To make home ownership easier for Americans FHA loans were introduced. You can qualify for an FHA loan even with a modest down payment and not-so-good credit.
Find out what an FHA loan is, how it works, and whether you can qualify for one.
Key Takeaways
- FHA loans are government insured and issued by FHA-approved financial instituitions.
- FHA loans are more flexible than conventional loans.
- There are more than 10 different loan programs under the FHA.
- FHA loans are the most cost-effective mortgage alternative for first-time homebuyers.
What is an FHA Loan?
The Department of Housing and Urban Development established FHA loans. It is a mortgage insured by the Federal Housing Administration(FHA) to help home buyers who might not get conventional loans.
It is either issued by a bank or a financial institution that is approved by the FHA. This government-backed loan especially benefits first-time home buyers.
How Does an FHA Loan Work?
FHA loans work in a similar manner to conventional loans. You will have to submit a loan application and provide all necessary documents. Since FHA doesn’t grant the loan itself, you will need an FHA-approved lender.
FHA loans require borrowers to pay Mortgage Insurance Premium(MIP) to secure the lender in case of the defaulter. MIP will be required on all loans if the down payment is less than 20%. FHA loans come with terms of 15 and 30 years.
How to Qualify for FHA Loan?
You must have a social security number, be of legal age to sign the mortgage and be a legal resident of the US.
FHA loan criteria are less lenient than a bank. Below are some of the FHA loan requirements:
- Credit Score: You must have a credit score of at least 500 to avail of an FHA loan.
- Steady Income: To ensure the lender that you can repay the mortgage, you must provide proof of your employment. This can be verified through tax returns and bank statements.
- History of Debts: You will be able to avail of an FHA loan after 1-3 years in case of bankruptcy or foreclosure. An exception may be made if your situation was particularly unfortunate and your credit has now improved.
FHA Loan Limits
FHA sets its loan limits based on regions. Lower-cost areas have a lower limit called “floor”. Whereas Higher cost areas have an upper limit called “ceiling”. Alaska, Hawaii, Guam, and the U.S. Virgin Islands are exception regions with costs higher than the upper limit(as per Investopedia).
FHA has to set its limits based on the loan limits set by FHFA for conventional loans. The upper limit of FHA goes up to $1,089,300 for 2023. Whereas the lower limit is $472,030.
FHA Vs Conventional Loans
| Sections | FHA loan | Conventional loan |
|---|---|---|
| Credit Score | You can qualify for an FHA loan with a credit score as low as 500. | In order to qualify for a conventional loan, you would require a credit score of at least 620. |
| Downpayments | Minimum 3.5% on credit score 580 and above. Maximum 10% on credit score 500-580. | Minimum 3% on high credit scores. Maximum 20% on low credit scores. |
| Term | 15 or 30 years. | 8-30 years. |
| Financial Background | You can qualify for an FHA even with a bad financial history. | You may have trouble getting a conventional loan with bad financial history. |
Types of FHA Loans
FHA offers more than a dozen home loan types. We have mentioned some below:
Home Equity Conversion Mortgage(HECM)
Senior citizens aged 62 and above can withdraw some portion of their home equity using this loan type. Funds can be withdrawn as fixed monthly amounts or line of credit.
FHA 203(k) Improvement
This loan type is designed to include the cost of repairs and renovations in the loan amount. Borrowers can request up to $35,000 for the improvements.
FHA Energy Efficient Mortgage(EEM)
In case you are looking to purchase an energy-efficient house, this loan would be a good option for you. You can also accommodate the cost of green upgrades to an older home with this loan type.
Is an FHA Loan Right for You?
FHA loans might be an ideal option if you don’t qualify for conventional loans, VA loans, or USDA loans. Additionally, FHA loans might work in your favor if you have a poor credit score and cannot afford large down payments. Getting an FHA loan would be easier if you are a first-time home buyer.
But if you have a good income and a strong credit score, a traditional mortgage would be ideal for you.
Frequently Asked Questions
How to Apply for FHA loan?
1. Find an FHA-approved lender.
2. Submit loan application.
3. Provide personal details and financial documents to complete the application.
Can you refinance an FHA loan?
Yes, you can refinance your FHA loan. FHA provides many different refinance options. You can select the one that best suits your requirements.
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