FHA Home Loans

What is an FHA Home Loan?

FHA home loans are insured by the Federal Housing Administration (FHA), and can only be provided by lenders approved by the FHA. This type of mortgage has a fixed term length of either 15 or 30 years. It's a popular choice among first-time homebuyers, as well as buyers with limited savings or lower credit scores.

When purchasing a home, you might be responsible for certain out-of-pocket expenses like loan origination fees, appraisal costs, and attorney fees. One of the advantages of an FHA home loan is that the seller, home builder, or lender can cover some of these closing costs on your behalf.

Down Payment & Credit Requirements

The minimum down payment (3.5%) and credit score requirements (at least 580) of FHA loans are lower than that of many conventional loans. And unlike conventional mortgages, 100% of your down payment can be a gift. This gift can come from any of the following:

• The borrower's relative.
• An employer or labor union.
• A close friend.
• A charitable organization.
• A governmental agency or public entity that has a program providing home ownership assistance.

If your credit score is between 500 and 579, you still can qualify for this kind of loan; however, you'll have to make a larger down payment. Generally speaking, the lower your credit score and down payment, the higher the interest rate you'll pay on the mortgage.

Mortgage Insurance Premiums

Borrowers who obtain an FHA loan must pay FHA mortgage insurance (this protects the lender from a loss if you default on the loan). You're required to pay two types of mortgage insurance premiums—an Upfront Mortgage Insurance Premium (UFMIP) and an Annual MIP (charged monthly). This is different from conventional loans, where you have to pay private mortgage insurance (PMI).

The UFMIP is typically equal to 1.75% of the base loan amount and can either be rolled into the loan or paid at closing. As for Annual MIP, monthly payments range from 0.45% to 1.05% of the base loan amount, depending on factors such as loan length, base amount, and the original loan-to-value ratio (LTV).

If you start with a down payment of less than 10%, you'll continue to pay mortgage insurance for the duration of the loan. Those with 10% down payments will pay FHA mortgage insurance for 11 years.

How to Qualify for an FHA Loan

• Have a debt-to-income ratio (DTI) of no more than 50%.
• Pay the upfront mortgage insurance premium (UFMIP), usually 1.75% of the base loan amount.
• Have bank statements for the last 30 days, with documentation for any deposits made during that time.
• Have a steady job history (if self-employed, two years of documented self-employment history).
• Be at least two years out of bankruptcy, unless caused by circumstances beyond your control.
• Be at least three years removed from any foreclosures.
• Have a valid social security number.
• Have U.S. citizenship and be of legal age.

FHA approved lenders use a program called Desktop Underwriter (DU) for mortgage approval, which looks at debt ratio, reserves, and credit score. Lenders can also add their own overlays on top of the minimum requirements, so comparison shopping is important.