FHA Loans

Federal Housing Authority (FHA) loans are one of the most popular mortgage programs, particularly for first-time buyers. The FHA does not lend money; instead, it insures loans made by FHA-approved lenders to reduce the risk if the borrower later defaults on the loan. This guarantee allows lenders to provide loans to borrowers who otherwise could not qualify for a loan. This includes borrowers with lower income, an average credit score, or very little saved up for a down payment.

FHA mortgages have been available since the 1930s. This loan program was created after a period of many foreclosures and defaults, and it was designed to give lenders insurance against risk and make loans more accessible to the public.

Benefits of an FHA Loan

FHA mortgages have several advantages, including:

• Down payment as low as 3.5%
• Closing costs and down payment funds can be gifted
• Closing costs can be financed
• FHA loans are easier to obtain following foreclosure or bankruptcy
• Underwriting focuses on income, employment, and job security rather than credit
• No prepayment penalties
• Loans are assumable

Qualifying for an FHA Loan

FHA mortgages are easier to obtain than conventional mortgages. The following are requirements to get approved.

• Must have stable employment history (either in the same field or preferably with the same employer) for at least 2 years
• Down payment of at least 3.5%, which may be gifted
• Front-end ratio of 31% or less of gross monthly income.
• Back-end ratio of 43% or less.
• Credit score of at least 580 (Note: Lenders usually have their own standards and require a higher score, typically around 620)
• Bankruptcy must be discharged for 2 years; 3 years out of foreclosure
• Property appraisal must be conducted by an FHA-approved home appraiser
• Property must be the primary residence