BlogFinancial IQ October 21 2020

What is an FHA Loan?

For borrowers with tight cash or tricky credit, an FHA loan can be the answer. But not every situation is a good fit for these mortgage loans. Find out if one is right for you.

An “FHA” insured loan is a US Federal Housing Administration mortgage insurance–backed mortgage loan that is provided by an FHA-approved lender.

Because it is insured, this type of loan provides more protection to the lender, if a borrower defaults on an FHA loan, the government will compensate the lender for their losses.

An FHA loan might be of advantage to the borrower because it allows a lender to make loans that might be considered a little riskier, helping borrowers who might not qualify for conventional loans.

Types of FHA Loans

There are several types of FHA loans, but the one most commonly known is a 203(b) basic home mortgage loan. A 203 (b) is used to purchase or refinance a home, and you can be eligible for one with a down payment as low as 3.5%.

Other types of FHA loans include:

  • 203(k) rehabilitation mortgages, for financing eligible home repairs and improvements.
  • Energy Efficient Mortgages (EEM), which help homeowners finance home improvements that reduce energy use on the property (either a new purchase or a home you already own).
  • Home Equity Conversion Mortgages (HECMS) are more commonly known as a reverse mortgage, which helps seniors convert the equity in their home to cash.

What You Need to Qualify for an FHA Loan

Because they are insured and there is more protection for the lender, FHA loans can be more easily secured for first-time buyers or those with less than perfect credit.

  • Credit Score: 580 or higher
  • Down Payment: 3.5% or more
  • Debt to income ratio: less than 43%
  • Mortgage insurance: required

Who is an FHA Loan Good For?

It’s important to know if an FHA loan is the best fit for you. Here are some scenarios where an FHA loan can be a great choice for a buyer if:

  • You have a low credit score. Most conventional lenders require a score of 620 and above, compared to 580 for FHA loans.
  • You carry a lot of debt. FHA loans allow for higher debt in relation to your income.
  • You have a small down payment. FHA loans require only 3.5% down.
  • Less expensive mortgage insurance. If you can’t meet the 20% down payment threshold, a lender will charge you mortgage insurance; FHA loans carry cheaper mortgage insurance rates.

Not every scenario is right for an FHA loan. For example, they’re not a great fit if: 

  • The house is a serious fixer-upper. FHA loan properties must meet the minimum requirements for health and safety.
  • You live in an expensive area. FHA limits the amount of money you can borrow based on 65% of the area’s conforming loan limits, so you won’t be able to finance as much house with an FHA loan.
  • If you plan to rent the property. FHA loans can only be used for primary residences.

At Eagle Home Mortgage, we know loans are never “one size fits all.” Find out more about our options and how we can help get you into your dream home with the best possible mortgage.

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