What is an FHA Home Loan?
The Federal Housing Administration, or FHA, offers a low down payment home loan to American citizens.
This program has been around since the 1930’s when people had difficulty purchasing homes due to times of instability resulting from the Great Depression. As a result, many people couldn’t afford their mortgage, and multiple families had to live together in a single home, as foreclosures rose to staggering levels.
Today, first-time homebuyers often take advantage of an FHA home loan, which allows them to use a low down payment to buy a home. Also, it’s easier to qualify for an FHA loan, enabling many people to buy a home with a low credit score.
Advantages and Disadvantages of an FHA Home Loan
The biggest advantages of an FHA home loan are:
- Low down payment: FHA enables borrowers to buy a home with a low down payment, which is 3.5% in most cases.
- Low credit score: Borrowers can qualify for an FHA home loan with a minimum credit score of 580 for a home loan with a 3.5% down payment; however, many lenders require a slightly higher credit score to qualify. Sometimes, borrowers may qualify with a lower credit score, but the down payment is typically much higher.
- Lower interest rate: Borrowers can often get a lower interest rate with an FHA home loan than a conventional loan.
- Sellers can contribute more toward closing costs: An FHA home loan allows sellers to contribute up to 6% of the selling price toward closing costs, compared to conventional loans, which would enable sellers to contribute 3%.
- FHA home loans are assumable: Homeowners with an FHA home loan can sell their home, and the buyer can assume the home loan, which is very appealing in an environment of rising interest rates.
The most substantial disadvantage to an FHA home loan is mortgage insurance (MIP), which is paid for the life of the loan in most cases. There is an upfront mortgage insurance premium at the time of closing of 1.75% percent and a monthly insurance premium that varies based on several factors.
Higher 2017 FHA Home Loan Limits
The FHA home loan limits were raised in 2017.
The new FHA loan “floor” amount is $275,665 for a one-unit dwelling but can be higher based on the county in which the home is located. To see the FHA loan limit for individual counties in the U.S., use this government resource, which is updated with the latest information.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients to lower their monthly mortgage payments.