Less rigorous lending standards and lower down-payment requirements make FHA loans popular among mortgage borrowers.
What is an FHA loan?
An FHA loan is a type of government-backed mortgage insured by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, or HUD. FHA borrowers pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
FHA Loans vs. Conventional Mortgages
|Credit Score Minimum:||620||500|
|Down Payment:||Between 5% to 20%||
3.5% for credit scores of 580+
10% for credit scores of 500-579
|Loan Terms:||10, 15, 20, 30 years||15 to 30 years|
|Premiums:||PMI: 0.5% to 1% of the loan amount per year||
Upfront: 1.75% of the loan amount
Annual premium: 0.45% to 1.05%
|Interest Type:||Variable rate, fixed rate||Fixed rate|
Compare FHA loan rates today.
Why homebuyers like FHA mortgage loans
Because they are government-backed, FHA home loans have attractive interest rates and less stringent qualifications.
FHA loan applicants must meet credit-score and down-payment requirements, and show proof of employment and a steady income. An appraisal of the home by an FHA-approved appraiser also is required.
Fast facts about FHA home loans
Here are seven facts that borrowers should know about FHA loans.
1. You don’t need stellar credit to qualify
Credit-score requirements for FHA loans depend on the down payment.
- For an FHA loan with a down payment as low as 3.5 percent, the borrower’s credit score must be 580 or higher.
- Those with credit scores between 500 and 579 must pay at least 10 percent down.
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People with credit scores under 500 generally are ineligible for FHA loans. However, there may be some wiggle room there. The FHA does make allowances, under certain circumstances, for applicants with “nontraditional credit history or insufficient credit” if other criteria are met.
Ask your FHA lender or an FHA loan specialist whether you qualify.
2. The minimum down payment is 3.5 percent
For most borrowers, the FHA requires only 3.5 percent of the purchase price of the home as a down payment.
That’s a “huge attraction,” says Dennis Geist, senior adviser at Treliant Risk Advisors, which has offices in Washington, D.C., New York City and Dallas.
FHA borrowers can use their savings to make the down payment. Other sources of cash allowed for a down payment include a gift from a family member or a government grant for down-payment assistance.
3. Closing costs may be covered
The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home.
Lenders typically charge more interest on the loan if they agree to pay closing costs. Borrowers can compare loan estimates from competing lenders to decide which option is the best for them.
4. The lender must be FHA-approved
Because the FHA is an insurer and not a lender, borrowers get their home loans from FHA-approved lenders, as opposed to directly from the FHA.
FHA-approved lenders have different rates and costs, even for the same FHA loan.
Costs, services and underwriting standards vary among lenders or mortgage brokers, so it’s important for borrowers to shop around.
5. There are two types of mortgage insurance to pay
All FHA loans require the borrower to pay two mortgage insurance premiums:
- Upfront premium:75 percent of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
- Annual premium:45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.
6. You can borrow cash for home repairs
The FHA has a special loan for borrowers who want extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203(k), is that the loan amount is not based on the current appraised value of the home, but on the projected value after the repairs are completed.
A so-called “streamlined” 203(k) allows the borrower to finance up to $35,000 for nonstructural repairs, such as painting and replacing cabinets or fixtures.
7. Loan limits are adjusted annually
Every year the FHA changes the maximum loan amount (“ceiling”) that it will insure, and the minimum loan limit (“floor”) it will insure. This is in response to shifting home prices.
Ceiling and floor limits vary according to the cost of living in a certain area. Areas with a higher cost of living will have higher limits, and vice versa. Special exceptions are made for housing in Alaska, Hawaii, Guam and the Virgin Islands, where home construction is more expensive.
For FHA home loans in high-cost areas in 2018:
- The ceiling is $679,650.
- The floor is $294,515.
Bonus: Financial hardship relief may be available
Loan servicers can offer some relief to borrowers with FHA loans who have suffered a serious financial hardship or are struggling to make their payments.
That relief might be in the form of a temporary period of forbearance, a loan modification that would lower the interest rate, extend the payback period, or defer part of the loan balance at no interest.