What to know about FHA loans

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The Federal Housing Administration (FHA) is one of the biggest insurers of mortgages for families in the US. FHA loans are great for first-time homebuyers or homebuyers wanting a lower down payment option. Read on to learn more about FHA loans, how they work and how you might qualify.  

What is an FHA loan?

The FHA provides mortgage loans to FHA-approved lenders who then provide loans to qualifying homebuyers. If you’re applying for an FHA loan, you won’t be working with the FHA directly. Because of this, these loans are also referred to as FHA-insured loans.

FHA loans are typically for those with low-to-moderate income and lower credit scores. They can be easier to obtain than some of the other loans on the market and often require a smaller down payment. FHA loans are easier to obtain because they are backed by the Federal Housing Administration, which means there’s less risk for lenders.

FHA loans are also a good option to consider for first-time homebuyers who don’t have money saved for a bigger down payment.

FHA loan vs. conventional loans

There are a few differences between FHA loans and conventional loans. Unlike FHA loans, conventional loans are not insured by a federal agency. The biggest difference between the two are their qualifications. FHA loans usually require a 3.5 percent minimum down payment and a minimum credit score that may vary by lender. Conventional loans vary when it comes to down payment, but may require a higher credit score  and greater savings.

FHA loans don’t require a certain income to qualify. For most mortgages, whether conventional or FHA, you must be at least three years removed from financial hardships related to foreclosures. The lender must see an improvement in your financial habits and will consider your credit score.

When it comes to FHA loans, there are down payment assistant programs out there to help you. Conventional loans, however, may not offer the same help. On top of this, conventional loans don’t require mortgage insurance if your down payment is 20 percent or more. If your down payment isn’t higher than 20 percent, lenders will usually require you to pay Private Mortgage Insurance (PMI).  FHA loans will always require monthly Mortgage Insurance Premium (MIP) regardless of the down payment.

Debt-to-income ratio is taken into consideration as well. Your debt-to-income ratio is the money you owe versus the amount of money you make. Both FHA and Conventional loans will look for a debt-to-income ratio of 43 percent or less.

In short, FHA loans are made for people in a less flexible financial situation, whereas conventional loans may require a higher down payment and credit score.

How do FHA loans work?

You can apply for an FHA loan in a few simple steps:

1. Find a lender

Finding a lender shouldn’t be too difficult, as most big banks and mortgage companies have FHA loans available. Make sure to compare lenders before settling on one.

2. Submit a loan application

Most banks and mortgage lenders have FHA loan applications online. In some cases, they may connect you with a loan advisor for assistance or direct you to apply through another medium.

3. Provide required information

• Your name
• Social security number (SSN)
• Driver's license or government ID
• Proof of income
• Employment status/history
• Current and future home address
• Property value
• Down payment amount 

4. Review the offer

After submitting your application, the lender will get back to you with a loan estimate. This loan estimate will include details about the loan they’re offering you, including interest rates and monthly payments. After this, you can decide if you want to move forward or continue shopping around with different lenders.

FHA loan qualifications

The FHA loan qualifications may vary by lender, but here are a few to keep in mind:

• 3.5 to 10 percent done payment based on credit score
• Monthly MIP (Mortgage Insurance Premium) is required
• Debt-to-income ratio less than 43 percent
• The home must be the borrower's primary residence
• Borrower must have steady income and proof of employment

Once submitted, your lender will review your application and determine whether you meet these qualifications.

FHA loans can be helpful for first-time homebuyers or homebuyers with a lower credit score and income. Keep in mind that the lower your down payment, the higher your interest rate, and always remember to shop around for the best offer.