FHA Loans 101
An FHA loan is a mortgage that is backed by the Federal Housing Administration, or FHA. Approved mortgage lenders throughout the nation offer this type of home loan, which helps millions of Americans pave the way toward responsible homeownership.
What is an FHA loan, exactly? This type of home loan makes it possible to purchase a house without needing several thousands of dollars for a down payment.
A mortgage is a loaning of funds from a creditor or bank to a homebuyer. In exchange for the loan, the lender charges a certain percentage of interest added onto the monthly payments. It is important for borrowers to understand all the details of this loan before applying. Find everything you need to know about FHA loans by downloading our comprehensive guide.
The Benefits of FHA Loans
If you are wondering about the benefits of FHA vs. conventional mortgages, you’ve come to the right place. FHA and conventional loans are the two most common types of home loans in the U.S. One of the most notable features of an FHA mortgage is the lower down payment requirement. A down payment is a portion of the cost of the home that must be paid up front before the loan kicks in.
Conventional loans typically require borrowers to make a down payment of 20 percent of the purchase price. However, not all homebuyers have the funds available for a down payment as large as this. Types of FHA loans typically require borrowers to make a down payment between 3.5 and 10 percent, which greatly reduces their immediate financial obligations.
In addition to lower down payments, these mortgages have less stringent credit qualifications. FHA loan credit score guidelines make it possible for borrowers with low or poor credit to become homeowners. Individuals with credit scores as low as 500 may be approved for loans through the FHA program. However, it is important to point out that a lower credit score often results in a higher interest rate. This means that the borrower pays more for the home throughout the life of the loan.
There are FHA limits set by the Department of Housing and Urban Development (HUD) for many reasons. There are maximum loan amounts in place in order to prevent homeowners from borrowing more than they can afford. Maximum loan amounts are determined by the FHA, along with the Department of Housing and Urban Development (HUD), each year. FHA loan limits vary, depending on the area in which a borrower lives, although the program does have a national cap.
The limits also ensure the program is distributed fairly across the nation. The HUD considers regional differences in home prices and cost of living when setting these loan limits. The national FHA maximum loan amount is referred to as the “FHA ceiling.” This number is based on the loan limits for conventional (also called conforming) mortgages. Loan limits for conventional mortgages are controlled by the top conventional mortgage enterprises, known as Fannie Mae and Freddie Mac. The “FHA floor” refers to the minimum loan limits found in low-cost areas.
The FHA loan maximum amount only applies to high-cost areas. Lower-cost areas have limits that range from the floor to the ceiling. Within every state, there are differences in home prices between counties. Homebuyers in high-cost counties often have more flexibility with higher loan limits than buyers residing in low-cost counties. The HUD controls whether a county is a low- or high-cost area by assessing the average home price and cost of living.
FHA Loans and Interest Rates
Although the HUD sets loose interest rate guidelines, each lender controls the FHA mortgage rates for borrowers based on their own policies. Interest is charged to compensate the lender for providing the funds to purchase a house. In short, interest is money paid in monthly installments for the use of borrowed money.
FHA interest rates can either be fixed percentages that last for the life of the loan, or variable rates that adjust each year. The rate of interest affects the total amount of the mortgage, and helps determine the overall monthly payment.
Current FHA mortgage rates fall between 3.5 and 5 percent. Interest rates vary between borrowers, and depend on several factors, including the borrower’s credit score. The lender must feel confident in the borrower’s ability to pay back the loan in a timely manner. Compared to conventional mortgages, FHA rates are not very different.
The HUD sets loose FHA loan qualifications that borrowers must meet to secure their mortgages. Ultimately, the mortgage lender is responsible for determining the specific eligibility criteria. It is not uncommon for lenders to require varying conditions for approval; buyers must shop around when considering a loan to find the best deal.
Requirements for FHA Loans
The FHA loan requirements also vary, depending on the type of loan needed, including a 203(b) or a 203(k) FHA loan. No matter which type of loan a borrower needs, he or she must meet the general eligibility criteria. Many people believe that FHA mortgages are only ideal for low-income buyers. However, the less-stringent FHA requirements make these loan types attractive choices, compared to conventional mortgages, which often require excellent credit and large down payments.
Only approved mortgage lenders may offer these types of loans. Because of this, most FHA home loan requirements are set by each lender. The FHA does not supply loans, but does insure them to protect lenders from default. This insurance helps lenders provide home loans with loose requirements. It is important that borrowers research their lenders to ensure that the companies being considered are approved by the FHA.
Mortgage lenders examine many financial aspects of candidates before approving or denying them home loans. Before getting approved for FHA loan status, borrowers must submit to a credit and income check. FHA-approved lenders assess the borrower’s credit score, which represents how reliable he or she is in paying debts on time. They also examine the borrower’s debt-to-income ratio, which explains how financially ready he or she is to take on another debt payment.
FHA loans are viable options for all types of homeowners. If you are in the market for a new home, or are looking to become a first-time homebuyer, an FHA mortgage might hold the key to your homeownership. To learn more about the loans provided through the FHA program, including how to apply for FHA loan programs, information about interest rates, loan limits and how to locate a lender, be sure to download our informative guide.