I recently heard about FHA Loans on TV. But what is an FHA loan anyway?
FHA stands for Federal Housing Administration. An FHA loan is a mortgage issued by an FHA-approved lender. These loans are meant for borrowers with low-to-moderate income, and are insured by the FHA.
What are the advantages of FHA Loans?
The biggest advantages are lower credit score requirement and lower minimum down payment. You can qualify for an FHA loan with a 10% down payment with a credit score as low as 500. And if your credit score is above 580, the minimum down payment requirement is only 3.5%! Plus, you can use money received as a gift from someone else for the down payment, which is not always allowed with a conventional mortgage.
What are the disadvantages of FHA Loans?
Since FHA loans require lower down payment than conventional mortgages and are insured by the FHA, you are required to pay a mortgage insurance premium. You pay an Upfront Mortgage Insurance Premium, which is 1.75% of the loan amount. You also need to pay an Annual Mortgage Insurance Premium, which is 0.45% to 1.05% of the loan amount depending on the down payment, length of the loan, and the loan amount.
There is an upper limit on how much you can borrow based on the region, and strict limitations based on your income and other debt you have. Also, the property must meet certain minimum standards when it is being evaluated during appraisal, and not everyone can qualify for an FHA loan.
So, who can qualify for an FHA loan?
Apart from the minimum credit score requirement of 500, you need to have a steady employment history for the past 2 years to get an FHA loan. Also, you should not have had a bankruptcy in the last 2 years or foreclosure in the last 3 years. The home you buy using an FHA loan has to be your primary residence – it can’t be for investment or rental.
Remember, although FHA loans are designed for lower-income borrowers, you would not be disqualified just because you have a high income.
Is the interest rate on FHA loans fixed, or does it keep changing, and how long is its duration?
FHA loans are loans with a fixed rate, which are offered for 15 or 30 years.
So basically, an FHA mortgage is a loan with a low down payment, with a term of 15 or 30 years, and that you can apply for with a credit score of as low as 500?
Yes, that is a good summary of what an FHA loan is.