FHA Loans – Why & How to Get One
FHA loans are government secured loans done through FHA-approved third-party lenders. These mortgage loans are great for first-time homebuyers, young people, and those with poor credit scores. FHA loan requirements are more relaxed than those of traditional mortgage loans, and you can start with a down payment as low as 3.5%.
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UPDATED: Apr 30, 2021
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- FHA loans are government-secured loans done through FHA-approved third-party lenders.
- FHA loans typically require lower credit scores and lower down payments than traditional mortgage loans.
- All FHA loans require mortgage insurance payments.
If you’re considering buying a home but are worried you can’t afford it, then you may be wondering if you qualify for FHA loans.
The Federal Housing Administration (FHA) can help you secure a mortgage loan with a low credit score, low down payments, and low closing costs. On top of that, FHA loan requirements are the most relaxed of all the different home loans.
Keep reading to find out what FHA loans are, why you should get one, and how you can qualify for them. But before you do, enter your ZIP code into our free comparison tool above to find affordable FHA loans from lenders near you.
What are FHA loans?
So, what are FHA loans? Well, simply put, an FHA loan is a government-secured loan that you can qualify for through an FHA-approved lender.
What does this mean? Well, instead of the government lending money directly to you, the FHA secures or guarantees the loan through a third-party lender.
This means that people who normally wouldn’t qualify for a mortgage loan through a traditional lender because of low credit scores are more likely to qualify for a loan since the government has backed it up.
Of course, FHA-approved third-party lenders will still require credit checks and down payments, but they will be nowhere near as high as they would be from traditional lenders.
Fortunately, mortgage rates are lower than they have been in years, so now might be a good time to buy.
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Why should I get an FHA loan?
If you have poor credit and can’t afford the 20% down payment typically required by mortgage lenders, then an FHA loan provides you with an easy solution.
With a government-backed FHA loan, you can pay as little as 3.5% percent down when buying your first home and can qualify for a loan with a credit score as low as 580 as opposed to the traditional requirement of 620.
However, such a low down payment can come back to bite you if the value of your home decreases over time. With such a small down payment, you won’t have much equity in your home.
In any case, FHA loans help lower the requirements for homeownership, which can be a big help. Just make sure to make your monthly payments on time and in full to avoid any financial problems.
How can I qualify for FHA loans?
As mentioned earlier, since FHA loans are only secured by the government and offered through FHA-approved lenders, each lender will have different requirements in place in order for you to qualify for a loan.
However, there are some FHA minimum requirements to keep in mind so you can see if you qualify.
For example, the minimum credit score for an FHA loan is 500. However, those whose credit score falls within the 500 to 579 range will have to come up with a larger down payment, around 10%.
The FHA also requires a debt-to-income ratio (DTI) of less than 50. This means your total monthly debt payments can’t be more than 50% of your pretax income.
Additionally, the FHA must appraise the property you’re considering buying to make sure it meets FHA standards. They just want to make sure your potential home is a good investment and meets certain safety standards.
Finally, all FHA loans require mortgage insurance. This added cost will make your monthly payments a little higher.
If your down payment is less than 10% you’ll be paying mortgage insurance for the life of the loan. However, with a 10% down payment, you’ll have to pay mortgage insurance for 11 years.
Now that you know how FHA loans work, start looking for your dream home today. Simply enter your ZIP code into our free comparison tool below to find affordable loans from lenders in your area.