How FHA Home Loans Work
FHA Home Loan Basics
A Federal Housing Administration (FHA) home loan has fewer qualifications and small down payment requirements. This is helpful for those who are unable to pay the hefty 20% down payment that's normally needed. The FHA loan also allows borrowers to choose a fixed-rate or a variable rate (ARM) mortgage. It’s a great option outside of conventional choices.
As part of the U.S. Department of Housing and Urban Development (HUD), it was designed to help first time home buyers get approved. While insured by the government, the FHA is not the one who grants the home loans. Rather, private lenders use their capital to fund loans to those who wouldn’t normally get approved for traditional loans.
However, since the loans are secured by the government, there is more flexibility. Here are some of the differentiating factors of the FHA loan:
Down payments as low as 3.5%
The down payment can come in the form of a gift from a family member
Low credit and credit score requirements (as low as 580, and sometimes lower, to qualify)
Option to finance your mortgage insurance (which you will be required to pay for the duration of the home loan)
Typically a maximum loan amount of just over $450,000 (based on location)
Provides up to 96.5% financing
Favorable interest rates
Competitive refinancing options
While starting your FHA home loan process, the lender will review your application. Your criteria will decide if you qualify. Like a traditional loan, your credit score, assets and liabilities, employment history, debt-to-income ratio, and total financial history will be reviewed. The difference with an FHA loan is that its requirements are less rigid and more encouraging to help you, the home buyer, purchase a home.
However, there are still FHA home loan requirements you must meet in order to get approved:
You must have a stable and verifiable employment history for up to 2 years
Minimum credit score of at least 580 (Lenders will consider home buyers with credit scores in the 500-579 range)
Must be able to pay a minimum down payment of 3.5% (Gifts from family or employers are eligible)
Must have a debt-to-income ratio of less that 45%
No credit delinquencies
Cannot have gone through a bankruptcy in the last 2 years
Cannot have a foreclosure in your financial past within the last 3 years
The FHA home loan is a great choice, especially for a first-time home buyer. It carries minimal risk due to government guarantees, and the home loans are lenient. Normally, borrower requirements are very strict in regards to down payments and credit scores. While 580 is the minimum credit score for an FHA loan, lenders may consider a lower credit score if the home buyer makes a larger down payment.
If you’re making strides in cleaning up your financial past, applying for an FHA home loan may be the right path. Lenders want you to achieve your home ownership dreams, and if you can commit, owning your own home will be one of your greatest achievements.