FHA loans are mortgages guaranteed by the Federal Housing Administration (FHA). The FHA doesn’t actually provide the loans, private lenders do. As a government insured loan program, it enables FHA-approved lenders to take more risk with qualifying people for a loan. This provides the opportunity for more Americans to own their own home.
Who are FHA loans for?
Home Purchase
FHA loans make buying a house more affordable with competitive interest rates, low down payment requirements, and flexible credit requirements. Tailored to borrowers with lower credit scores, an FHA mortgage makes it possible to buy a home with only 3.5% down. This is a great option for borrowers who may not qualify for a conventional home loan.
These loans are a great fit for first-time homebuyers, but you may also qualify for this type of mortgage even if you’ve purchased a home before.
Mortgage Refinance
You can also refinance your home with an FHA loan. The most common FHA refinance options available are:
- FHA Simple refinance is used when you want to reduce your interest rate and/or loan term length.
- FHA Cash-out refinance allows you to take out a loan for more than your current one and receive cash back for home improvement projects, debt consolidation, etc.
- FHA Streamline refinance: if you have an existing FHA mortgage, this program offers less paperwork and faster closing as a new FHA appraisal is not required.
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What are the benefits of FHA loans?
- Low money down — as little as 3.5% down payment.
- You don’t need a high credit score.
- More flexible debt-to-income (DTI) ratio — a DTI of no more than 50% and steady employment history. Estimate your DTI by adding your monthly debt payments (such as credit card and car payments) and dividing the total by your monthly income before taxes.
- The upfront mortgage insurance premium (UFMIP) can be financed into the loan. The amount is usually equal to 1.75% of your loan amount.
- Closing costs can be added to your loan balance — which could be anywhere from 2% – 6% of the purchase price.
- Existing mortgage refinance — simple, cash-out, and streamline loan refinance options.
- FHA Loan amount is based on location.
Frequently Asked Questions
Answers to common questions about FHA mortgages.
A conventional loan is the most common type of home loan. The requirements to qualify are more stringent than FHA as the lender will want to make sure you are a good credit risk since this type of loan is not backed by a government agency. Benefits include lower interest rate, less paperwork, easier to pass home inspection, and you can avoid paying personal mortgage insurance (PMI) if your down payment is large enough.
An FHA loan has more lenient requirements because it is insured by the Federal Housing Administration (FHA). This type of loan can be easier to qualify for with a lower credit score and has lower down payment requirements. However, FHA loans always require mortgage insurance (both an up-front mortgage insurance premium and monthly installments) and have stricter property standards. These loans are designed to help people purchase their first home but may also be a good option when refinancing a mortgage.
- Have a valid SSN and be a legal resident of the US.
- Have verifiable and steady income.
- Have a debt-to-income ratio less than 50%.
- Have a minimum down payment of 3.5% (varies based on credit score). However, the money can be gifted from a family member.
- The property must be used as your primary residence.
- The property must be appraised by an FHA-approved appraiser and needs to meet certain standards.
- Must pay FHA mortgage insurance – both up-front as part of your closing costs and monthly as part of your monthly payment, paid for the life of the loan.
- More stringent property requirements – the house must be structurally sound and meet specific standards. If it is a fixer-upper, an FHA loan might not work.
- Must be your primary residence – FHA loans can not be used for vacation or investment properties.
- Limited loan size – the maximum loan amount is based on the property location.
*Additional lender fees:
$1395 UW/Admin ($0 for VA loans)
$775 typical appraisal fee (varies)
$0 origination, $0 credit report, $0 processing, $0 doc prep, $0 funding, $0 wire transfer, $0 flood certification.
Always scan the fine print for origination and/or other fees. When getting verbal quotes from lenders who don’t post rates, request they email a screenshot of their pricing to be sure it matches their verbal quote.
Some mortgage companies quote different rates based on how you were referred to them. Some of their rates also vary by loan officer and/or by branch. Upwell rates are consistent regardless of source.