What is the Federal Housing Administration (FHA)?
The Federal Housing Administration (FHA) is a government agency that insures mortgages. This means that if you default on your mortgage, the FHA will pay the lender the remaining balance. This makes it easier for people to get a mortgage, even if they don't have a large down payment or perfect credit.
The FHA was created in 1934 by President Franklin D. Roosevelt in response to the Great Depression. The goal of the FHA was to help stabilize the housing market and make homeownership more accessible to Americans.
How does the FHA work?
When you get an FHA loan, you will pay a mortgage insurance premium (MIP). MIP is typically 1.75% of the loan amount and is paid monthly. MIP helps to offset the risk of default and helps to keep FHA loans affordable for borrowers with less-than-perfect credit or who don't have a large down payment.
Who is eligible for an FHA loan?
To be eligible for an FHA loan, you must meet the following requirements:
- You must have a credit score of at least 580.
- You must make a down payment of at least 3.5%.
- Your debt-to-income ratio (DTI) must be no more than 50%.
- You must have a stable income.
What are the benefits of an FHA loan?
FHA loans offer several benefits, including:
- Lower down payment: FHA loans allow borrowers to purchase homes with a down payment as low as 3.5%.
- Less-than-perfect credit: FHA loans are available to borrowers with credit scores as low as 580.
- Flexible income and debt-to-income ratios: FHA loans have more flexible income and debt-to-income ratios than conventional loans.
- Refinance options: FHA loans offer the option to refinance after 12 months, which can help you save money on your monthly mortgage payment.
What are the drawbacks of an FHA loan?
FHA loans also have some drawbacks, including:
- Mortgage insurance: FHA loans require borrowers to pay mortgage insurance premiums (MIP). MIP is typically 1.75% of the loan amount and is paid monthly. However, MIP can be canceled once you have 20% equity in your home.
- Property requirements: FHA loans have strict property requirements. Homes must be in good condition and meet FHA standards.
- Borrower limits: FHA loans have borrower limits that vary by county.
If you are considering buying a home and you don't have a large down payment or perfect credit, an FHA loan may be a good option for you. However, it is important to understand the benefits and drawbacks of FHA loans before you decide if it is right for you.
Here are some additional tips for borrowers who are considering an FHA loan:
- Get pre-approved for a loan before you start shopping for a home. This will give you an idea of how much you can afford and will make the home buying process go more smoothly.
- Compare rates and terms from multiple lenders. FHA loans can vary widely in terms of cost, so it is important to shop around to get the best deal.
- Be prepared to pay a mortgage insurance premium (MIP). MIP is typically 1.75% of the loan amount and is paid monthly.
- Make sure the home you are buying meets FHA property requirements. Homes must be in good condition and meet FHA standards.
If you are considering an FHA loan, be sure to work with a qualified mortgage broker like Tried & True Home Loans who can help you understand your options and find the right loan for your needs.
