FHA Loan

What is a FHA Loan?

A Federal Housing Administration (FHA) loan is a home mortgage loan insured by the government and designed to help borrowers with low to moderate incomes, but also popular with first-time home buyers. Because the lender is insured and takes less risk, FHA loans have lower requirements.

 

Taking an FHA loan also requires borrowers to pay Mortgage Insurance Premiums (MIPs), one upfront and one paid monthly, which is called an annual MIP. MIPs are paid to insure FHA backing of the borrower’s loan. The term of an annual MIP payment is less than that of the loan and dependent on the loan term, loan amount, and loan-to-value (LTV) ratio. For example, an LTV of more than 90% and less than or equal to 15 years means the borrower will pay an annual MIP for 11 years. In addition, as a borrower continues to meet payment, annual MIPs decrease.

 

Types of FHA Loan

• Traditional FHA mortgage: Finances a primary residence

• Home equity conversion mortgage (HECM): A reverse mortgage for senior citizens to exchange home equity for cash

• 203(k) loan: Mortgage that includes funds for home renovations, repairs, and improvements.

• Energy efficient mortgage: Includes extra funds for energy-efficient home improvements.

• Section 245(a) loan: A Graduated Payment Mortgage (GPM) with low monthly payments that increase over time.

 

Requirements

Because FHA loans are meant to be more accessible, the requirements to qualify for this type of loan is less stringent, including:

• As low as 3.5% down payment with a minimum of 580 credit score

• 10% or more down payment with 500 - 579 credit score

• General history of repaying debts

• Employment verification

• Sufficient income