Purchasing a home is one of the biggest financial commitments a person will ever make. While many loan options are available for homebuyers, choosing the right loan that aligns with your financial circumstances is essential.
For many homebuyers, an FHA mortgage loan might be the best option.
What is an FHA Mortgage Loan?
An FHA loan is a home mortgage that is guaranteed by the Federal Housing Administration (FHA). FHA mortgages are insured by the FHA, allowing homebuyers to borrow up to 96.5% of the value of a home with a 3.5% down payment.
FHA mortgage loans are issued through authorized providers, usually banks or mortgage lenders.
Understanding Mortgage Insurance
Mortgage insurance is a tool used by lenders to secure their investments. For example, some conventional mortgages require a down payment of 15-20%. Down payments reduce the risk to lenders by lowering the loan-to-value (LTV) ratio.
A lower LTV means the borrower has more incentive to pay off the loan because they have already invested their own money into the purchase. And with a lower LTV, the lender is not responsible for the entire amount of the home if foreclosure is necessary.
When a potential homebuyer borrows more than 80% of the home’s value, mortgage insurance gives the lender the same security without the upfront down payment from the homebuyer. In addition, with mortgage insurance, the lender receives compensation up to the maximum insured amount if the borrower defaults on their mortgage.
FHA Mortgage Insurance Premium (MIP), which the borrower pays, protects the lender in the event of default. To remove MIP, some FHA borrowers may need to refinance. See your lender for details.
Features of an FHA Mortgage Loan
What differentiates an FHA loan from a traditional mortgage? FHA loans have specific characteristics that make them a better option for some buyers, including:
- Low down payment requirements: Borrowers can qualify for a mortgage with a down payment as low as 3.5%.
- Lower credit score requirements: Unlike a conventional mortgage, borrowers can qualify for an FHA loan with a credit score of 580 or higher; however, many lenders require a score of 620 to 640 to qualify. In some cases, borrowers may be able to qualify for an FHA loan with a credit score between 500 – 579, but a 10% down payment is required.
- Looser down payment restrictions: FHA allows borrowers to qualify with a down payment from donations, grants, gifts, private savings clubs, savings bonds, IRAs, 401(K) accounts, investments, and down payment assistance programs.
- Federally guaranteed: FHA loans are guaranteed by the U.S. federal government. Borrowers pay FHA mortgage insurance premiums (MIP).
Because of these features, FHA loans are a popular choice for many first-time homebuyers. In addition, they often allow homebuyers to purchase a home earlier with a lower down payment.
FHA Loan Eligibility
To receive an FHA loan, borrowers must meet specific requirements. These requirements are subject to change by the FHA. The requirements to be eligible for an FHA loan include:
- FICO credit score of at least 580 for 3.5% down payment eligibility.
- FICO credit score of between 500-579 for 10% down payment eligibility.
- MIP (mortgage insurance premium) is required.
- A debt-to-income ratio of 43% or lower.
- FHA loans must be used to purchase the borrower’s primary residence.
- The borrower must provide proof of employment and steady income.
Types of FHA Loans
Different types of FHA loans are available for various real estate purchase types. Here is a list of FHA’s most popular single-family insured mortgage programs, with links for more information.
- Adjustable-Rate Mortgages
- Basic Home Mortgage Loan 203(b)
- Condominium Mortgages
- Disaster Victims Mortgages 203(h)
- Energy-Efficient Mortgages (EEM)
- HECM (Home Equity Conversion Mortgage) Seniors
- Indian Reservations and Other Restricted Lands (248)
- Manufactured Housing (Title I)
- Manufactured Home & Lot Combination
- Rehabilitation Mortgage 203(k)
- Streamline Refinance
- Title I Home Improvements
- Urban Renewal
Conventional Mortgage vs. FHA Mortgage
FHA mortgages allow more people to qualify for a home mortgage loan, especially first-time homebuyers.
The main distinctions between conventional and FHA mortgages are the credit score requirements, down payment requirements, and mortgage loan terms.
A credit score of at least 620-640 is required for conventional mortgages. FHA loans only require 580, with some borrowers qualifying with a score as low as 500-579 under certain circumstances. Both loans require the borrower to be at least two years out of bankruptcy.
A few factors play into the differences in down payment requirements. With a 580 credit score, borrowers can often qualify for an FHA loan with a 3.5% down payment and mortgage insurance (MIP) payment. With a conventional mortgage, there are numerous down payment options; however, a lower down payment also requires you to pay mortgage insurance (PMI).
The other factors deal with the source of the down payment. FHA has fewer restrictions regarding down payment assistance in the form of gifts.
Related: Acceptable Sources of Borrower Funds
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
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.