An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). They are popular primarily with first-time homebuyers because they allow 3.5% down payments for credit scores of 580 or higher. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
Applicants can qualify for an FHA loan with a down payment as low as 3.5% for a credit score of 580 or higher. The borrower’s credit score can be between 500 and 579 if a 10% down payment is made. However, it is important to remember that the lower the credit score, the higher the interest that borrowers will receive.
The FHA program was created in response to the wave of foreclosures and defaults that occurred in the 1930s, to provide mortgage lenders with adequate insurance, and to help stimulate the housing market by making loans are accessible to people with a lower credit score. Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
Requirements for an FHA loan
Those interested in buying a home with an FHA loan, putting down a small down payment of 3.5%, must have a minimum FICO score of 580 to qualify. However, having a credit score below 580 does not necessarily exclude you from eligibility for an FHA loan. In that case you only need to provide a minimum initial payment or fee of 10%.
Credit score and down payment amounts are just two of the requirements for FHA loans. Below is a complete list of FHA loan requirements, which are established by the Federal Housing Authority:
- Borrowers must have a stable employment history or have worked for the same employer for the past two years.
- Borrowers must have a valid social security number, legal residency in the United States, and be of legal age to take out a mortgage in their state.
- Borrowers must pay a minimum down payment of 3.5 percent. The money can be a contribution from a family member.
- New FHA loans are only available for primary residence occupancy.
- Borrowers must have an appraisal of the property from an FHA-approved appraiser.
- Borrowers’ ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowner’s insurance) must be less than 31 percent of their gross income. You may be able to pass at a slightly higher percentage, around 40 percent. Your lender will need to justify why they believe the mortgage is a reasonable risk. The lender must include any compensation factors used for loan approval.
- The borrower’s fund ratio (the mortgage plus all of their monthly debt, ie credit card payment, car payment, student loans, etc.) must be less than 43 percent of their gross income. You may be able to pass at a slightly higher percentage, around 50 percent. Your lender will need to justify why they believe the mortgage is a reasonable risk. The lender must include any compensation factors used for loan approval.
- Borrowers must have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
- Borrowers must have a minimum credit score of 500-579 for a loan-to-value (LTV) ratio maximum of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will review on a case-by-case basis to determine the applicant’s creditworthiness.
- Borrowers generally must be within two years of bankruptcy and have reestablished good credit. Exceptions may be made if you have been out of insolvency for more than a year, there were extenuating circumstances that caused the insolvency, and you have managed your money responsibly.
- Borrowers typically must be within three years of foreclosure and have reestablished good credit. Exceptions may be made if there were extenuating circumstances and your credit has improved. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
- The property must meet certain minimum standards in appraisal. If the home you are buying does not meet these standards and the seller does not agree to the required repairs, your only option is to pay for the required repairs at closing (which will be held in escrow until the repairs are completed).
Benefits of FHA Loans: Low down payments and less stringent credit score requirements
It’s usually easy to qualify for an FHA loan because it requires a small down payment and you may have a lower credit score. For FHA loans a down payment of 3.5 percent is required for maximum financing. Borrowers with low credit scores, around 500, may already qualify for an FHA loan.
Borrowers who can’t afford a 20 percent down payment, have a lower credit score, or can’t get private mortgage insurance should consider whether an FHA loan is the best option for them.
Another advantage of an FHA loan is that it is a transferable mortgage, which means that if you want to sell your house, the buyer can “assume” your loan. People who have low credit scores, were insolvent, or have been foreclosed may qualify for an FHA loan.
Mortgage insurance is required to apply for an FHA loan
You’re probably thinking that it can’t be that simple and you’re right. Because an FHA loan does not have the strict standards of a conventional loan, it requires two types of mortgage insurance premiums: one is paid in full up front – or, can be financed in the mortgage – and the other is a down payment. monthly. What’s more, FHA loans require the home to meet certain conditions and must be appraised by an FHA-approved professional.
The Prepaid Mortgage Insurance Premium (UFMIP) is a one-time monthly premium payment, which means borrowers will pay a 1.75% premium on the home loan, regardless of their credit score. Example: Loan of $300,000 x 1.75% = $5,250. This sum can be paid in advance at closing as part of the transaction costs or can be transferred to the mortgage.
The annual MIP is known as the Annual Premium but it is actually a monthly charge that will be included in the mortgage payment. The mortgage insurance premium amount is a percentage of the loan amount, based on the borrower’s LTV, the size of the loan, and the length of the loan:
|loan term||loan amount||LTV ratio||Annual insurance premium|
|More than 15 years||$625,000 or less||95% or less||80%|
|More than 15 years||$625,000 or less||More than 95%||85%|
|More than 15 years||More than $625,000||95% or less||one%|
|More than 15 years||More than $625,000||More than 95%||1.05%|
|15 years or less||$625,000 or less||90% or less||0.45%|
|15 years or less||$625,000 or less||More than 90%||0.70%|
|15 years or less||More than $625,000||90% or less||0.70%|
|15 years or less||More than $625,000||More than 90%||0.95%|
For example, the annual premium on a $300,000 loan with a 30-year term and less than 95% LTV would be $2,400: $300,000 x 0.80% = $2,400. To calculate the monthly payment, divide $2,400 by 12 months = $200. So the monthly insurance premium would be $200 per month.
How long do borrowers have to pay for FHA mortgage insurance?
The length of your annual MIP will depend on the repayment term and the LTV ratio on the loan origination date.
For loans with FHA case numbers assigned on or after June 3, 2013:
Borrowers will have to pay mortgage insurance for the entire term of the loan if the LTV is greater than 90% at the time the loan was originated. If your LTV is 90% or less, the borrower will pay mortgage insurance for the term of the mortgage or for 11 years, whichever comes first.
|loan term||original down payment||Duration|
|15 years or less||Less than 10%||The one with the loan|
|15 years or less||10% or more||11 years|
|More than 15 years||Less than 10%||The one with the loan|
|More than 15 years||10% or more||11 years|
For loans with FHA case numbers assigned before June 3, 2013:
|loan term||original down payment||Duration|
|15 years or less||22% or more||No annual MIP|
|15 years or less||Less than 22%||Canceled at 78% of the LTV|
|More than 15 years||22% or more||5 years|
|More than 15 years||Less than 22%||Canceled at 78% of the LTV (minimum 5 years)|
How do you get an FHA loan?
A lender must be approved by the Federal Housing Authority to help you obtain an FHA loan. You can login here to get started.
FHA Loan Interest Rates
Below are today’s average FHA interest rates. You can use Zillow to see FHA interest rates for your particular situation. Submit a loan application with less than a 20% down payment and you’ll instantly receive personalized FHA quotes from multiple lenders. Use the filter button to find FHA interest rates.
To see the interest rate you’d qualify for, enter specific details like credit score, income, and monthly debt. Then, you want to talk to a lender, you can contact any of the ones on your list.