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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. Note that the FHA has maximum mortgage limits based on the place you live. To find out how much house you can buy with an FHA loan use LendingTree’s FHA loan limit tool. 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.

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How to get 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

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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.

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Less-than-perfect Credit

FHA underwriting guidelines are more flexible than conventional (non-government) guidelines.

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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.

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Interest Rates Can Be Lower

FHA loans can be less expensive than non-government loans for people with small down payments or credit issues.

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An assumable mortgage

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

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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

Pros and cons of FHA Loans

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.