“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” – President Franklin D. Roosevelt

As many Americans already know, today’s turbulent economic circumstances are making it harder to attain the dream of homeownership. Mortgage interest rates have been on the rise, plus saving up for the standard mortgage down payment of 6% can be seemingly impossible. But there is a more lenient option if you have less than stellar credit or limited savings by considering an FHA loan. And while the government doesn’t actually issue the loan itself, it will ensure them for qualified borrowers. Read on to learn about the ins and outs of FHA loans. 

What is the FHA?

As part of the US Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) was created through the National Housing Act of 1934 by President Franklin D. Roosevelt. The FHA provides mortgages on single and multi-family homes and is one of the largest mortgage insurers worldwide. Since 1934, they’ve provided 50 million mortgages across America. The FHA is known for offering low down payments, low closing costs, and easy credit qualifying.

What is an FHA loan?

A Federal Housing Administration (FHA) loan is a mortgage insured by the FHA, which works in conjunction with FHA-approved lenders to buy/refinance homes. By insuring the loan, the FHA takes responsibility for protecting your mortgage lender against loss if you default on your loan. The FHA generally offsets risks associated with lending to low- to moderate-income borrowers.

Who qualifies for an FHA loan?

First-time home buyers are attracted to the option of an FHA loan simply because of the lower down payment and credit requirements, but anyone can qualify for an FHA mortgage. Qualified home purchases include single-family dwellings; two- to four-unit multifamily homes; condo units; and manufactured homes (attached to a permanent foundation and a minimum of 400 square feet in size). Refinancing options with the FHA can include new construction or renovations.

The advantages of an FHA loan.

Some of the benefits of an FHA loan include being able to qualify for a mortgage even with seemingly detrimental financial situations, such as having:

• a lower credit score 
• a lower down payment
• debt
• declared bankruptcy

Many times applicable FHA closing costs, approximately 2–6% of your home’s value, can be rolled into your mortgage loan.

Basic requirements for an FHA loan.

To qualify for an FHA mortgage, borrowers must meet certain minimum requirements, including:

• a credit score of 580, while noting that your credit score is directly linked to the down payment you’ll be required to make
• a home inspection that certifies your intended property meets or exceeds minimum standards 
• a minimum down payment of 3.5% of the total purchase price (depending on your credit score: if you can put down 10%, your credit score can run between 500–579)
• a valid Social Security number
• bank statements for the past 30 days
• the home you want to buy must be approved by an FHA appraiser
• the home you’re intending to purchase must become your primary residence, meaning it can’t be a second home or an investment property
• occupying your new property within 60 days of closing
• pay stub documentation
• proof of US citizenship, legal permanent residence, or an eligible work status

The FHA will also take into consideration your total income and maximum loan limits (geographically and population determined) when checking your qualifications for an FHA mortgage loan. And, when it comes to down payments for FHA loans, it’s important to note that you’ll require a paper trail for any cash down payments incorporated into your deposit to ensure it’s not a secret loan disguised as a gift.

How your credit score can affect your FHA loan worthiness.

Your credit score is comprised of several factors, including:

• how much credit do you use as compared to your overall credit limit
• the amount of debt you owe
• the type of credit you have, like student loans, credit cards, etc.
• whether or not you pay your bills on time

All of this information is compiled to determine your debt-to-income (DTI) ratio. The lower your DTI, the better off you’ll be when applying for an FHA loan as they’ll be looking for a maximum 31% mortgage payment based on your gross monthly income, and no more than 43% of your DTI, depending on your credit score.

How do FHA loan interest rates compare to conventional lenders?

Generally, because FHA loans are government-backed, interest rates will be lower than those offered by conventional lenders. Of course, this also depends upon many factors including current Federal Reserve interest rates, coupled with your income, the amount to be borrowed, your down payment money, as well as your credit score and DTI as mentioned above.

How to get the best available FHA loan rate.

Get your financial ducks in a row! Here are some easy steps to follow to ensure you won’t be surprised along the way:

• gather all of your financial documents, which are so easy to organize and securely store with DomiDocs, including tax returns, bank statements, and recent income/employment verification, plus a list of liabilities and assets
• know your credit score – pull your free annual credit reports from the three big credit reporting agencies, Experian, Equifax, and Transunion; address any errors and know that the higher your credit score, the better loan interest rate you’ll get
• shop around for FHA-approved lenders – remember that even small differences in your terms can save you thousands of dollars over the lifetime of a mortgage
• pay down your debt – the less you owe, the more desirable your debt-to-income ratio will be
• research first-time home buyer programs in your state; some can assist with grants towards closing costs or down payments

The mortgage insurance premium requirement for FHA loans.

On top of meeting the above conditions, FHA mortgages incur a requirement of paying monthly mortgage insurance premiums (MIP) to protect the FHA against losses if your loan goes into default. This is essentially the same as paying private mortgage insurance (PMI) when dealing with a non-FHA lender. You’ll be required to pay MIP for the life of your loan, or if you put a down payment of more than 10%, you’ll be obligated to pay MIP for 11 years. 

FHA mortgage insurance is calculated in two ways, payable in upfront and annual payments, as follows: 

1. an upfront MIP equivalent to approximately 1.75% of your base loan amount
2. an annual MIP fee is determined by your loan amount, down payment, mortgage term, and loan-to-value ratio, with an average amount due running 0.15–0.75% of your base loan amount. This amount is then taken and turned into a monthly MIP due, estimated by Freddie Mac to be $30–70 per month per $100,000 borrowed

Types of FHA loans. 

FHA government loans fall into a few different classifications, but all have limitations set as to the specific type of home you can purchase and how the money you receive will be spent.