is sufficient to repay the loan. Those are the minimum requirements.
Are FHA loans easy to obtain?
It is commonly said that FHA is easier to qualify for when compared to conventional or “regular” home loans. There is some truth to this. But you’ll still need to have good credit.
What’s the average credit score?
As mentioned above, the lowest possible score for an FHA-insured mortgage loan is 500. But many of our readers have also inquired about the average score among borrowers who use this program. It’s around 683 for home buyers, according to Ellie Mae.
Are they just for first-time buyers?
There is a common misconception that FHA-insured mortgage loans are reserved for those who are buying their first home. This is not true. People who have owned a house in the past can also use this program, as long as they meet the basic criteria.
How much income is needed to qualify?
The Federal Housing Administration does not have an official minimum income requirement for this program. But they do have specific limits regarding the borrower’s “debt-to-income” or DTI ratio.
Can my down payment be gifted?
In a word, yes. One of the benefits of using an FHA loan to buy a house is that the down payment funds can be gifted by a family member, a friend, or other approved donor.
Is there a credit check before closing?
Your lender will check your credit reports and scores when you apply for a loan. But they might check it again a few days before closing. So it’s best to preserve the status quo in between.
Can the seller pay my closing costs?
Derek Egeberg
Branch Manager
Bill Craft
Sales Manager
NMLS 1621885
State Lic: AZ LO-0942496, CA-DBO01621885, MLO-54015VA
PHONE: (928) 366-1639
PHONE: (928) 247-9089
Rosa Castillo
Senior Loan Officer
