FHA Loans:
What You Need to Know
- October 20, 2022
If you’re curious about FHA home loans but don’t have the time to decipher the FHA handbook, you’re in the right place. In this guide, we’ll cover the benefits of FHA loans, the qualifying standards, how to get one, and how to apply.
What Is an FHA Loan?
An FHA loan is a type of mortgage that’s insured by the Federal Housing Administration (FHA). It’s a government-backed loan, which means that if you have one, the government will pay your mortgage lender in the event of a foreclosure.
FHA loans are one of the most popular types of mortgages, especially for first-time homebuyers and those with less-than-perfect credit. They’re also especially useful for borrowers who want to refinance and take advantage of lower interest rates.
As long as you meet certain eligibility requirements (which we’ll discuss later), FHA loans offer many benefits. Let’s explore some of the highlights.
FHA Loan Benefits
Whether you’re a first-time homeowner or you have real estate experience, FHA loans have many benefits. Here are some key advantages of FHA loans to consider.
Low Down Payment Requirements
FHA loans typically require much lower down payments compared to conventional mortgages. The minimum required down payment on an FHA loan varies depending on your credit score, but it typically ranges from 3.5% to 5%. In contrast, conventional mortgages often require a higher down payment to qualify for a loan.
This makes it easier to buy a home if you don’t have enough money saved up for a large deposit like most lenders require today due to the risk involved when lending out money at low interest rates (which will be discussed later).
Lenient Credit Score Requirements
FHA loans can be ideal for borrowers with lower credit scores. You can qualify for an FHA loan with a credit score as low as 580. In contrast, most other types of mortgages require a minimum credit score of 620.
Types of FHA Loans
There are a variety of FHA mortgage loan options to choose from:
- Basic Home Mortgage: This is used to buy a primary residence. You can choose between a fixed-rate loan or an adjustable rate loan.
- Rehab Mortgage: This is used to fund a “fixer-upper” house that needs a lot of work
- Construction Loan: This is used to buy land and build a home from scratch
- Property Improvement Loan: This is used to finance home renovations (it can supplement a rehab mortgage)
- Energy Efficient Mortgage: This is used to finance projects that make a home more eco-friendly (the project must be assessed by a professional)
FHA Loan Requirements
FHA loans are quite lenient, but the Department of Housing and Urban Development (HUD) still requires FHA borrowers to meet certain qualifications to get approved.
Minimum Down Payment
If your credit score is between 500-579, the minimum down payment for an FHA loan is 10% of the home’s purchase price. If your credit score is 580 or higher, the minimum down payment is just 3.5%.
So, if the house costs $300,000, the minimum you could theoretically put down would be $10,500, assuming you have good credit.
Debt-to-Income Ratio
Your DTI must be less than 50 to qualify for FHA loans. This means your total monthly debt payments can’t exceed 50% of your pretax income. FHA lenders will also look at other factors as well, including your credit history, tax returns, pay stubs, and length of employment.
If you have student loans in deferment, your underwriter will include 1% of the loan amount as the monthly payment amount.
Property Approval
Whether you’re looking at a single-family home, multifamily residence, or a condominium, the property must meet the FHA’s requirements. For example, the FHA requires a property appraisal, which is different from a home inspection.
Mortgage Insurance
FHA mortgage insurance is built into the loan. When you get an FHA loan, you make an upfront mortgage insurance payment, which you’ll make monthly payments on.
If your down payment is less than 10%, you’ll pay mortgage insurance throughout the life of the loan. If your down payment is 10% or higher, you only pay mortgage insurance for 11 years.
FHA Loan Limits
The amount of money you can borrow through an FHA loan depends on where you live. As of 2022, FHA loan limits range from $420,680 to $970,800 in high-cost areas.
If you want to find out more about your specific area, check out our list of FHA loan limits by state.
FHA Loan Rates
FHA loan rates are lower than conventional loan rates—that’s because FHA loans are backed by the government. However, these rates aren’t set in stone: they can change over time as the economy changes and more people buy homes with FHA-backed financing.
For example, the average 30-year fixed FHA loan rate in Missouri is 6.158% (as of August 2022).
Recap: When to Consider
an FHA Loan
Choosing the right mortgage is a huge part of the homeownership journey. If you fit these criteria, an FHA loan might be a good fit for you:
- You’re a first-time homebuyer
- You’re seeking a moderately-priced home
- Your credit score is between 500-619
- You don’t have a lot of liquid cash for a large down payment
Ready to take the next step in your home buying journey? Get in touch with Delmar Mortgage today!
- Home Loan Options
- Oct 20, 2022
