If you’re buying your first home or buying a home and wondering if you’ll meet the financing requirements, an FHA loan provides simple and flexible options.
Approvals are made easier with lower credit score requirements and smaller down payment amounts, while still offering competitive interest rates.
What is an FHA Loan?
You have a handful of options when choosing the right loan to buy a home. Loan types often differ based on their qualification requirements and the terms they offer, such as the loan’s length, interest rate, and minimum down payment amount.
An FHA loan is backed by the government through the Federal Housing Administration. FHA-approved lenders are insured by the government to cover risks if borrowers can’t pay back these loans. A Mortgage Insurance Premium (MIP), paid during the life of each FHA loan, insures against losses like this.
This backing allows lenders to offer FHA loans with more flexible qualification requirements than conventional loans, including lower credit scores. It also allows for options such as low down payment amounts, starting at 3.5% of the home’s value. These features make them popular options among first-time homebuyers.
How to Get an FHA Loan
To learn whether an FHA loan is the best option for purchasing your home, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand the process.
The Financing Process
Homebuyers often start by requesting a quote for their interest rate or beginning an application with a lender. By sharing basic information about your potential purchase, we’ll work with you to pull your credit report and discuss your finances, as well the potential value of the house you’re interested in purchasing.
As we move through the process together we’ll arrange for an appraisal of the house to determine its value and an inspection to ensure it meets the minimum property standards.
We’ll also discuss the terms you qualify for and your options, as well as request various documentation for the underwriting process to make sure the loan begins on a solid foundation.
We’re with you through each step, leading to closing where we’ll finalize your affordable loan when you’re ready to purchase.
FHA Requirements to Meet
These are some of the common requirements often needed to qualify for an FHA purchase loan. If you have questions about these requirements, we’re here to help.
- Credit score requirements vary. In most cases a credit score of 580 or higher qualifies. This may shift lower or higher based on other factors such as Debt-to-Income ratio and down payment amount.
- Through underwriting evaluation, you’ll need documentation of consistent income with a Debt-to-Income ratio at or below 50%. This ratio shows how much of your monthly income goes to paying your debt.
- Along with income information you need to share employment verification and history.
- A down payment of 3.5% or more of the home’s value. This minimum requirement goes up based on your credit score and finances. Gift down payments are allowed.
- The house needs to be your primary residence, and it must meet the minimum property standards according to an inspection.
- You need to move into the house within 60 days of closing your new loan.
- You can qualify if you haven’t experienced a foreclosure in the last three years.
FHA Loan FAQs
Financing a home is an important investment. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
Both FHA and conventional loans offer flexible financing options. FHA loans differ in that they’re insured by the government, so lenders don’t need you to meet the strict qualification requirements of a conventional loan.
If you have a lower credit score, an FHA loan may be the most affordable option for you. It may provide fewer options than a conventional loan, but it offers competitive interest rates and low down payment options.
A conventional loan, on the other hand, often has stricter qualification requirements based on standard borrower criteria. The benefit, if you qualify, is that you also get better options when it comes to your mortgage insurance, term lengths, and closing costs, as well as a lower interest rate.
You’ll want to consider how much you’ve been able to save for a down payment, the value of the house you want to buy, as well as how the down payment amount impacts your potential mortgage.
With an FHA loan, you’re also able to use a gift toward your down payment amount, as long as it’s well documented and clearly not a loan.
A typical minimum required down payment amount for FHA loans is 3.5% for credit scores of 580 or more. With a higher down payment at 10%, you may qualify with a lower credit score, down to 500. Depending on your current finances and your homebuying situation, various requirements are considered to determine your minimum down payment amount.
The FHA has set property requirements to ensure that each house being financed is a good investment for all involved.
The minimum property standards assess a home’s safety, security, soundness, and structural integrity to evaluate whether the house will negatively affect the health, safety, or security of its residents.
A home inspection will be required for this assessment, which considers factors such as the condition of the house’s electrical wiring, heating and cooling systems, and its roof, but not the cosmetic features of the house.
To offer flexible qualification requirements, FHA loans require a Mortgage Insurance Premium (MIP). Homebuyers using an FHA loan will pay an upfront MIP that is included at closing, as well as an annual MIP, which becomes part of the monthly mortgage payment. The annual MIP decreases each year, over the lifetime of the loan.
MIP can be reduced based on various factors, such as if you have a higher down payment or a shorter term length.
For example, if your down payment is less than 10%, the MIP on your new FHA loan lasts for the life of the loan, reducing slightly each year. If your down payment is 10% or more, the annual MIP will only last 11 years.
A typical upfront MIP is around 1.75% of your loan amount. The annual MIP can range between 0.45-1.05% of your loan amount.
When you close your FHA loan to purchase a house, you’ll need to account for several costs, both upfront and those included in your ongoing monthly payment. These will be clearly outlined as your loan is processed and before you close.
Beyond your initial down payment, you’ll also pay closing costs, which cover expenses such as loan origination fees, an appraisal, upfront MIP, title insurance, etc. These typically range from 1-3% of your total loan amount.
The FHA also allows that up to 6% of these costs can be covered by the person selling your new house. This may be an option if it helps everyone close the sale of the house.