Guides FHA Loans 101

FHA Loan: What You Need to Know

Holden Lewis
November 27, 2018

FHA loans are mortgages insured by the federal government. They allow a down payment as low as 3.5% with a credit score of 580 or higher, and are easier to qualify for than conventional mortgages.

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What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are popular among first-time home buyers who have little savings or flawed credit.

The FHA insures mortgages issued by private lenders, protecting them financially in case you default. Mortgage insurance premiums are paid by you, the borrower.

FHA loans can be used to buy or refinance single-family houses, dwellings in one- to four-unit buildings, condominiums approved by the agency, and certain manufactured and mobile homes.

An FHA 203(k) loan can pay for home renovations and other specialized FHA loans can pay for energy-efficiency upgrades and reverse mortgages for seniors.

Only an FHA-approved lender can issue an FHA-insured loan.

» MORE:  Compare the best lenders for FHA loans

How an FHA loan is different

It's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that is not insured or guaranteed by the federal government. An FHA loan allows for lower credit scores and, in some cases, lower monthly mortgage insurance payments. FHA rules are more liberal regarding gifts of down payment money from family, employers and charitable organizations. Closing costs and mortgage rates are often lower for FHA loans.

» MORE:  Details on FHA vs. conventional loans

FHA loan eligibility and requirements

It's easier to qualify for an FHA loan than for a conventional loan. Here's a summary of FHA eligibility standards. The links take you to other FHA-focused articles with details.

  • Credit score. 

    If your credit score is 500 or higher, you may qualify for an FHA loan. Minimum credit score on conventional mortgages is 620 but can vary by loan program and lender.

  • Minimum down payment. 

    The minimum down payment on an FHA loan is 3.5% if your credit score is 580 or higher. The minimum down payment is 10% with a credit score of 500 to 579.

  • Loan limits. 

    The maximum FHA loan size depends on where the home is. The limit is lower in the least expensive housing markets and higher in the most expensive housing markets.

  • Debt-to-income ratios. With both FHA and conventional mortgages, your total monthly debt payments can be up to 50% of your pretax income.

  • Mortgage insurance. 

    FHA mortgage insurance cannot be canceled if you made a down payment of less than 10%, while private mortgage insurance on conventional loans can be canceled after you have accumulated sufficient home equity.

  • Foreclosure. You can't have a foreclosure or have given up your property’s deed in lieu of foreclosure within the past three years. There are exceptions for extenuating circumstances such as serious illness or the death of a wage earner.

» MORE: Find out how much home you can afford

Other requirements

Getting an FHA loan means meeting a few more requirements:

  • You will need a valid Social Security number.

  • You will have to provide proof of U.S. citizenship, evidence of legal permanent residency or eligibility to work in the United States.

  • You'll need to be old enough to sign a mortgage under your state’s borrowing laws.

» MORE:  Detailed FHA loan requirements

Is an FHA loan right for you?

Conventional mortgages require credit scores of 620 or higher. So if your credit score is lower than 620, an FHA loan might be your only option.

Even if your credit score is 620 or higher, an FHA loan might give you lower monthly payments than a conventional mortgage with private mortgage insurance. Specifically:

  • FHA costs less per month than PMI if your credit score is less than 720, according to the Urban Institute.

  • PMI costs less per month if your credit score is 720 or higher.

» MORE:  Details about FHA mortgage insurance and its costs

FHA loans have a couple of other advantages over conventional loans: FHA loans often have lower closing costs, and FHA interest rates are competitive. They're often lower than conventional loan rates.

» MORE:  Calculate how much your FHA payment would be

An FHA-insured loan is not the only low-down-payment mortgage. If you are serving or have served in the military, you may qualify for a loan backed by the Department of Veterans Affairs. A VA loan requires no down payment. And if the home is in an area that is designated rural by the U.S. Department of Agriculture, you may be eligible for a USDA loan, which also requires no down payment.

» MORE:  How much down payment is required for various loan types