What is an FHA Loan?

For more than 80 years, FHA loans have helped create an affordable path to home ownership for Americans. Can they help you join the ranks of successful home owners? Learn more to find out.

An FHA loan is a mortgage backed by insurance provided through the Federal Housing Administration. The key is this: by providing federally-backed insurance for mortgages, the FHA encourages lenders to make mortgages available to borrowers with less stellar credit histories, and with lower down payments and more reasonable mortgage rates.

Though insured by a federal agency, FHA loans are provided by private lenders, giving you the freedom to shop around and find the best deal for your situation.

How to Get An FHA Loan

Here are some simple steps towards getting an FHA loan:

  1. Check your credit history. Make sure it is accurate and see if there are any problems you can clear up before applying for a loan.
  2. Start saving for a down payment. FHA loans only require a down payment of 3.5 percent, though if you can afford a larger one it will lower your long-term costs.
  3. Figure out your housing budget. A combination of how much you can put aside monthly towards a down payment plus your current rental costs, if applicable, is a good indicator of how much of a monthly mortgage payment you'll be able to afford.
  4. Compare loan rates. LendingTree's FHA page will show you some current loan rates and the site also provides you with the means to get competing loan rates in minutes.

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.
FHA loans are assumable. This feature can help you sell your property if rates are higher in the future.

FHA Loan Qualification Requirements

The basic eligibility requirements for an FHA loan include:

  • Minimum FHA loan 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 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 pay stubs, 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.

Who Should Get an FHA Loan?

If you have a great credit history, you can probably get a mortgage more cheaply than through an FHA loan. However, not everybody has that luxury. For example, if you are still fairly young and haven't had time to develop an attractive credit history, an FHA loan might allow you to qualify for a mortgage sooner than would otherwise be possible. Also, if you have had some difficulties with credit in the past but have since gotten your finances in order, an FHA mortgage might encourage lenders to be more forgiving about your history.

Key Benefits of an FHA Loan

Here are some key benefits of an FHA loan:

  • Low down payment. Saving for a down payment while paying rent can be a significant barrier to home ownership. By requiring a down payment of as low as 3.5 percent, FHA mortgages help people overcome this barrier.
  • Easier credit requirements. It can take years to establish a strong credit history or fix a damaged one. An FHA loan can help you buy a house without waiting all that time.
  • Reasonable interest rates. Lenders are likely to charge more to borrowers with low down payments or less-than-ideal credit histories. The reassurance of federally-backed mortgage insurance helps keep interest rates on FHA mortgages more reasonable than they would be otherwise.
  • Freedom of choice. Though FHA mortgages are a government program, you have a wide choice of private lenders who provide them. This choice gives you the opportunity to save money by shopping around.
  • Refinancing available. The FHA does not only support purchase mortgages, it also helps provide refinancing loans. This can help expedite changing your loan terms when the time comes.

FHA Loan Rates

Refinance rates now in Ashburn, VA [Change this]

  • ?
    Home Price (Purchase)
    When you get a mortgage to purchase a home, the lender uses the lower of the agreed-upon purchase price or the property's appraised value to determine your maximum loan amount. The loan amount divided by the property home price equals your loan-to-value ratio, or LTV. That ratio is one of the major factors that lenders use to set your mortgage rate. If your LTV exceeds 80 percent, you'll probably be required to pay mortgage insurance, which increases your monthly payment. If the property appraises for less than the agreed-on purchase price, you are not usually required to complete the purchase.
    Home Value (Refinance)
    This is your estimate of the current value of your property. When you refinance, your home is almost always evaluated by a licensed appraiser. The refinance loan amount divided by the property's appraised value equals your loan-to-value ratio (LTV), and that number is one of the major factors that determine your mortgage rate. To get an accurate refinance rate quote, your home value estimate must be reasonably accurate.
  • ?
    Down Payment
    The down payment is the amount you pay upfront when you finance property. Your purchase price minus your down payment equals your mortgage amount. The higher your down payment, the more likely you are to be approved for a home loan. If your down payment is less than 20 percent of the purchase price, you'll probably be required to pay for mortgage insurance, which increases your monthly payment.
  • ?
    Credit Score
    Your credit score is a number designed to measure your credit-worthiness. It's based on a formula that combines many factors, including your payment history, amount of credit used and number of accounts. This number is used by lenders to calculate the probability that you'll default on your mortgage. Most lenders won't approve mortgages to applicants with credit scores lower than 620. Your credit score is one of the most important factors that determines your mortgage rate - applicants with higher scores are offered better mortgage rates.
  • Refresh Rates
Mortgage rate quotes displayed on LendingTree LoanExplorer℠, including loan pricing data, rates and fees, are provided by third party data providers including, but not limited to, Mortech®, a registered trademark of Zillow®, LoanXEngine, a product of Mortgage Builder Software, Inc., and LoanTek, Inc.

Pros and Cons of FHA Loans

Here are some pros and cons of FHA mortgages:

Pros of FHA Loans

  • Loans are available to people with limited or damaged credit

  • Only a low down payment is required

  • You can choose from a wide range of lenders

Cons of FHA Loans

  • An FHA loan may be more expensive than other loans

  • FHA loans require mortgage insurance premiums (FHA MIP) that add to the cost of the loan

  • The amount of the loan is limited, with the maximum depending on where you live

Alternatives to FHA Loans

If you have a strong credit history, a so-called conventional loan might be a more cost-effective option for you. A conventional loan is one where the borrower can meet conventional approval requirements without special backing from a government program. If you can meet those tougher requirements, you could probably save money on interest rates and mortgage insurance premiums compared to an FHA loan. Also, you would not be subject to FHA loan limits.

If you are a veteran of the U.S. military, you may qualify for a VA loan. In some ways, a VA loan functions like an FHA loan, but it has additional advantages. Like an FHA loan, a VA loan is backed by the U.S. government, which makes it easier to qualify. However, a VA loan requires no down payment and does not require you to pay mortgage insurance premiums.

Frequently Asked Questions

Minimum Credit Score For FHA Loan

What credit score allows me to get an FHA loan?

The minimum FICO credit score required for an FHA loan is 580. If your score is 580 or higher, you are eligible to pay the minimum down payment requirement of 3.5 percent. However, if your score is lower, that doesn't mean you won't qualify. Instead, you'll be required to put down 10 percent, as those with a credit score of less than 580 are limited to a loan-to-value (LTV) ratio of 90 percent. Remember that the better your score, the better interest rate you will receive on your FHA loan.

To see where you stand, view your credit score for free on LendingTree.

Minimum Down Payment For FHA Loan

What is the minimum down payment for an FHA loan?

If your FICO credit score is a 580 or higher, the minimum down payment requirement is just 3.5 percent. If your score is lower, though, the minimum down payment increases to 10 percent of the purchase prices of the home, assuming all other qualifications are met.

FHA Loan Fund Provider

Who provides the funds for FHA loans?

The Federal Housing Administration, or FHA, backs loans given by approved FHA-lenders through mortgage insurance. If a borrower were to default on the loan, the FHA will pay a claim to the lender. Unlike other government programs, the FHA fully supports itself. Mortgage insurance paid by homeowners is where funds for FHA loans come from.