What is an FHA Loan?

Launched in 1934 to help boost the housing market, the Federal Housing Administration (FHA) loan is still pretty much the same today. It’s a government-backed loan that allows people to buy a moderately priced home with a down payment as low as 3.5 percent. The partnership between the FHA and HUD has helped many people since its inception, insuring over 34 million home mortgages and 47,205 multifamily project mortgages. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. In the 80 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world.

The government doesn’t actually lend the money, but it does insure the mortgages. That way, if the borrower can’t repay the loan, the FHA insurance reimburses the lender. This allows mortgage lenders to offer loans to less affluent applicants who might otherwise be denied.

Top 5 Reasons to Get an FHA Loan

Small Down Payment
You can put as little as 3.5% down. It doesn’t even have to be your own money – the down payment can be a gift or loan.
Less-than-perfect Credit
FHA underwriting guidelines are more flexible than conventional (non-government) guidelines.
Sensible Underwriting
FHA lenders take what they call “compensating factors” into account when they underwrite loan applications. This can help those who are not perfect on paper but still deserving of a home loan.
Interest Rates Can Be Lower
FHA loans can be less expensive than non-government loans for people with small down payments or credit issues.
Assumable
FHA loans are assumable. This feature can help you sell your property if rates are higher in the future.

FHA Loan Requirements

There are some basic eligibility requirements for an FHA Loan. They include:

Minimum Credit Score of 580

This is for a mortgage with a 3.5 percent down payment. Ten percent down is required for applicants with scores between 500 and 579.

3.5 Percent Down Payment from an Acceptable Source

Your down payment can come from your savings, a loan or a gift, but not from anyone who would directly benefit from the transaction, such as the seller, agent or lender.

Documentation of Income

Lenders are required by law to make sure you can afford your mortgage. You’ll have to supply paystubs, W-2s and possibly tax returns.

Clear CAIVRS

CAIVRS is the government’s Credit Alert Interactive Verification Reporting System. It’s a database of people who have defaulted on government loans, owe back taxes or have other federal debt. If you turn up on this list, you must be cleared before you can get an FHA loan.

Primary Residence

This loan cannot be used to purchase a vacation home or second home. However, FHA financing can be used to buy a primary home for a family member.

What's Cheaper? An FHA Loan or a Conforming Loan?

Unlike FHA loans, conforming mortgages are not government-backed. They’re called "conforming" because they must conform to guidelines issued by Fannie Mae and Freddie Mac, to huge companies that buy mortgages from lenders and sell them to investors. About half of all mortgages are conforming loans. Conforming mortgage include community mortgage programs, which allow three percent down payments but have income restrictions.

For most applicants, conforming mortgages are less expensive than FHA home loans. However, those with fair-to-poor credit scores and low down payments might do better with FHA, as might borrowers refinancing with cash out. Have your lender provide estimates for both types when you shop for your mortgage.

Side by side loan comparison.

FHA Loan Conforming
Lower down payment requirements
Lower credit score requirements
Lower mortgage rates
Possible prepayment penalty
Ease of qualification
Reserve requirement (for 1-2 properties)
Gift funds can cover 100% of closing cost and down payment
Always subject to mortgage insurance
No mortgage insurance with 20% down payment
More loan program options
More lenders to choose from
Can be used on all occupancy types
More available for condominium complexes
Higher debt-to-income ratio

If you’re unsure if you’ll qualify for a conforming home loan, apply for both FHA and conforming financing to increase your chances of getting approved. In addition, there are conforming programs for people with moderate incomes that have reduced mortgage insurance, flexible underwriting and require just three percent down. Make sure to ask your lender about My Community Mortgage (Fannie Mae) or Home Possible (Freddie Mac) if you think you might qualify.

We find that many customers who apply for an FHA loan actually qualify for conforming financing. Why not view free offers?

It’s always good to know where you stack up before shopping for a home loan, so be sure to check your credit score. As always, there’s never any obligation and it’s completely FREE.

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Where Do I Find an FHA Lender?

FHA mortgage lenders are not hard to find.
FHA Lenders must be approved through the US Department of Housing and Urban Development (HUD) in order to fund FHA loans.

Nearly all major US banks are FHA-approved and so are many local banks and mortgage brokers.

To find out more about any FHA lender, search by lender name on the HUD website.

Find FHA Lenders in Your Area >

What is FHA Refinance & FHA Streamline?

There are a few scenarios in which refinancing from non-government mortgages to an FHA loan make sense.

For example, if you’re a borrower with little home equity, a high debt-to-income ratio or shaky credit, you could pay less with an FHA refinance. Also, FHA doesn’t charge you extra fees for cash-out refinancing (up to 85 percent of the home’s value).

If you’re a homeowner with more home equity and stronger credit, you’ll probably pay less by refinancing with a conventional (non-government) loan.

If you already have an FHA home loan, you may be able to refinance cheaply and quickly through FHA’s Streamline Refinance program. This is a great option if you’re underwater on your property because appraisals are not required.

  • Tips for a Streamline Refi:
  • Have an acceptable mortgage payment history – no more than one 30-day late payment in the last 12 months
  • Get an appraisal to wrap your FHA loan fees into your new loan
  • Don’t get an appraisal if you don’t add in your closing costs
  • Keep a close eye on your credit. You may need to provide your credit score

FHA Loan Calculator

What Can I Afford?

Use our FHA loan calculator to estimate your monthly payments and determine the FHA loan limit in your area.

To make sure your home fits within your budget, simply enter your ZIP code, home price, and credit score to see current FHA mortgage rates and estimate your monthly payment. Then we can match you with lenders that will cater to your individual needs.
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