FHA Loans Explained

FHA loans are generally easier to qualify for and a possible option for those who don’t have excellent credit scores or a large down payment available. FHA loans are issued by the Federal Housing Administration and guarantees that lenders will be compensated if the loan is defaulted.. The loan program was created to help lower income families obtain a mortgage. One in every 5 new home loans is backed by FHA.

FHA loans come with a borrowing limit; generally $271,050 in most areas of the nation but as much as $625,550 in areas where the cost of housing is higher such as San Francisco. Some FHA loans accept down payments as low as 3.5% which is significantly lower than the 20% required for most conventional loans. Lenders like loanDepot offers FHA loans which will also allow a buyer to carry up to 47% in total debt while conventional loans require a borrower to spend no more than 45% of income on all debts.

Credit requirements are also lower; the average score for an applicant who qualifies is 685. Most people who qualify have credit that is below average but not “poor credit”. In addition lenders look for 2 years of employment at the same employer. Those who are self-employed will need to provide tax returns.

However, FHA loans require mortgage insurance which stands at 1.75%. In addition most buyers will also need to pay monthly insurance costs which tends to be higher than PMI on conventional home loans. In a nuthshell; FHA loans offer the benefits of a lower down payment while allowing more flexibility if your credit isn’t perfect but you will need to pay extra fees. Talk to your lender to find out if a FHA loan is the right option for you.