Whether you're thinking about buying your first home or second home, or perhaps your credit isn't in the best shape, then you might be eligible for an FHA loan. But what is an FHA loan, who is eligible for it, and what are some of the benefits?
In this article, we'll provide a brief overview of what you need to know about FHA loans and if it's right for you.
What is an FHA Loan?
A Federal Housing Administration (FHA) loan—part of the U.S. Department of Housing and Urban Development (HUD)—is a home mortgage loan that is issued by either a bank or another mortgage lender.
An FHA loan was created to give a helping hand to low- to moderate-income families who want to own a home but would not be otherwise eligible for a conventional home loan.
An FHA loan is popular among first-time homebuyers because it allows borrowers to finance homes with down payments as low as 3.5% and less than stellar credit. And, if you've suffered from bankruptcy or foreclosure, you may still be able to qualify for an FHA loan.
FHA Loan Requirements
The FHA insures mortgage loans–provided by FHA-approved lenders and banks—on single-family and multi-family homes in the United States (plus US territories).
Here are a few important requirements to consider.
- Mortgage Insurance Premium (MIP) is required—one that is paid upfront (equal to 1.75% of the principal loan amount) and one that is paid annually (with monthly payments from 0.45% to 1.05% of the principal loan amount, as of 2022.
- The home must be your primary residence (you can't use the residence as a rental property).
- You must have proof of employment and a consistent income for the last two years.
Benefits of an FHA Loan
The FHA loan requirements we listed above make an FHA loan an attractive option if you’re having difficulty qualifying for a conventional mortgage or saving a large down payment.
There are several benefits to getting an FHA loan:
- Less strict credit requirements—even if you have some road bumps on your credit report, you may still be eligible for an FHA loan.
- More forgiving qualifying guidelines—an FHA loan offers more flexible guidelines than other loans, making it easier to qualify.
How to Apply for an FHA Loan
Most banks and mortgage lenders are approved to offer an FHA loan so you'd apply directly with a bank or a lender of your choosing. Once you've decided on a lender, they can help you apply to get pre-approved for an FHA loan, once they have all of the pertinent financial information.
Getting pre-approved for an FHA loan will provide you with a good idea of how much house you can afford without committing to it.
If you're thinking about buying your first home, then an FHA loan might be a good option for you. With lower interest rates and more flexible qualifying guidelines, an FHA loan may allow you to get into homeownership at a lower upfront financial threshold.
So, if you're ready to take the plunge into homeownership, and you meet the above requirements, an FHA loan may be able to help you realize your dream of owning a home.