An FHA loan allows borrowers to buy a home or refinance with less stringent financial requirements. If you have a lower credit score, debt, or even a bankruptcy on your financial record, you still may be able to qualify for an FHA mortgage.
Let’s take a closer look at what an FHA loan is and if it may be the right home financing solution for you.
What is an FHA Loan?
FHA loans are government-backed by the Federal Housing Administration, an agency under the Department of Housing and Urban Development. FHA loans are insured by the FHA, which means that if the borrower defaults on the loan, the organization will protectthe lender against loss.
FHA loans not only have lower credit score requirements, but they also come with low down payment options, which makes this an attractive program for first-time buyers. However, you don’t have to be a first-time buyer to qualify.
FHA Loan Requirements
To be eligible for an FHA loan, specific requirements must be met, including:
- An FHA-approved appraiser must appraise the home you’re purchasing.
- The home you’re buying must be your primary residence, not an investment property or second home.
- You must occupy the property within 60 days of closing.
- An inspection must take place to ensure the home meets minimum property standards.
FHA Down Payment & Credit Score Requirements
With an FHA mortgage, the minimum down payment requirement, which is a percentage of the home purchase price that you pay upfront, is dependent on your credit score, which can range from 3.5% to 10%.
Typically, the minimum down payment is 3.5% down for credit scores of 580 and higher, and 10% down for credit scores between 500 and 579.
FHA loans accept down payments made through gift assistance, but it must be well-documented to ensure that the funds are indeed a gift and not a loanin disguise from a friend or family member.
FHA Mortgage Insurance
When you have an FHA loan, you must paya mortgage insurance premium (MIP) to insure your lender against losses if you default on your loan. Typically, borrowers pay mortgage insurance for the life of the FHA loan, unless your down payment was at least 10%. In that case, you would only pay mortgage insurance for the first 11 years, then it would be eliminated.
FHA loans have an upfront premium of 1.75% of the loan amount, and an annual premium that ranges from 0.45% to 1.05% of the loan amount.
FHA Loan Limits
FHA loans have maximum amount limits, and those limits depend on the county where the home is located. For 2021, the maximum FHA lending amount for single-family homes located in high-cost areas is $822,375. In lower-cost areas, the FHA limit can go as low as $356,362. Loan limits are set based on your county’s property values. You can look up FHA mortgage limitsbased on location on HUD’s website here.
FHA Loan Terms and Interest Rates
FHA loans are available as 15-year and 30-year mortgages. Interest rates on FHA loans can be competitive compared to conventional mortgages. This is because the government backing lessens your posed risk and allows lenders to offer a lower interest rate in return. However, your rate would depend on several factors, including the market rates, your income, credit score, loan amount, down payment, and more. FHA loans are fixed-rate mortgages, which means your interest rate stays the same throughout the life of the loan.
Is an FHA Loan Right for You?
An FHA loan can allow borrowers with less than ideal financial backgrounds to achieve homeownership. Therefore, if you’re looking for a home loan with lower credit score and down payment requirements, an FHA loan might be your best home financing fit. Speak to a Cross Timbers Loan expert to see if you’d qualify for an FHA loan.