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FHA Loans Explained:

FHA loans are designed to help those with lower credit scores and down payments. Discover how they work.

What They Are and How They Work

FHA loans can be a great option for buyers with less-than-ideal credit scores or lower incomes. Explore how these loans work and see if one is right for you.

What Is an FHA Loan?

FHA stands for the Federal Housing Administration. These government-backed loans are designed to help homebuyers with limited financial resources get approved to purchase a home. FHA loans are only available through FHA-approved lenders and are popular with first-time homebuyers.

Types of FHA Loans

There are different types of FHA loans based on their purpose and requirements:

FHA purchase loan: These allow homebuyers to purchase a home with a low down payment and flexible credit requirements.
FHA streamline refinance: This type of refinance helps FHA homeowners lower their interest rate and monthly payments with a simpler process.
FHA cash out refinance: These help homeowners tap into their home's equity by refinancing their existing mortgage.

To help determine the right loan product for you, consider your current homeownership status, credit health, and financial needs.

How Does an FHA Loan Work?

As mentioned, FHA loans are issued by FHA-approved lenders. The FHA doesn’t provide funds for these loans, but the agency insures the loan if the homeowner defaults on their mortgage. This insurance helps buyers qualify because the lending risk no longer falls solely on the loan provider.

FHA Loan Benefits and Considerations

If you're not sure if an FHA loan is right for you, consider the following benefits:

Low down payment requirement
Flexible credit score requirement
No income requirement
Assumable (it can usually be transferred to a new owner)
Availability to first-time and repeat homebuyers

Keep in mind that FHA loans do require a mortgage insurance premium (MIP) upfront as well as annually for the life of the loan unless you made a down payment of at least 10%, in which case, MIP would stay on the loan for 11 years.

There are also FHA loan limits based on the size and location of the property. Applicants with lower incomes may have to prove their ability to pay with a good debt-to-income ratio (DTI), proof of steady employment, or demonstrated ability to repay what they borrow.

FHA Loan vs. Conventional Loan

If you're weighing the benefits of an FHA loan against a Conventional loan, here are some important differences to explore:

FHA Loans	Conventional Loan
Often allows for a low down payment Flexible credit score requirements Mortgage insurance premiums are required for at least 11 years Government-backed Available to many first-time and lower-income homebuyers	Often allows for a low down payment Requires a higher credit score than an FHA loan Private mortgage insurance (PMI) isn't needed at 20% equity Not government-backed Often ideal for high- and middle-income homebuyers with strong credit

How To Qualify for an FHA Loan: Eligibility Requirements

There are several FHA loan requirements you must meet to qualify for loan approval:

DTI: Generally speaking, FHA loans allow for a debt-to-income ratio (DTI) of up to 43% but no higher.
Proof of income and income history: You must provide proof that you can afford to make monthly FHA loan payments.
Minimum down payment: FHA loans require a minimum down payment that's as low as 3.5% of the purchase price.
Proof of established credit: While homebuyers with lower credit scores can still be approved, a higher credit score can mean a better chance of approval.
FHA closing costs: FHA-related closing costs can include appraisal fees, title searches, application fees, and more. These costs are usually 2%-5% of the home's purchase price according to Fannie Mae.
FHA mortgage insurance: FHA loans come with both an upfront mortgage insurance premium (UFMIP) and a monthly mortgage insurance premium (MIP).
FHA property and appraisal requirements: An FHA-certified appraiser must state that the property meets health and safety requirements.

Curious what your monthly payment could look like with an FHA loan? Use our FHA loan calculator before seeing if you prequalify.

How To Get an FHA Loan: Get Started Today

Buying a home is exciting, and FHA loans are designed to make the process easier for first-time homebuyers and repeat buyers with lower credit scores. With government backing, FHA loans offer flexible requirements that allow more people to achieve their homeownership goals.

If you're ready to take the next step on the road to homeownership, get prequalified today, and we'll help you figure out if an FHA loan is right for you.