What is an FHA loan?
The Federal Housing Administration (FHA) insures mortgages issued by FHA-approved lenders, like banks, credit unions, and independent mortgage companies. These loans offer lower credit requirements and down-payment options to assist all types of buyers to get into their homes. Being they are insured by the FHA, this allows lenders to offer more favorable terms to borrowers who may not otherwise qualify for a home loan.
What are the general requirements to qualify for this type of loan?
It is typically easier to qualify for an FHA loan compared to conventional loans. You generally need a mid-fico score of at least 580 and in certain cases your back-end debt-to-income ratio can exceed 50%. Minimum down-payments can start as low as 3.5% on primary home purchases.
What types of properties can I use this loan type on?
These loans can be used on most types of properties. This includes single-family homes, PUDS, condos, and even multi-units. However, FHA has much stricter requirements regarding properties and their condition. Additionally, condos specifically must be FHA approved in almost all cases to use an FHA loan.
Is there mortgage insurance for this type of loan?
FHA loans require an Up-Front Mortgage Insurance Premium (UFMIP) and a monthly mortgage insurance premium (MIP) to be paid instead. The UFMIP is paid at closing either in cash or financed into the loan amount. The UFMIP is non-refundable UNLESS the borrower is refinancing into another FHA mortgage. Monthly MIP is almost always paid through the life of the loan, even when you have obtained 20% equity in your home.
Who are these loans best suited for?
These loans are generally a great option for buyers with lower credit scores, higher debt-to-income ratios, and at least a 3.5% down-payment plus funds for closing costs. Because they can only be used on primary homes, these loans are well suited for first-time homebuyers or those looking for an affordable option to obtain a home.