What is an FHA loan?
A Federal Housing Administration insured loan, known as an FHA loan, is backed by the government. Lender requirements for an FHA loan are less stringent than conventional mortgage loans.
Besides being easier to qualify for, FHA loans have much lower down-payment requirements; borrowers can get a mortgage with as little as 3.5% down.
There are some downsides to FHA loans, though. Borrowers must pay mortgage insurance for the life of the loan, and this extra cost can add up over time. The FHA also charges an upfront fee of 1.75% when the loan is originated.
That means the FHA loan is a good option primarily when borrowers simply can’t pay 5% or more down on the loan, have credit issues that prevent them from qualifying for a conventional loan, or have debt-to-income ratios too high for a conventional mortgage.
FHA loans also allow the down payment to be made with cash gifted from others, and may be made sooner after bankruptcy or foreclosure than other loans.
FHA Loan Requirements
Not every home buyer will qualify for an FHA loan. Generally, one needs to have 2 years of steady employment history, no recent bankruptcies, a stable credit history, no recent foreclosures, and enough income to afford the loan.
Because FHA loans have strict guidelines about the property that can be purchased, additional fees, and monthly mortgage insurance premiums, they may not be the best choice for a particular home buyer. If one qualifies for a conventional mortgage, then that may be a better option than an FHA loan. Currently FHA loans make up around 5% of mortgages in the US.
FHA Loan Limits
An FHA loan is limited to a certain amount. The maximum loan amount depends on the county where the home is being bought. You can look up the FHA loan limit for your county at HUD’s FHA Mortgage Limits page. Simply select your state and type in your county then click Send. On the results page you’ll find the loan limit under the One-Family column if you’re planning on purchasing a single family dwelling.
Should I apply for an FHA loan, and how do I get approved?
If you’re in a position where an FHA loan is the only good option for you, then start by reaching out to your lender. They can tell you if you qualify for an FHA loan.
When you’ve gotten the information you need and you think you qualify, it’s time to apply for a loan. You’ll want to get pre-approved. This pre-approval will give you a specific idea of how much you can afford when looking for a home.
Next, find a home. Whether you shop yourself or use a real estate agent, stick within the budget determined by your pre-approval. Any offer you make should be contingent on your financing; that way if your loan application is denied for any reason, you aren’t obligated financially with regard to the home you’re trying to purchase.
The next step is to get the loan. This is the time to shop around and make sure you get the best possible mortgage rate. If you’re working with a real estate agent, they may be able to help you, but always compare multiple options rather than going with the first offer you get.
The loan approval process will include appraisals, insurance, inspections, etc. Take a First-Time Home Buyer course with a HUD-approved housing counseling agency to get all the info you need to navigate this part of the process.
Finally, you’ll close on your FHA loan, and take ownership of your home. You’ll sign some important paperwork—perhaps at your real estate agent’s office, a title company, or some other venue, and get the keys to the house. Understanding your closing statements, loan documents, and disclosures is an important part of responsible homeownership. Your lender will give you information about making your payments, and you’ll get copies of all of the signed loan documents.
Remember, whatever kind of mortgage you have or are considering, HUD-certified counselors are available free of charge to help you. Call us any time for confidential housing counseling and advice.