An FHA mortgage is a type of home loan that is insured by the Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD). These loans are popular, especially among first-time homebuyers, due to their lower down payment requirements and more lenient credit standards compared to conventional mortgages. Here are some key aspects of FHA mortgages:
FHA loans require a minimum down payment of 3.5% for borrowers with a credit score of 580 or higher. For borrowers with credit scores between 500 and 579, a 10% down payment is required.
FHA loans are accessible to borrowers with lower credit scores. While the exact requirements can vary by lender, the minimum credit score typically required is around 500-580 for the FHA's 3.5% down payment option.
Borrowers are required to pay two types of mortgage insurance premiums (MIP): Upfront MIP, which is paid at closing and is typically 1.75% of the loan amount, and Annual MIP, which is paid monthly and varies based on loan amount, term, and loan-to-value ratio. This insurance premium is necessary for the life of the loan for most borrowers, especially if you make a down payment of less than 10%.
For FHA loans, the Mortgage Insurance Premium (MIP) is required for the life of the loan in many cases, especially if you make a down payment of less than 10%. However, for FHA loans originated after June 3, 2013, if your original loan-to-value (LTV) ratio was less than or equal to 90%, the MIP can be removed after 11 years. For loans with an initial LTV ratio greater than 90%, MIP cannot be removed for the life of the loan. It's important to consult with your lender or a financial advisor for specific guidance on your loan.
FHA loans have maximum loan limits that vary by location. These limits are based on the median home price in a particular area and are recalculated annually.
The home being financed must meet HUD's minimum safety, security, and soundness standards. An FHA appraisal includes an inspection to check for these issues.
FHA loans can be used to purchase a variety of property types, including single-family homes, 2-4 unit properties, condominiums, and manufactured homes.
FHA loans are intended for primary residences only. This means that the borrower must occupy the property as their principal residence.
FHA loans are assumable, meaning a future buyer of your home can take over your FHA loan at its existing interest rate, subject to credit approval.
For those who already have an FHA loan, the FHA Streamline Refinance program offers an expedited process to refinance to a lower interest rate with less paperwork and no appraisal required.
FHA loans typically come in 15- or 30-year terms with fixed interest rates.
FHA loans are particularly attractive for buyers with less-than-perfect credit and limited savings for a down payment, but the trade-off includes paying mortgage insurance. It's important to consider all aspects of an FHA loan and compare it with other loan types to determine the best fit for your financial situation. Consulting with a mortgage professional can provide more personalized information based on your specific circumstances.