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What is a FHA Loan?

In 1934, the Federal Housing Administration (a.k.a. FHA) was established to improve U.S. home ownership standards and provide a home mortgage financing system with mortgage insurance coverage, so families that may have not been able to purchase a home could finally buy their dream home.

FHA does not make actually home loans, it just insures a home loan, so if a homebuyer defaults on their mortgage, the actual home loan lender is paid from the FHA mortgage insurance fund.

  • FHA allows you to buy a house with as little as 3.5% down.
  • FHA is ideal for the first-time homebuyers unable to make larger down payments.
  • FHA is a solution for those who may not qualify for a conventional loan.
  • Down payment assistance programs can be used for down payment and closing cost assistance.

FHA Loans vs. Conventional Home Loans

The main difference between a FHA Home Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment (only 3.5%), and the credit qualifying criteria for a borrower is not as strict, usally as low as 580 Credit Score is allowed. This allows those without a credit history, or with minor credit issues to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting.

Mortgage Insurance Premiums

FHA charges an upfront mortgage insurance payment added to your loan amount (also called “MIP”) along with annual mortgage insurance premiums paid on a monthly basis. The upfront MIP is the same for all FHA Home Loans, which is 1.75% of the loan amount and is financed directly into the mortgage. Remember, payment for mortgage insurance from borrowers are mandatory in order to protect lenders from losses in instances of defaults on loans. The annual. monthly mortage payment (also called “Private Mortgage Insurance” or “PMI”) varies based on the loan term, loan amount, and the loan-to-value (LTV) ratio. Use the tables below to figure out proper MIP rates.

2019 FHA Annual MIP Rates

Loan Term—Longer than 15 Years

FHA Loan Criteria Highlights

• FHA allows Credit Scores as low as 580,

• FHA allows higher debt-to-income ratios, see “Understanding Qualification Ratios” page. DTI can go up to 50% of gross monthly income depending on your credit score,

• FHA is great loan for borrowers with good credit scores, but only have a small down payment,

• Gift Funds for the 3.5% down payment and/or closing costs are allowed from family members. Seller concessions can be used to pay for closing costs,

• Several gift and grant programs are available for Zero Down Payment and Zero Closing Cost scenarios, see “0% Down Payment & Grant Programs” page,

• Only 2 years out of Chapter 7 bankruptcy and 3 years out of foreclosure. Small medical and non-medical collections are allowed,

• Permanent resident alien status is ok. Work visa status ok as long as the work visa has not expired, and

• Use to purchase Single Family Residence, Condo, Townhouse, and Manufactured home. FHA does require Condos to be FHA approved.