What is an FHA loan and how do I qualify?
An FHA loan is a home loan that is insured by the Federal Housing Administration (FHA). This offers a guarantee to the lender: if you fail to repay the mortgage, FHA will step up and repay the lender instead. Because of this guarantee, lenders are willing to make mortgage loans in cases when they’d otherwise be unwilling to approve the loan.
To fund this obligation, the FHA charges borrowers a fee. Home buyers who use FHA loans pay a mortgage insurance premium (MIP) as well as a modest ongoing fee with each monthly payment. If you default on an FHA loan, the FHA uses those collected insurance premiums to pay back the lender.
Loans from the Federal Housing Administration (FHA) are popular for several reasons:
- Down payments as small as 3.5%.
- Sellers can pay up to 6% of the loan amount toward a buyer’s closing costs
- Gifted down payments are easier to use and qualify
- No prepayment penalty
How do you Qualify for an FHA Loan?
The FHA makes it relatively easy to qualify for a loan.
- No Income limits. This program is typically geared to lower income and first time home buyers, but if you do have a higher income, you are not disqualified like other programs.
- Credit score: borrowers with lower credit scores are more likely to get approved if they apply for an FHA loan.
- Debt to income ratios: to qualify for an FHA loan, you’ll still need meet specific debt to income ratios, but often times these ratios may not be as strict as other programs.
To figure out how much you might spend on a mortgage payment, use our Mortgage calculator.
FHA loans come with many appealing features, but you may find that FHA loans are not the best option for you. The main drawback is that the upfront mortgage insurance premium (and ongoing premiums) can cost more than private mortgage insurance (PMI) would cost. In some cases, if you have good credit, even with little down, you may find a more competitive offers that beat FHA loans such as a first time home buyer program.
For more questions about FHA loans and qualifications or to look at other mortgage programs that might be right for you contact a Genisys Credit Union Mortgage Representative.
More Common Mortgage FAQs
- Can I qualify for a mortgage with my credit score?
- How do I figure out how much I can afford?
- What is the difference between Fixed and Adjustable Rate Mortgage?
- How much do I need for a down payment?
- What is PMI and can it be avoided?