FHA loans

FHA loans, or Federal Housing Administration loans, are government-insured mortgages that provide a path to homeownership for prospective buyers who meet the criteria to qualify for this type of home loan.

If you’re looking to apply for a mortgage but don’t have the credit or savings for a typical financing plan, FHA loans might be right for you.

Since these loans are government insured, lenders can be certain their investment is safe and insured, allowing them to be more flexible towards certain credit or property characteristics when approving a loan. If the buyer can’t keep up payments and the home loan falls into default, the lender can foreclose the property and sell it back on the market to recoup any losses. By insuring a portion of the lender’s financing, banks can be more flexible with their mortgage approval terms, creating new paths to homeownership for borrowers who apply for an FHA loan.

While an FHA loan structure trims down some conventional mortgage obstacles, this type of financing does come with some added expenses that every applicant should be aware of.

Your lender will take on additional risk when they approve your FHA loan and will need to compensate for that uncertainty by requiring mortgage insurance.

FHA mortgage insurance protects the lender’s loan amount if you default on your loan. Just like private mortgage insurance on a conventional loan, this policy is paid by the borrower, but only extends coverage to the lending organization’s investment in the property. In the event of default or foreclosure, the mortgage insurance company would reimburse the lender for their losses.

On a conventional 30-year fixed mortgage, lenders will usually attach a private mortgage insurance requirement if the buyer can’t make a down payment of at least 20%. Minimum down payments on an FHA loan can be even smaller, making FHA mortgage insurance a built-in necessity for this financing structure.

FHA mortgage insurance usually includes one upfront payment of 1.75% of the principal loan. This first expense is typically paid as an upfront premium included in the mortgage’s closing costs, if the buyer has the cash on hand. This premium can also be financed as part of the loan amount. In addition to this one time installment, FHA borrowers will also have insurance premiums folded into their monthly mortgage payments, amounting from 0.45% to 1.05% of the home loan, according to Investopedia.

As a popular option for first-time homebuyers, FHA loans can ease some of the barriers associated with securing a mortgage.

Since these loans are backed by the U.S. government, lenders can be more comfortable financing a home loan for a borrower who would otherwise present too much risk for a mortgage.

For example, a credit score below 620 would typically disqualify a borrower from conventional mortgage approval. With an FHA loan, as long as the borrower can demonstrate gainful employment and afford the required down payment, they could be a much more likely lending candidate.

To receive an FHA mortgage, you’ll need to demonstrate that you’re an applicable candidate that can reliably repay the debt. Since these loans are government insured, there are several thresholds hopeful borrowers will still need to meet before they begin the homebuying process:

• At least 18 or older
• Valid social security number
• Lawful resident of the United States
• Currently employed or were employed at the same job for at least two years
• Down payment affordability (3.5% or 10% options)
• Favorable credit score
• Bankruptcy free for at least two years
• Home will be your primary residence
• Front-end debt-to-income ratio is less than 31% of your total monthly income
• Back-end debt-to-income ratio is less than 43% of your total monthly income