Insured by the Federal Housing Administration, FHA loans are essentially mortgages that are backed by the federal government, more specifically by the US Department of Housing and Urban Development.
With a down payment minimum of 3.
5%, FHA mortgage loans are an excellent option for first-time home buyers looking to settle down, so long as their credit score is at least 580.
In fact, applicants can still qualify for an FHA loan even if they wouldn’t normally be able to take out a mortgage, or even if they’ve experienced bankruptcy.
While the government doesn’t issue these loans, they offer insurance if the borrower defaults on it, meaning that the lenders are protected and that they’re open to a lot more customers than they normally would be.
Because of this, FHA lenders sometimes offer loans with favorable terms to borrowers that don’t qualify for a conventional mortgage.
Compared to a conventional loan, FHA loans are much easier to qualify for, as they’re both insured and guaranteed by the federal government.
One key difference is that FHA loans are available to Americans with significantly lower credit scores, and sometimes even offer those who experienced bankruptcy or other credit issues a second chance.
On the flip side, a conventional loan doesn’t require mortgage insurance, which can vary based on the size of your down payment.
Usually, with a conventional loan, if your down payment is 20% of the home’s purchase price, you’re not required to pay any mortgage insurance, and this also applies to situations where you’ve reached 20% equity in your home.
Due to the loan being insured by the federal government, it must first pass an appraisal by a qualified inspector, who will make sure it meets all of the required health and safety standards.
Requirements for an FHA loan
All borrowers are required to meet a certain set of criteria if they wish to receive an FHA loan, although this criterion can vary based on the lender, albeit the majority of it still has to be in line with the minimums set by the FHA.
One good example would be that some lenders require that you meet a credit score of at least 600, whereas another may require something closer to 620, while the minimum score proposed by the FHA is 500.
Lenders are also in charge of setting their own interest rates and closing fees, and if you’re looking to get the most out of the money you’ll be paying back, you’ll want to shop around for FHA-approved lenders that may offer better terms.
Generally, the minimum score for an FHA loan is 500, although you will be required to make a down payment of at least 10% in order to qualify for the loan.
Apart from the requirements you have to meet as a lender, the property itself must undergo a thorough examination by an FHA-approved inspector, who will make sure it meets the minimum property requirements for a loan.
This appraisal is much different from a standard home inspection, as the goal is for the home to be a good investment, meaning that you’re actually getting what you’re paying for, which also includes some criteria regarding the safety and livability standards of the property in question.
For a renovation loan, on the other hand, the property must undergo two separate appraisals, one before the renovation is carried out, and one after, which will estimate the property’s value after all the work is done on it.
Types of FHA loans
The FHA offers many different types of loans, all of which are designed to meet a set of very specific needs, and you can find a full list of the products the FHA has to offer at the Department of Housing and Urban Development’s official website.
Among the products the FHA has to offer, you’ll find home purchase loans, refinancing loans, renovation loans, and many more, and it’ll be up to you to pick the one that’s best suited to your needs and circumstances.
Apart from the aforementioned three, the FHA also offers energy-efficient mortgages, which focus on financing home improvements that can help the household save money on energy-related expenses.
Other times, the FHA may offer a loan for a so-called manufactured home, which is also known as a mobile home, and they can be bought with FHA financing, so long as they meet all of the agency’s standards.
FHA loans are an incredible option for first-time home buyers, as well as anyone who’s been dealing with some credit issues recently, as they’re available to Americans with a suboptimal credit score.
Generally, the loans are available to anyone with a credit score of 500 and above, although those with a score between 500 and 579 will have to make a down payment of at least 10%, whereas those with a better score can gain access to a down payment as low as 3.5%.