What is an FHA Loan?
One of the most popular types of loans insured by the government is a Federal Housing Administration, or FHA, loan. (The Federal Housing Administration is part of the U.S. Department of Housing and Urban Development, or HUD as it is commonly known.) This type of loan requires as little as 3.5% down. Also, the credit requirements are lower than for a typical mortgage loan. However, if an FHA loan is used, the homebuyer will pay an Upfront Mortgage Insurance Premium of 1.75% (This was just raised from 1% in April and is causing many borrowers to look to other loan options). As the name implies, the Upfront Mortgage Insurance Premium is paid upfront at the closing and is added to your loan balance; therefore, the home buyer will pay interest on it for the life of the loan. You must also pay an Annual Insurance Premium each month on an FHA loan.
EXAMPLE: For a 30-year fixed interest rate FHA mortgage if your loan to value is 95% or lower, the annual mortgage insurance premium is now 1.2% of the base loan amount. If your loan to value is greater than 95%, the annual mortgage insurance premium is 1.25% of the base loan amount. For a 15-year fixed interest rate FHA mortgage, if your loan to value is 90% or lower, the annual mortgage insurance premium is 0.35% of the base loan amount. If your loan to value is greater than 90% , the annual mortgage insurance premium is 0.60% of the base loan amount.
Also, a 15-year FHA mortgage for which the loan to value is less than 78% is exempt from the FHA annual mortgage insurance.
Note: Use our mortgage calculator to figure out what your monthly mortgage payment would be.
What Are Requirements for an FHA Loan? Having a minimum credit score of 580 will qualify the homebuyer for FHA’s 3.5% down payment program; however, new borrowers with less than a 580 credit score will be required to put down at least 10%. There are debt-to-income requirements for FHA loans. A debt-to-income ratio is a comparison of your pre-tax income to housing and non-housing expenses. The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. (FHA can allow more than 41% to go towards housing expenses under certain circumstances. )
Note: To see what the actual FHA loan limits are in your area, go to the FHA Mortgage Loan Limits page on the HUD website.
Where to Get an FHA Loan. You can apply for FHA loans at conventional lenders either in person or online. However, please do make sure you are dealing with a loan officer who has significant experience in these types of loans.
Note: If you need to you can visit the HUD website to find out where you can inquire about an FHA loan.