What is an FHA Loan?

If you’re beginning the home-buying process, you may have come across FHA loans. But what exactly is an FHA loan, and why might it be the right choice for you? FHA stands for Federal Housing Administration, and these loans are particularly helpful for those with debt or lower credit scores. In fact, it’s possible to qualify for an FHA loan even with a bankruptcy or other financial challenges in your past.

What is an FHA Loan?

FHA loans are insured by the Federal Housing Administration, which falls under the U.S. Department of Housing and Urban Development (HUD). This insurance protects lenders from losses in the event you default on the loan.

How Do FHA Loans Work?

FHA loans allow borrowers to finance a significant portion of a home’s value, depending on their credit score. For instance, borrowers with a credit score of 580M or higher can borrow up to 96.5% of the home’s value, while those with scores between 500 and 579 may qualify for a loan with a 10% down payment. However, individual lenders may set their own credit score requirements. Talk to your

Mortgage Advisor, Dustin Dumestre (Brokered Loan Officer)

for more details.

Why Are FHA Loans Popular?

FHA loans are attractive for several reasons, especially for first-time buyers:

• Low credit score requirements compared to other loan types.
• Low down payment options, making it easier to afford a home.
• You may still qualify even with financial setbacks like bankruptcy.
• FHA closing costs can often be rolled into the loan.
• FHA Loan Requirements
• To qualify for an FHA loan, you must meet certain criteria:

The home must be appraised by an FHA-approved appraiser.
FHA loans can only be used for primary residences, not second homes or investment properties.
You must occupy the home within 60 days of closing.
The property must meet minimum inspection standards.
Other key factors include down payment size, mortgage insurance, credit score, and loan limits, all of which we’ll dive into below.

FHA Loan Down Payments

The minimum down payment for an FHA loan is tied to your credit score. If your score is 580 or higher, the minimum down payment is 3.5%. For scores between 500 and 579, a 10% down payment is required. You can use a

 Mortgage Calculato

r to estimate your monthly payments based on your down payment.

Cash down payments can come from gift assistance, as long as it’s well-documented to show it’s truly a gift and not a loan.

FHA Mortgage Insurance

All FHA loans require a mortgage insurance premium (MIP), similar to private mortgage insurance (PMI) on conventional loans. This protects the lender if you default on the loan.

How Long Do You Pay Mortgage Insurance on an FHA Loan?

For most FHA loans, MIP is paid for the life of the loan, unless you make a down payment of at least 10%, in which case MIP is required for 11 years. FHA borrowers must pay both an upfront MIP (typically 1.75% of the loan amount) and an annual MIP, which ranges from 0.15% to 0.75%, depending on loan factors.

FHA Credit Score Requirements

Several factors contribute to your credit score, including:

• The types of credit you have (credit cards, loans, etc.).
• How much credit you’re using (credit utilization).
• Your payment history.
• The amount you owe.
• How much new credit you’ve taken on recently.
• FHA Home Loan DTI

Your debt-to-income ratio (DTI) plays a crucial role in determining your FHA loan eligibility. DTI is calculated by dividing your total monthly debt payments by your gross monthly income (before taxes). For example, if your debts total $2,000 and your income is $8,000, your DTI is 25%.

The FHA generally prefers a DTI of no more than 43%, though higher DTIs may be acceptable with a higher credit score.

FHA Loan Limits

FHA loans have maximum borrowing limits, which vary based on the county where the property is located. In 2024, FHA loan limits in high-cost areas can go up to $1,149,825, while lower-cost areas typically have a limit of $498,257 for a single-unit property. You can check specific FHA loan limits by county on the FHA mortgage limits page.

If you’re considering an FHA loan, consulting with your

Mortgage Advisor, Dustin Dumestre (Brokered Loan Officer)

can help determine if it’s the best option for your financial situation and home-buying goals.