What is a Federal Housing Administration (FHA) loan?
An FHA loan is a type of mortgage that is designed to help low to moderate income borrowers purchase a home. FHA loans are more lenient on credit scores and credit reports as they are trying to make purchasing a home more accessible to people.
Benefits (compared to conventional loans)
- Accept low-down payments
- Accept low credit scores
- Accept low quality credit reports
Down Payments
An FHA loan allows for down payment as low as 3% which allows you to finance up to 97% of the capital needed to purchase the home.
Example
FHA Down Payment = $18,000
FHA Down Payment = ($600,000 * 3%)
Purchase Price = $600,000
Down Payment = 3%
Traditional Down Payment = $120,000 ($600,000 * 3%)
Traditional Down Payment = ($600,000 * 20%)
Purchase Price = $600,000
Down Payment = 20%
Example Explained
This home buyer is now able to purchase a $600,000 home with a 3% down payment. A 3% down payment on this property is $18,000 with an FHA loan. While a traditional loan can request a 20% down payment which in this example would be $120,000 down payment. The difference between an FHA loan and a traditional loan is $102,000.
What dictates the down payment I receive on an FHA loan?
3% Down Payment Minimum Credit Score of 580
10% Down Payment Credit Score Between 500 and 579
Disadvantage
Borrowers can expect a higher-than-normal monthly mortgage payment. Why? The smaller the down payment, the bigger the monthly mortgage payment. The larger the down payment, the smaller the monthly mortgage payment.
How do I get a loan with the Federal Housing Administration?
Borrowers don’t actually get a loan for the FHA. Borrowers get a loan from FHA approved lenders such as a local or institutional bank or lender. The loan they provide your becomes FHA insured. In other words, the borrower is using the Federal Housing Administration as insurance to be approved for a loan. The FHA agrees to pay the lender if the borrower defaults on the loan.
FHA Loan Borrower Requirements
- Mortgage Insurance
- Premium Payments to the Federal Housing Administration
