What is an FHA Loan & Who Qualifies?

First, What is FHA?

FHA is the Federal Housing Administration.  The FHA program was created in the 1930s in response to the slew of foreclosures and defaults that happened during that era.  The program was designed to provide mortgage lenders with adequate insurance, and to help stimulate the housing market by making loans accessible and affordable.

What is an FHA Loan? 

An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). What this means, in a nutshell, is that the federal government insures loans for FHA-approved lenders in order to reduce the lenders’ risk of loss if a borrower defaults on his/her mortgage payments.

Why should you consider an FHA mortgage?

Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment.  Unlike the traditional down payment of 20 percent, FHA typically only requires a down payment of 3.5 percent for those eligible for maximum financing. This is what makes an FHA loan very popular with first-time home buyers.

Why might an FHA mortgage not be for you?

Yes, there is a bit of a catch (or three) with the low down payment benefit of FHA. Here are 2 reasons why this loan may not be for you:

  1. FHA requires two kinds of mortgage insurance premiums: one is paid in full upfront (Up Front Mortgage Insurance Premium or UFMIP, which is currently at 1.75% of the base loan amount)-– or, it can be financed into the mortgage –- and the other is an annual insurance premium, collected in monthly installments.  Mortgage Insurance is a policy that protects lenders against losses that result from defaults on home mortgages. FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than 20 percent.
  2. FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.  A “fixer-upper” may not qualify for an FHA mortgage. The FHA-approved appraiser will inspect the property to make sure the home meets HUD’s minimum standards for health and safety.  If the appraiser flags certain issues — such as peeling paint, loose handrails, or other safety issues, or such things as a deteriorating roof or older furnace — those issues must be corrected before the loan will be funded. In other words, the transaction will be put on “hold” until the discrepancies are resolved. That is not usually the case with a regular appraisal used for a conventional home loan.
  3. There are loan limits on an FHA mortgage.  The amount of your FHA home loan depends on a combination of factors including the local market in your county or zip code, the appraised value of the property, and the amount you may qualify to borrow based on your credit and payment history.

Who can qualify for an FHA loan?

Here are a few questions to ask yourself before applying for an FHA loan (or any mortgage loan, for that matter):

  1. Do I have a steady source of income?
  2. Have I been employed on a regular basis for the last two years or more? Do I have a good record of paying bills?
  3. Do I have few outstanding long‐term debts?
  4. Do I have the ability to pay a mortgage every month, plus other expenses?

You’ll need a good credit rating to qualify for a FHA home loan. While the FHA has set minimum credit scores, most secondary market investors have placed minimum credit scores on FHA loans at 620.