Mortgages that are insured by the Federal Housing Administration, otherwise known as FHA Loans, are popular options for first and second-time home buyers. FHA loans are relatively easy to qualify for.  FHA offers low down payment and low credit requirements which has made these loans an amazing option for any prospective home buyer. Having the loan backed by the government lets lenders be more flexible with their eligibility requirements.

Should a borrower default on repayment of the loan, the FHA reimburses the lender for its loss. With less risk, lenders have more reason to offer FHA loans at competitive rates, which is great for home buyers!

FHA Mortgage Basics

The FHA mortgage program is one of the best tools first time home buyers can use to get into their home when they’re relatively cash poor and have little credit experience. FHA’s 203(b) mortgage insurance program is FHA’s most popular loan product for single-family home buyers.

FHA has down payment as low as 3.5% and low credit requirements for eligibility have made these loans an amazing option for any prospective home buyer.

FHA is backed by the government which allow lenders be more flexible with their eligibility requirements. Should a borrower default on repayment of the loan, the FHA reimburses the lender for its loss. With less risk, lenders have more reason to offer FHA loans at competitive rates, which is great for home buyers!

FHA tightly regulates what kind of closing costs you can be charged, as well as limiting their amounts. However, if you bring a down payment smaller than 20 percent of the purchase price of your home to the table, you’ll be responsible for paying for mortgage insurance.

Pros and Cons of FHA Mortgages

FHA mortgages are generally pretty good options, but they’re not for every home or every home buyer. Just a few things to think about:

Benefits of a FHA Mortgage

  • Qualifying for an FHA loan is one of the easiest ways to be approved for a mortgage. They require low down payments, and your credit score can be less than stellar. In fact, borrowers with credit scores as low as 580 can qualify for FHA mortgage loans.
  • Low down payment requirement. You can borrow from FHA with as little as 3.5 percent of the purchase price as a down payment. You’ll see benefits for bringing 10 percent, but more than that is just showing off.
  • Controlled closing costs. FHA tightly regulates what closing costs can appear on your closing statement and how much they can be. This has deterred some lenders from using them, but overall, FHA loans are very easy to find.
  • Competitive Interest Rates. FHA loans offer low interest rates to help homeowners afford their monthly housing payments. This is a great benefit when compared to the negative features of subprime mortgages.
  • Bankruptcy / Foreclosure. Having a bankruptcy or foreclosure in the past few years doesn’t mean you can’t qualify for an FHA loan. Re-establishing good credit and a solid payment history can help satisfy FHA requirements.
  • Determining Credit History. There are many ways a lender can assess your credit history, and it includes more than just looking at your credit card activity. Any type of payment such as utility bills, rent, student loans, etc. should all reflect a general pattern of reliability.
  • It’s an Assumable Mortgage. This means if you want to sell your home, the buyer can “assume” the loan you have.

Drawbacks of a FHA Mortgage

  • Potential lifetime mortgage insurance. Since June 2013, FHA’s mortgage insurance premium (MIP) has been a lifetime sentence for anyone with less than 10 percent down. That can be a big chunk of extra payment for no benefit, forcing you to refinance down the line.
  • Additional inspections required. Anyone who has sold to an FHA buyer and had problems can tell you that they’re not always easy. Not only do you have your home inspector go through the house, FHA sends an appraiser who performs an FHA inspection. It’s meant to ensure the house meets FHA’s minimum requirements, but can create a last-minute delay.
  • Can be slow to close. FHA requires additional paperwork and in-the-field inspections to ensure their gamble is one that’s likely to end in long-term homeownership. Foreclosure is a dirty word at FHA, so these loans take a bit longer to close due to the additional checks and balances.

FHA Loan Requirements

Homebuyers looking to secure an FHA loan must first meet a few standard eligibility requirements. While not as strict as most conventional loans, FHA loans require borrowers to conform to these standards:

  • Must be a lawful resident of the USA
  • Valid Social Security Number is required
  • Must adhere to state age requirement for signing a mortgage
  • Must have steady employment or source of income for at least two years
  • Must have a credit score of at least 620
  • Borrowers with credit scores between 580 and 619 are still eligible, but a down payment of no less than 3.5% must be made; however, very few lenders work with borrowers with these credit scores.  Most lenders start at 640+ credit scores.
  • Must be able to pay a down payment of 3.5% minimum (unless more is required as stated above)
  • Must have a debt-to-income ratio of less than 45% (actual amount varies by lender)
  • Must have a clean Credit Alert Verification Reporting System (CAIVRS) report showing no current delinquencies.  This simply means that you cannot have a FHA foreclosure or unpaid/default student loan.
  • Must intend to use loan proceeds toward a primary residence
  • Property must be appraised by an FHA-approved appraiser
  • Property must meet minimum standards
  • Must be 2 years out of bankruptcy (if applicable)
  • Must be 3 years out of foreclosure (if applicable)