what is a fha home loan

What is an FHA Loan and Who Qualifies?

Do you think of the FHA loan as a first-time homebuyer’s loan? You aren’t alone. FHA loans have carried this reputation for many years, but it’s the perfect loan for any borrower who doesn’t qualify for conventional financing.

Let’s take a look at what FHA financing is and how it works.

What’s an FHA Loan?

An FHA loan is a mortgage loan for borrowers who don’t have perfect credit, have higher debt ratios, or don’t qualify for a conventional loan for other reasons. Its relaxed guidelines make it easy for many more people to afford a home.

You can be a first-time homebuyer or have already owned a home. An FHA loan is a loan backed by the FHA. The FHA guarantees lenders they will pay them back if the borrower defaults. This guarantee allows lenders to offer more flexible guidelines, making it easier for more people to buy a home.

What are the Requirements?

Each lender has different FHA loan requirements, but the general requirements include:

  • Minimum 580 credit score – Borrowers need at least a 580 credit score (which is the lowest credit score requirement for any program) to qualify for the minimum down payment.
  • Minimum 3.5% down payment – If you have a 580+ credit score, you can put down just 3.5% on the home and secure financing.
  • Minimum 10% down payment with 500 credit score – If you have a credit score between 500 – 579, you can still get FHA financing with a 10% down payment.
  • Gift funds for the down payment – You may accept gift funds (upon lender approval) for the down payment, sometimes even using gift funds for the whole down payment.
  • Stable income and employment – You must prove you have stable income and employment for the last 2 years. If you changed jobs but stayed within the same industry, you may still qualify.
  • Proof of funds – If you’re making your own down payment and/or covering the closing costs, you must prove you have the money to cover it.
  • Maximum 43% debt ratio – Your total debts (mortgage, credit cards, car payments, student loans, etc.) must not exceed 43% of your income before taxes. This doesn’t include costs like groceries, utilities, insurance, cellphone bills, or internet costs.

Should you Use FHA Financing?

If you don’t qualify for a conventional loan, FHA financing is the next best bet. FHA loans have low interest rates, flexible underwriting terms, and require little money down. They are a great way to get into homeownership. Once you improve your financial situation (credit or otherwise), you can refinance out of the FHA loan and eliminate the mortgage insurance by securing conventional financing.

Bottom Line

FHA loans have millions of people becoming homeowners every year. Their flexible guidelines and low interest rates make them easy and affordable. They do charge mortgage insurance for the life of the loan, so figure that into your overall loan costs, but FHA loans provide an incredible opportunity to own a home much sooner than most other loan programs.

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