What Is an FHA Loan?

The main point of FHA loans is to make it a little easier for people to purchase a home. Those who cannot afford to pay 20 percent as a down payment will appreciate the fact that an FHA loan requires buyers to pay just a 3.5-percent down payment. The reason this type of loan is able to offer such a low down payment is because buyers have to pay for mortgage insurance. This protects the bank in case the buyer defaults on the loan.

More specifically, anyone getting an FHA loan will have to pay for two mortgage insurance premiums. The first one is equal to 1.75 percent of the amount of the loan, which the buyer can pay upfront or finance into the loan. The buyer then also has to buy an annual premium at a cost that depends on the amount, length and loan-to-value ratio of the mortgage loan.

An additional fact to know about FHA loans is that builders, sellers or lenders can pay some closing costs. In fact, they are allowed to pay up to 6 percent of the sale price, while a traditional mortgage loan would limit them to paying only 3 percent. So motivated sellers who want to entice home buyers to buy from them might also benefit from the use of an FHA loan.

Generally, home buyers need to have a minimum credit score of 580 for full financing. Anyone with a score of 500 to 579 might qualify for a loan that pays 90 percent of the housing cost, requiring a 10-percent down payment. Anyone with a credit score of less than 500 will not qualify for an FHA loan.

The qualifications for an FHA loan do not only apply to home buyers. They also apply to the home itself. This is because each county within each state has its own limits on how much the house can cost. For example, in Los Angeles County, the limit for a detached home is $625,500, while the limit is $271,050 in Arizona’s Maricopa County. This is why buyers should make sure the home they have in mind qualifies for this type of loan.

Before applying for an FHA loan, home buyers should also collect certain information they will need during the application process. This includes addresses, tax forms and the contact information of employers from the past two years. Of course, they will also need to provide documentation for any income they get, which is standard during any loan application process.

Buyers should keep in mind that the FHA is not a lender, which means they will need to find a mortgage lender that offers FHA loans in order to apply. Such lenders should be able to use the most updated information available to determine which buyers are eligible for this type of loan.